Insurance Agency Ownership Perpetuation Tom Doran

Reagan Perpetuation Studies

Insurance Agency Ownership Perpetuation Two Excellent Options: or Internal Perpetuation External Perpetuation

The Four Pillars of Internal Perpetuation Healthy Operation Reasonable Sellers Able Buyers Effective Transfer Mechanism

The Four Pillars of Perpetuation Healthy Operation Reasonable Sellers Able Buyers Effective Transfer Mechanism

(expressed as a multiple of revenue) Profitability EBITDA Margin (% of revenue) % of Industry Value at 6.0x EBITDA (expressed as a multiple of revenue) Less than 10% 21% Less than 0.6 x 10% to 20% 35% 0.6 x – 1.2 x 20% to 30% 26% 1.2 x – 1.8 x Greater than 30% 18% Greater than 1.8 x

Growth is Essential Growth provides buyer purchasing power Growth influences the EBITDA multiple, which impacts value Growth means viability

The Four Pillars of Perpetuation Healthy Operation Reasonable Sellers Able Buyers Effective Transfer Mechanism

Accept Internal Valuations Are Sellers in Your Firm Willing to Take a Discount to a Third-Party Valuation?

12.5% 7 years Finance the Deal MEDIAN DOWN PAYMENT Are Sellers receiving cash at close or are they financing the deal? MEDIAN DOWN PAYMENT 7 years MEDIAN FINANCING PERIOD

Time Share Sales Appropriately Current WASA 53.8 WASA in 10 Years 56.7 * Assumes sales at age 65 and no sales to younger employees

The Four Pillars of Perpetuation Healthy Operation Reasonable Sellers Able Buyers Effective Transfer Mechanism

Assessing Financial Ability BUYER COVERAGE RATIO Buyer Ownership Distributions or Bonuses Buyer Principal & Interest Payments 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

The Buyer Coverage Ratio Is Your Firm’s Buyer Coverage Ratio 100% or Higher?

100% Buyer Coverage Ratio ≠ Free Ride Out of Pocket Costs (BCR = 100%) Typical Buyer Profile 5% of $5 million firm $25,000 down Annual out-of-pocket tax expenses of $8,700 3% of $15 million firm $45,000 down Annual out-of-pocket tax expenses of $15,700 Age 37 Highly compensated Producer Risk tolerant Plays well with others

What Does a Buyer Transaction Look Like? 10% 8 years 100% MEDIAN DOWN PAYMENT MEDIAN FINANCING PERIOD MEDIAN BUYER COVERAGE RATIO

The Biggest Challenges to Finding Buyers

The Four Pillars of Perpetuation Healthy Operation Reasonable Sellers Able Buyers Effective Transfer Mechanism

Industry Use of Transfer Mechanisms What is Your Firm’s Primary Transfer Mechanism?

How Do the Pieces Fit Together? Recruit Talent Grow and Increase Value Reasonable Sellers Buyer-Friendly Purchases

Why remain independent? Because this is an incredibly resilient industry The future has never been brighter for creative and innovative brokers The best talent in the industry follows the equity opportunities available at most independents Unparalleled quality of life Because the economic rewards are sizeable …

The “Great Soft Market” Agency values have increased during every economic period in past 2 decades Recovery 10.6% Annual Growth Rate The Leverage Bubble 9.4% Annual Growth Rate The Great Recession Hard Market 6.9% Annual Growth Rate The “Great Soft Market”

Keys to remaining Independent Focus on operating results to support a robust internal valuation and distributable earnings Hiring and developing of young professionals (aka buyers) Plan for it, don’t assume it will simply happen

1998 Business Insurance Top 100 Who has not changed hands? As of 7/19/99

1998 Business Insurance Top 100 Who has not changed hands? As of 7/19/99

Why Sell to a Third-Party Buyer? FEAR $ No Plan

Valuation Realities *Reagan Value Index and Reagan Consulting analysis

Deal activity scorecard Buyer 2012 Deals 2013 Deals1 Hub 29 18 Confie Seguros 17 AssuredPartners 27 16 Arthur J. Gallagher 60 12 Fidelity National Financial 7 8 Brown & Brown 5 Marsh Agency 14 USI Total 183 86 Most active buyers list unchanged, but deals down by half Notes: 1Through 12/15/13 Source: SNL Financial

Acquisition market share by type of buyer Private Equity from last to first Source: SNL Financial, Includes North American Deals

Keys to successful perpetuation – internal or external

Maximizing Valuation and Marketability - Start with a solid foundation Restrictive Agreements Legal Structure Ownership of Assets and Exit Strategies Align Ownership Interests People Investment Sales Culture

Build carefully to achieve desired results Advisory Team Maximize Profitability Careful Long-Term Investments Minimize Long-Term Commitments Clean Financial Statements Market Compensation Concentration Risk Restrictive Agreements Legal Structure Ownership of Assets and Exit Strategies Align Ownership Interests People Investment Sales Culture

To access Reagan’s Private Ownership Study, visit our webpage at www To access Reagan’s Private Ownership Study, visit our webpage at www.reaganconsulting.com

Tom Doran Senior Vice President & Principal Tom joined Reagan Consulting as a consultant in 1993 and became a principal in the firm in 1995. He holds an undergraduate degree in Computer Information Systems and a Masters of Business Administration from Georgia State University. Before joining Reagan Consulting, he worked in the computer industry, both as a software developer and as a management consultant. Tom’s areas of expertise include merger and acquisition representation, agency valuation, ownership perpetuation planning, agency valuation enhancement and strategic planning facilitation. Tom is a regular contributor to Reagan Consulting’s industry studies and is frequently published in various insurance industry publications. He also speaks on a regular basis to industry trade groups and associations on a wide variety of topics concerning the insurance distribution system. 404.869.2534 tom@reaganconsulting.com