Determining the right time to buy or sell a managing general agency (MGA) is a matter of great debate, particularly in the current economic climate. On one hand, merger and acquisition (M&A) activity remains robust, with 627 agency deals occurring in the first three quarters of 2022, according to OPTIS Partners, an investment banking and consulting firm. In fact, deal volume in Q3 2022 was the second-highest recorded total for the period and 8% higher than the prior five-year average. On the other hand, choppy waters lie ahead. When looking at deals exclusively involving property and casualty, M&A activity declined 14% year-over-year from Q3 2021 to Q3 2022. OPTIS Partners predicts a return to a normal deal environment by year's end, which means M&A volume won't match 2021's record-breaking numbers. At the same time, the global economy faces a pending storm. Inflation concerns, a looming recession and the increasing costs of capital all point to a slowdown in M&A activity. But this is no time to panic because successful agency deals can happen in any market. The best path forward for agency owners is to educate themselves about the latest trends. Let's take a closer look at three economic factors that could impact buying or selling an MGA and discuss steps agency owners can take to complete a deal at the right time for the right value. |

3 economic factors impacting MGA M&A activity

1. Inflation

The MGA M&A market isn't directly correlated to inflation. However, it does feel the pinch of one inflation-related trend: rising interest rates. When interest rates are low, MGA sales rise. When interest rates rise, the availability of financing decreases, reducing the number of potential buyers who want to devote capital to inorganic growth opportunities. As a result, deals become more expensive, and buyers think twice about paying a premium for an available agency. In short, when interest rates rise, MGA sales decline. It is my goal to help you understand how buyers evaluate businesses so you can be best prepared to navigate the selling of your firm despite difficult economic circumstances.

2. Recession

Six months ago, some economists believed we could still avoid a global recession. Now, however, sources report the recession is a matter of when, not if. A recessionary economy will signal the end of the post-COVID-19 boom for M&A activity. MGAs looking to sell will feel the squeeze as buyers begin to pull back on the number of multiples they'll pay for a business. Owners who want to sell their MGA to gain more liquidity should act fast. Multiples are likely to decline as a recession takes hold. That doesn't mean agency owners can't sell their agency another six or 12 months down the road, but it does mean that if they wait, they will need to lower their valuation expectations.

3. Hard market conditions

Hard market conditions are traditionally a growth driver for MGA businesses that can achieve rate increases. Those that write risks most effectively benefit from improved P&L statements and higher earnings, which makes their agencies more valuable in the eyes of potential buyers.

Rob Pearlstein of DOXA Insurance Holdings. (Credit: Courtesy photo)

However, MGAs that achieved revenue growth despite hard market conditions may discover that buyers won't look at valuation the same way. Many buyers will understand that a large percentage of recent MGA growth is driven by market forces. As a result, they'll look to bifurcate an agency's growth trend into two buckets — growth attributed to hard market conditions and growth attributed to bound policies. They'll put less value on the former and more value on the latter. Rob Pearlstein is the head of mergers and acquisitions for DOXA Insurance Holdings. Prior to joining DOXA, he worked as an investment banker on Wall Street, where he was personally involved in more than 50 acquisitions and closed in excess of $1 billion in aggregate deal value in the insurance industry. He can be reached at [email protected] Opinions expressed here are the author's own. Related: |

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