Michael Ryan is a former partner of Donovan Sullivan & Ryan, a Westwood, MA accounting firm that focuses on servicing insurance agencies. What many may not know is that Mr. Ryan is also a long-time business broker within the insurance industry. After moonlighting for many years, Mr. Ryan has now retired from his accounting career to focus full- time on a career as an insurance agency business broker.
For this ‘second act’ to his career, he has represented many insurance agencies in and around the Commonwealth as the principal of Insurance Agency Consulting Services, LLC
The current COVID-19 public health crisis may affect insurance agency mergers & acquisitions as well as agency valuations. Agency Checklists thought it might be worthwhile to get Mr. Ryan’s thoughts about agency mergers and acquisitions in general and how this market may change as a result of the pandemic.
For those who may be unfamiliar with you or your firm, could you give us a little bit of your background and how you became a business broker?
My career has been as an accountant. I started in public accounting back in 1976. As we developed our accounting firm [ Donovan Sullivan & Ryan], our niche with clients become more and more focused on independent insurance agencies.
As a result, I gained a lot of experience with M&A on both sides of the transaction. I had both larger agencies that did multiple acquisitions as well as individual insurance agencies that split up or sold.
The first time that I represented an agency in their sale as a business broker was in 2006. At that time, it was just a one-off type of thing.
I was still doing public accounting, but I continued to develop that business model and continued to grow it over the years. I spent more and more time developing it while staying in public accounting, sort of doing both. Over the last few years, however, I have pretty much withdrawn from public accounting and now am focused just on insurance agency consulting services that mostly involve helping agents sell their agencies.
You mention that you started in 2006 with a one-off type of deal. How has your business model developed since then?
With every transaction, I learned more about how to run this type of business and what opportunities are available for insurance agents who want to sell their agency. As a result, I learned a lot about what makes a good potential buyer.
As a result of my business model, I have had a lot of experience representing insurance agents. I have formalized my process of agreements and information gathering. Now I can put together an entire package that virtually any buyer is going to want to see to decide on making an offer. I have streamlined the entire process.
How many deals would you say you have done since 2006?
Close to 50 transactions. There were some years when maybe I had done one or none, but in the last five years, I would say I have done generally between three and eight transactions a year. As for this year, I will probably do seven or eight. Some are big, some are small, but they all require pretty much the same process.
What kind of services do you offer as a business broker?
The primary service I offer is to represent agency sellers and advise them in all aspects of the sale. This includes determining the agency’s market value, potential buyers, and sale structure. While that is primarily what I do, I also advise owners who are looking to acquire agencies and advise them on any possible acquisition.
I have also worked with agency owners who want to know how to try and structure an internal perpetuation plan, something which can often be challenging to do. These are the services that I mainly offer.
What does a business broker offer an independent insurance agent contemplating the sale of their agency versus them doing it themselves?
When I speak with an owner, I tell them that I will handle all aspects of the sale for them as a seller.
More specifically, I usually tell an agency owner the following: One, they don’t know the value of their agency; Two, they don’t know who the best potential buyers are; and three, they do not want their staff, as well as their competitors or their customers, to know that they are considering a sale of their agency.
I have in place a process for gathering all the necessary data for the potential buyers. As a result, I make the whole process a lot easier for them. I can advise them as to what is a good offer and not a good offer and who the best buyers are and try and create a competitive situation among the buyers to the benefit of the seller.
Finally, I keep everything confidential, which is going to be very difficult for them to do. I also am in constant contact with the owner throughout the process.
What is the most common barrier that you see stopping agents from hiring a business broker?
Well, I am not sure, but my best guess would be that some agents think their business is too small or that it is not worth the trouble of bringing a professional into the process. As a result, they may only look at selling to an agent in their local area.
I think that often an agent considering selling may think it is going to be expensive and are concerned about the cost. But with that said, I would mention that I do work with lots of small agencies, and I think I can bring a lot of value to virtually any agent.
The big national brokers would have no interest these types of sales and a lot of the clients that I work with, but I am pretty much a one-person operation, and so I am glad to work with any independent agents.
In that same vein of deal size, what is the smallest deal you have ever done that you recall?
Probably a commission book of between $150,00-$200,000, which naturally is not the sale of an agency. It is more the sale of the book. In that case, you are looking for a buyer who is going to roll that into their operations. Although that is a pretty small sale, it is still an engagement that I would accept if I could bring value to the seller.
And what is the largest one that you have ever handled?
The largest one would be a sale of approximately $6 million, which was a few years ago. As for the average amount, most of the sales I handle fall somewhere between $1 million to $3 million. Overall, generally smaller-sized insurance agencies.
When you say the $6 million, that was the price?
Yes, that was the sales price.
Before you talked about the size of the book, what would be the smallest sales price you ever worked on?
I would say about $300,000, although I have one right now that is still smaller that will probably be about $265,000.
You also mentioned cost as one of the barriers to potential sellers not employing a professional like yourself. Can you talk about cost generally?
Sure. Typically, I charge the buyers 5% for what I call a success fee. Most business brokers charge the seller a fee, but I decided to use this arrangement based on my own experience, where it is a very different market for insurance agencies.
There are a lot of aggressive buyers who are willing to pay a finder’s fee. As a result, I decided not to charge the sellers a fee. I mean, they [the buyers] only pay me if they decide to go ahead with the transaction with the fee representing 5% of the sales price.
How has been the reception to this type of arrangement?
I have not had any resistance from any sellers, and the buyers have all been satisfied with that arrangement. As for me, it allows me to go to a potential seller, and say, ‘Look, if I can’t find an acceptable buyer, then you have no obligation to me.’
There is no long-term commitment. I tell them all the same thing. If at any time during the process, they are unhappy with the way things are going, they can just terminate the engagement. I do not have any contracts that tie people to me for any period of time.
But do you have some sort of contract with the selling agency?
I have an engagement letter, but there is no commitment other than I ask that I be their exclusive representative while I am engaged by them to represent their agency in a sale.
What is the biggest mistake you commonly see in insurance agency mergers and acquisitions?
Many times, I think sellers do not approach the sale of their insurance agency as the significant financial transaction that it really is. They would never consider selling their home without consulting a real estate professional to get a good idea of the value of their home. Yet, many agents decide to sell their business to a friend or associate without determining their agency’s value.
Moreover, they will agree to a sales structure that is not in their best interest, both financially and tax-wise. Ultimately, many agents also do not have their agencies positioned to make it easy to sell them.
For example, they often have employees who are critical to their operation without either employment contracts or antipiracy agreements in place. If those types of agreements are not in place, buyers are very leery of buying an agency.
It creates a real barrier to a sale by not having those kinds of agreements. Those are just some of the biggest mistakes I often see agency sellers making.
Let’s talk about agency valuations. Many would say that they have been sky high for the past few years. Would you agree to that?
Yes, they have been great.
Do you think the agency valuations will change post-COVID-19?
I am afraid that COVID-19 will impact values. I already see activity slow down just due to the risk and uncertainty. Many buyers are simply deciding to stay put for a while.
Ultimately, I believe personal lines agencies will be less impacted by the pandemic than commercial lines agencies. A lot of businesses are going to go out of business or cut back on employees, and commercial premiums are going to decline. So, personal lines agencies will probably hold their value better than commercial lines agencies due to this uncertainty.
Some of the national M&A advisors are already telling buyers that they should expect prices to come down. If the buyers believe that, then we are going to see lower prices.
Do you see opportunities for buyers? Do you see more agencies coming on the market or more books of business coming on the market because of COVID-19?
Well, I suppose some people may panic and decide they want to get out. I probably would tell people it does not cost you anything to explore your options. If you think that you want to find out if you can get an acceptable offer for your agency, then go through the process. If you decide that it is not sufficient, you are under no obligation to sell. You could continue and wait and see if the market gets stronger.
But right now, it is difficult to get a buyer’s attention. COVID-19 has kept potential buyers focused on issues within their own agencies rather than on any new acquisitions.
Overall, it is probably not a good time right now. I do have some transactions that I expect will happen before the end of the year. They all began before the shutdown, however, and fortunately, the buyers have not backed out. But, looking forward, I expect that activity will slow down.
Do you see the possibility of some agencies, the smaller agencies doing mergers where the principals become employees of the larger agencies?
Often that is one of the goals of the sellers. I had a local agency just a few years ago, and there were two owners, with one who wanted out of the agency right away. The other wanted to continue to work, so that was a part of the whole sales process, and it worked out fine.
I talked to the owner who went to work for the buyer, and he was satisfied with the employment arrangement. He had cashed out, but he had still wanted to continue working and being productive. It all worked out fine for both sellers and the buyer. So, it is a possibility.
Over the last couple of years, there has been a massive consolidation in independent agencies. Do you see this trend continuing, or is there going to be a slowdown?
I did not see any slow down before COVID-19, but I do expect things to slow down, as I mentioned earlier. Long term, I expect there to be continued consolidation, albeit at a slower pace. It still makes sense for the buyers to acquire agencies – both the synergy and the economics of it.
How about the Massachusetts marketplace for independent agencies as opposed to the national marketplace? Do you see a big difference or little difference or the same?
In Massachusetts, there is undoubtedly a difference. As we all know, Massachusetts has a higher percentage of independent agents than probably any other state. The economy here also has been so strong. It is a great market. It has been better than probably any place else in the country for insurance agencies.
When I talk with people about other regions, the sales prices just do not seem to be as strong. There does not seem quite as competitive a market to acquire agencies.
I think this is due to how profitable agencies are here due to profit sharing. Massachusetts is an excellent market for insurance agencies sales, so in that way, it is different from a lot of other States.
What do you recommend agency owners considering a sale to consider?
In the typical agency sales that I deal with, the owner is looking to retire. I make it clear to them at the beginning, however, that most buyers do not want them simply to walk away after the closing. There will likely be some minimum involvement.
It is up to them though as to whether they want to stay engaged for an extended period of time. Whether as an employee or as a consultant, a buyer would want the seller to stay involved for at least three to six months after an agency sale to help the buyer retain business.
But when I talk to owners who are considering selling their agency, I discuss whether they want to do an internal or an external sale of the agency. If they want to sell internally, I tell them that it is exceedingly difficult to make internal sales work out, if the owner wants to get market value for their agencies. But if they are committed to doing that, you can devise a structure and a plan to accomplish that.
But most of the agency owners I deal with are looking to retire and want market value for their agency. They do not want to stick around long term. Sometimes they do, but most do not want to do that. They do not want to work for somebody else because they have worked for themselves all their lives, so it is hard to do.
If an agent is considering using a business broker, how should they prepare for an initial consultation?
I like to tell them that they have to determine what their goals and priorities are from the sale. What are they looking for out of the sale?
Once they know that, you can determine which potential buyers will be a good fit. Some things that are important to some sellers are not important at all to others. For example, if the agency’s name is a family name, some sellers may want to keep the family name on the agency when sold. Others want continued employment for themselves or their staff. Some want to see that the sold agency stays in the existing the location for a number of years.
In any event, they really must decide if their goal is to maximize the sales price or if other factors are more important to them.
They have to think about their goals and come to some decisions for me or any other broker to advise them on how to best move forward.
What do you think that a potential seller of an agency should look for in a broker?
First, they want a knowledgeable professional who is familiar with the local insurance market and who understands insurance agencies. There are business brokers who sell all kinds of businesses, such as hair salons and retail stores, all kinds of things. In my experience, however, these types of brokers do not understand insurance agencies. You need someone who has got that type of expertise. I tell people to check back to any buyers and sellers that they have worked with and check their references.
How could an agent go about checking their references?
They can ask for the names of some of the transactions they have done and who the buyers and sellers were. If possible, call them and ask them about how the process went and whether they were satisfied. That would be my advice.
Is that something that you offer?
My website has plenty of references listed. It has phone numbers, but if somebody wanted some of the more recent transactions, I would be glad to give them a list, and they can talk to any of the people on the list.
On a final note, what advice would you offer to independent agents during these particularly uncertain times?
I would tell them to prepare their agency so that a future transaction will go smoothly. Agency buyers want to buy profitable agencies with good loss ratios, and quality staff already in place. Those are key.
If you do not have all three of those factors, just know that it is going to be reflected in the sales price.
Buyers also really want to have employment contracts or antipiracy agreements in place before they begin the process. Right now, I am involved in the sale of a small agency, where the owner is not that involved in the business. He is older, and he has one key employee who runs everything. The agency has no employment contract or antipiracy agreement with that employee.
Now that he wants to sell, this lack of such an agreement has become a complicating factor. So, it has become a conflict. Unfortunately, this lack of written agreements with employees is a mistake that a lot of agency owners make. So, an agency owner thinking about selling needs to prepare and take care of these things before the sales process begins.