Perpetuation: Worst Practices & Outcomes Bobby Reagan Reagan Consulting October 19-20, 2017
Worst Perpetuation Outcomes 1) Not staying privately-owned when you desire to do so 2) Not using private ownership to drive your success 3) Not realizing your firm s full potential 2
Reagan s Private Ownership Study Study Sponsors: 3
The Private Ownership Study Remaining privately-held is an important goal for many agents and brokers Today s environment is making internal perpetuation harder than ever Weak economy / soft P&C pricing High third party valuations Healthcare uncertainty How do agents and brokers successfully plan for internal perpetuation? 4
Effective Perpetuation Planning Preparing to Perpetuate Indefinitely Maintaining Perpetuation Options for Your Firm Increasing the Value of Your Agency To All Buyers 5
6 The Four Pillars of Perpetuation Healthy Operation Reasonable Sellers Able Buyers Effective Transfer Mechanism 37.7% 31.7% 45.7% 36.8% % of Firms Challenged by Each Pillar 6
Healthy Operation: Profit EBITDA Margin (% of Revenue) <10% % of Respondents 21% Value at 6.0x EBITDA (as a multiple of revenue) <0.6x 10% to 20% 35% 0.6x 1.2x 20% to 30% 26% 1.2x 1.8x > 30% 18% >1.8x 7
Healthy Operation: Growth Growth provides buyer purchasing power Growth influences the EBITDA multiple, which impacts value Growth means viability 8
Healthy Operation: Risk & B/S Enforceable contracts, good morale, employee success Diversification among clients, industries, producers and carriers Balance sheet health Working Capital (30 days) Good collections and Trust Ratio of 1:1 Tangible Net Worth to support impending redemptions 9
Reasonable Sellers: Main Issues Willing to sell at internal values Willing to sell when buyers are ready Willing to finance the purchase Valuation must be a multiple of actual, going-concern EBITDA Carefully manage ownership concentration Length of financing should help buyers fund purchase 10
Able Buyers: Houston, we have a problem. 55% - 60% of agencies not hiring enough producers to grow and perpetuate 11
Generational Capacity Age Distribution of Production Force (Based on RVI Data) 28% 12% Up to Age 35 22% 18% Age 36-45 29% 22% Age 46-55 41% 28% Over Age 55 The Effects of Producer Age Distribution (Based on RVI Data) Metric Bottom 25% Top 25% WAPA 53.6 45.1 WASA 56.6 49.7 Organic Growth 1% - 2% 8% - 9% Sales Velocity 7% 15% Bottom 25% Top 25% Leaders under Age 46 1 5 12
Number of Producers by Age Band Healthier firms spread their producer count more evenly among different age bands. Number of Producers by Age Band Healthy 27.8% 22.2% 22.2% 27.8% ABC 8.0% 23.3% 33.0% 35.8% 0.0% 20.0% 40.0% 60.0% 80.0% 100.0% Up to age 35 36-45 46-55 Over 55 Source: Producer Recruiting & Development Study. Includes only validated producers. 13
How to Determine Producer Hiring Needs Commercial Lines Commission Book: $5,000,000 Total New Business (10% Sales Velocity): $500,000 10 CL Producer: Avg Revenue per Book: $500,000 Avg New Business: $50,000 1) Organic Growth Target 5% / Year: + $250,000 / Year Successful New Producers Needed: ½ / Year If Success Rate = 50%, Need to Hire: 1 / Year 2) Retirement If 35% >55, next 10 years: 3.5 will retire If Success Rate = 50%, Need to Hire: 0.7 / Year 3) Attrition Death, disability, termination:? Total New Producer Hiring per Year As a Percentage of Your Current Producers 1.5 2.0 15-20% 14
Able Buyers: Financial Ability BUYER COVERAGE RATIO Buyer Ownership Distributions or Bonuses Buyer Principal & Interest Payments Is Your Firm s Buyer Coverage Ratio 100% or Higher? First-year metric: Does not contemplate growth in the business Pre-tax metric: Taxes on ownership bonuses or distributions not included Down payment not factored into the calculation No 45.0% Yes 55.0% 15
Able Buyers: Financial Ability The Typical Buyer Transaction in the Industry Today 10% MEDIAN DOWN PAYMENT 8 years MEDIAN FINANCING PERIOD 100% MEDIAN BUYER COVERAGE RATIO 16
Able Buyers: Non-Financial Ability What are the Biggest Challenges to Finding Able Buyers? 64.8% 33.5% 31.9% 31.5% 31.1% 12.3% 7.5% 4.8% Lack of Financial Resources Lack of Leadership Lack of Potential Buyers Lack of Willingness to Defer Gratification Lack of Sophistication Lack of Interest in Ownership Lack of Cohesion Other 17
Transfer Mechanism: Industry Use 65.4% What is Your Firm s Primary Transfer Mechanism? 9.8% 9.8% 3.8% 3.8% 7.5% Ownership Purchases Stock Grants Gifting ESOPs Stock Options / Phantom Equity Other 18
19 Transfer Mechanism: Selection Profitability and Distributions Revenue Growth Readiness of Buying Group Age and Timing of Sellers Family Ownership Profitable and Distribute a High % of Profits Above Average Organic Growth Potential Buyers Identified and Prepared to Purchase Shares Many Sellers with a Wide Dispersion of Ages Desire to Maintain Family Ownership of the Firm Rolling / Single Ownership Purchase Ownership Purchase and Stock Grants Rolling / Single Ownership Purchase Rolling Ownership Purchase Gifting Single Event Ownership Purchase ESOP ESOP Stock Grants ESOP ESOP Stock Grants ESOP Single Event Ownership Purchase Rolling Ownership Purchase Low Profitability or Low Distribution Yield Challenging Organic Growth Forecast The Buying Group is Currently Unidentified Few Sellers Concentrated in Older Age Groups The Firm is not Family Held
What Does This Say About the Industry? Desire for private ownership is strong and widespread Confidence level exceeds ability to accomplish However, best practices leading to success with many agents Biggest and most serious challenges are: Lack of able buyers Lack of operational health Firms that are able to perpetuate are also well-positioned for a third-party sale A successful perpetuation plans enables the continued strong return for investments in agents and brokers 20
What Should Agents & Brokers Do? Determine what your objectives are Examine each of the Four Pillars of Perpetuation within your firm Which are strongest? Where is improvement needed? Put together a plan to address each area of need Articulate your plan clearly And finally... 21
22 Use Your Perpetuation Plan! A well thought-out and clearly articulated perpetuation plan can be a key differentiator in the marketplace Battle for talent Carriers Clients Culture 22
Reagan Publications Organic Growth & Profitability Survey Quarterly Real-time Data 23
Robert W. Reagan, CPCU CEO Bobby Reagan brings more than three decades of insurance industry experience to the company that bears his name. 404.233.5545 bobby@reaganconsulting.com www.reaganconsulting.com After graduating with high honors from the University of Tennessee, where he earned BS and MS degrees in Industrial Engineering, Bobby joined a Southeastern regional insurance brokerage firm as a commercial property and casualty producer. During his 10 years with the firm, he served in regularly ascending capacities, including COO. Bobby received his CPCU designation in 1980. In 1984, he joined the consulting firm of Hales & Associates and, the following year, opened its Atlanta office. Two years later, in 1987, he became CEO of the firm and, in 1992, was elected Chairman and CEO. In April 1995, Hales & Associates underwent reorganization, and Reagan Consulting was formed as a result. Bobby s expertise and integrity have ensured his reputation as a true authority within the insurance industry. He has consulted with many of the country s most successful insurance agents and brokers, and worked with many leading financial institutions on their insurance initiatives. He is also in consistent demand as a speaker and author, with speeches delivered to more than 150 insurance industry groups and associations, and articles published in the majority of the industry's trade publications. 24