By the fourth quarter of 2009, however, signs of life were returning to the M&A market. Stock valuations for many of the public buyers were recovering. Several of the traditional buyers–including Arthur J. Gallagher, Hub and USI–were raising acquisition capital, while Marsh & McLennan Agency was planning an aggressive push into the middle market.

Deal activity reversed course in the fourth quarter, reaching its highest level for the year. And the market seemed poised to return to historically normal deal volume levels, if not to the supercharged levels of 2006-2008.

But with more than half of 2010 already in the books, the expected recovery has failed to materialize. In fact, deal activity has dropped in both of the first two quarters, and actually trails activity through mid-2009.

So, what happened to the M&A recovery? In short, it has been dampened by a lack of sellers. As buyers have returned to the market this year, they have found agents often reluctant to engage in serious discussions about selling.

Some agents are conflicted and feel pulled in different directions. On the one hand is the issue of ownership perpetuation, which continues to loom large. On the other hand, however, is the perception that buyers are offering substantially lower multiples than a few years ago. Does selling now mean selling at the bottom of the market?

For those agents wrestling with uncertainty about the current M&A market, consider the following:

o Deal multiples are stronger than you may think. Deal valuations are often expressed as a multiple of the seller's pro forma EBITDA (earnings before interest, taxes, depreciation and amortization). Despite the perception that EBITDA multiples in the current market are down substantially, they are actually down only slightly. In general, 2009 multiples were approximately 10 percent below recent highs and have rebounded slightly in 2010.

The confusion comes from the fact that some agencies have lost value over the last two years. The combination of a continued soft market and a struggling economy has, for some agents, resulted in negative organic growth and a compressed margin. The resulting decline in EBITDA has produced a decline in value.

For example, an agency that experienced a drop in EBITDA from $1 million to $800,000 also experienced a 20 percent loss in value, assuming deal multiples remained the same. Conversely, however, agencies that have maintained steady earnings have also generally maintained value.

o Waiting for improved performance may hurt more than it helps. If the real culprit behind reduced deal valuations is reduced earnings (and not reduced multiples), waiting for improved performance may hurt more than it helps.

In time, the economy will improve and rates will stabilize. As they do, agency performance will improve and values will get a lift. But it's far from certain either will occur in the near term. In fact, performance may get worse before it gets better.

Current indications are that earnings for many agents and brokers will be down again in 2010. If so, values will take another hit.

The agency owner with a long time horizon can afford to wait for conditions to improve. But for the owner intending to transition ownership within the next two-to-three years, waiting could prove to be expensive.

o Higher taxes will reduce net proceeds. Pending changes to tax law pose a second threat to a strategy of waiting. The long-term capital gains tax rate is poised to jump from 15 percent to 20 percent in 2011. Therefore, simply maintaining value through 2010 won't be enough. Instead it will be necessary to grow value for 2011 after-tax proceeds to equal 2010 after-tax proceeds.

Although the window is rapidly closing on the opportunity to complete a deal under the current tax structure, it will remain open until the end of this year.

The decision of when to sell is a complicated one, made even more uncertain by external factors such as a grinding soft market, a weak economy and changing tax policy. Ultimately, however, it is a highly personal decision that requires a clear and sober view of the market.

Many agents who would otherwise be engaged in discussions with buyers have been sidelined by concerns about the current M&A market. Some of these concerns are legitimate, but others are the result of misperceptions.

For those agents who can afford to have a long-term horizon, waiting may be the best strategy. But for those who intend to sell within the next three years, the time for maximizing after-tax proceeds to shareholders may be now.

Jim Campbell is a principal and senior vice president of Reagan Consulting Inc., an Atlanta-based management consulting firm that developed and produces the “Independent Insurance Agents and Brokers of America Best Practices Study.” He may be reached at 404-233-5545 or at [email protected].