Mergers & Acquisitions Best Practices Sponsored by IIAT Insurance Agency Tom Braniff, JD, CPCU| Texas Insurance Consulting

Operational Improvement Review Service Introducing IIAT’s Operational Improvement Review Service Agencies that are reviewed and then implement best-practice recommendations are 40% less likely to have an E&O Claim Improve agency operations Identify areas that could lead to E&O claims Achieve efficiency across the agency Westport clients can get a 10% discount on their E&O premium (good for 5 years)

Mergers & Acquisitions Best Practices www.texins.net 713-664-6424 Thomas M. Braniff, JD, CPCU January, 2019

Seller’s Market Prices at record levels. Much activity. Down payments up. Payment terms shorter. Buyers 5 to 1 over Sellers.

Middle Market Agency Transactions By Year Source : The Hales Report

Valuations at Record Highs

Who is Buying?

Most Active Acquiring Brokers National Brokers 2018 2017 2015 2013 Acriscure, LLC 100 92 56 5 Hub 50 42 30 32 Broadstreet Partners 17 A J Gallagher & Co. 26 39 18 AssuredPartners, Inc. 33 15 29 19 Hub International 28 25 Alera Group 16 Brown & Brown 22 11 12 Seeman Holtz NFP Corp 20 6 Marsh & McLennan 7 4 Sub Total 335 306 243 114 Other 262 285 196 122 Total 597 591 439 236 Source : The Hales Report

Considering Selling? Know your agency. Clean-up your financial statements. Clean-up your agency database. Written employment/producer agreements. Trim unnecessary expenses. Know your agency. Commercial / Personal. Revenue / compensation per employee. Major markets. Strengths / weaknesses. Specialties / concentrations Know the type of buyer you are seeking. Liquidity / capabilities. Commonality of culture / chemistry Future plans

Considering Buying? Know what you want to acquire. Get to know your competitors (i.e. potential sellers). Arrange prior approval of financing needed. Be ready to move quickly. Due diligence plan. Relationships with carriers and customers. Commonality of culture / chemistry.

Information Needed Commission statements. Financial statements (tax returns / audit reports). Information about customers Operational handbooks. Existing contracts with insurers. Litigation / regulatory information. Employment, non-disclosure and non-compete agreements. Miscellaneous.

Deal Process

Offer and Negotiations Form of purchase – assets v. stock Price and terms of payment. Upfront money. Earn-out. Stock in acquirer. Representations and warranties. Qualifications. Survival. Contingencies and restrictive covenants. Non-compete v. Non-solicit. Indemnifications. Cap / Deductible. Employment matters.

Deal Structure Few true mergers Large transactions Publically traded stock deals Few stock purchases Liabilities No amortization of consideration paid Mostly asset purchases Limited liabilities Amortization of consideration paid

Valuation of Agencies Street Talk = Multiple of gross revenues. Smart Buyers = Multiple of projected future profits.

Proforma Profit / Loss Statement

Parting Advice An individual that attempts to represent himself has a fool for a client. - Abraham Lincoln (paraphrased) Get advice and assistance from experienced professionals Insurance Consultant CPA Attorney What you do once in your life, experienced professionals do many times. Move deliberately / cautiously Sometimes the best deal is no deal Be willing to walk away