July 21, 2015
David Tralka
President & CEO, InsurBanc
David W. Tralka has more than 25 years of experience in banking
and financial services. Mr. Tralka is responsible for keeping the
bank focused on being an innovative provider of financial products
and services for the independent agency community.
Mr. Tralka brings a wealth of experience and leadership to the
helm of InsurBanc. As a seasoned banker, his career is
distinguished by an extensive tenure at Merrill Lynch where he
served in a number of senior management positions including
President of Merrill Lynch Bank and Trust in Princeton, NJ, and
Chairman of Merrill Lynch Community Development Company.
2

Why are we here?

Where are we in today’s M&A market?

A Young Agent’s Perspective

Perpetuation & Planning

Agency Valuation

Accessing Capital

Post Transaction
3





Activity picked up in the latter part of 2013.
2014 was a sizzling pace with 375 deals
announced. 2015 may exceed 2014’s record
level.
Through April, 2015, 148 deals announced.
Buyers are hungry, aggressive and enabled.
Buying earnings potential.
Money is historically “cheap”
4




Persistent low rate environment driving equity
markets – public broker stock value high –
currency helps drive premium prices
Low rates for debt capital when available –
increases buying power
Stress test for rising rates – reverses trend for
capital and equity valuation.
Timing the market is difficult but lead
indicators are everywhere
5

Low rate environment—drives activity

PEG Buyers are flush with Liquidity


The Credit Crunch is Over? Banks are getting
aggressive but not in this space.
Agencies still viewed as a Specialty borrower
6
A Young Agent’s Perspective
52% of Young Agents have a very
optimistic outlook on their career
34% of Young Agents feel very confident
ownership dreams will come true
81% of young agents consider insurance
to be a permanent career
•2014 Insurance Journal Young Agents Survey
7
A Young Agent’s Perspective
Age of Principals with 20%+
Ownership, 2014
18%
12%
12%
18%
18%
14%
8%
2014 Agency Universe-Future One Survey
8
A Young Agent’s Perspective
1/3 of agency owners hoped to sell
to family members
•2012 Survey of Agent-Carrier Relationships
1/3 of agencies and brokers will
change hands in the next 15 years.
•A.M. Best, July ‘14
9
Perspectives Differ
If you are a Buyer
–
due diligence, technology platform, staff,
company relationships, access to capital
If you are a seller
Personal goals, tax considerations,
maximizing agency value, timing,
intangibles, quality of buyer
10


Consider the agency you are working at?
Is there a chance to become part of the
succession plan?
What will you have to offer?
Concentrate on building a book of business,
establishing carrier and client relationships,
client retention
11
Do you know…
 the agency’s worth

the owner’s drivers of value

the goals/plans of the owner

that the goals match your desires
Recognize the process requires
attention and takes time!
12

Are your personal finances in order?
Good credit and repayment history is an
indictor of your ability to obtain financing
13

Seller’s Alternatives:
◦ Sell to a Related Third Party – Internal
Perpetuation
 Colleagues/Partners/Family
 Producers/Management
 ESOP
◦ Merge with another Agency
◦ Sell to an Unrelated Third Party
 Competitor/strategic buyer
 PEG/Roll-up/ Financial buyer
14


Start before you think you have to – 5 years
Self-assessment
◦ Honest with Yourself
◦ Your Role & Identity in an organization
◦ Emotions and Decision-making

Are You a Qualified Buyer?
◦
◦
◦
◦

Personal Financial Condition
Your Management skill set
Colleagues vs. Employees
Post transaction life
Consequences of Inadequate Planning
15




Your Willingness /ability to assume risk and
debt
Viability of perpetuation plan or buy-sell
Size of debt structure required
Sustainability of post-transaction agency
◦ Retention of staff/clients/appointments

Goals of Seller re: intangibles
16

Tend to be seller concerns

Legal & Business Structure

Asset Sale

Stock Sale
17



Determine Pro Forma Profitability.
Understand the mechanics of the income
statement.
Determine an Appropriate Deal Structure.
18

EBITDA aka Cash Flow

Adjustments for:
◦
◦
◦
◦
◦
Executive compensation to market levels.
Producer’s comp to the Buyer’s level.
Normalize contingents.
Eliminate owner’s perks and other expenses.
Consolidation savings. Sometimes up-front. Who
gets this value?
19







Brand/Reputation
Quality of Leadership
Quality of Staff
Continual Investments in Producers
Current from a technology perspective
Specializations
Restrictive Covenants
This will give the appraiser an idea of the Quality
of Earnings.
“All Earnings are not created equal”
20

Integrity of available transaction data
◦ Timing and context






EBITDA v. Revenue model
Public buyer v. Private buyer
Banks always cause a problem
Transaction size and structure
“CCM” aka Country Club Multiple
Believe nothing you hear
21

Sellers

Banks

Personal Resources of Buyers

Other Institutional Sources/Some
Combination of the Above
22

Considerations on the Buy – Side
◦
◦
◦
◦
◦
◦
◦
Personal financial situation
FICO Scores
Personal liquidity
Personal leverage
Risk appetite of your spouse/partner
Short term sacrifices for long term success
Tax returns- PFS – Clarity and organization
23

Considerations on the Buy – Side
◦
◦
◦
◦
◦
◦
◦
Quality of financial reporting
Cocktail napkin statements
Quality of agency management reporting
Operating profitability v. contingency profitability
Being in Trust
Operating trends over multiple years/cycles
Agency Real estate if applicable
 Market leases
 Ownership structure
 Appraisals
◦ Agency Valuation Reports
24
100% Seller Note
100% Bank Financing
Structured Transaction Bank/Seller
Notes/Mezzanine
25
Loan Duration
Rates
Security and Collateral
26

Pro Forma Financials with Assumptions

Management Resumes

Contracts/Covenants

Basis of Valuation
27
Traditional Industry Challenges





Lack of Tangible Assets on Balance Sheets
Managed Bottom Line
“Thin” Net Worth
Specialty Borrower
Lack true understanding of Enterprise Value
28

EBITDA & Debt Service Coverage

Adequacy of Working Capital

Adherence to Fiduciary Responsibilities

Skin in the Game

Realistic Assumptions?
29
Financial Information

3 Years FYE Statements
◦ Management System Reports






3 Years Tax Returns
Interim Financial Statement
Personal Financial Statement/Principals
2 Year Tax Returns/Principals
Projections with Detailed Assumptions
Operating Account Statement/Analysis
30
Key Financial Indicators





Trust Ratio
Current Ratio
Cash Flow/CMLTD (Debt Service Coverage)
Cash Flow/ LTD (Leverage)
Expense Management
31
Business Analysis





Breakdown of Business Lines
Markets and Carriers
Retention Experience
Loss Ratios
Contingency History
32
Agency Snapshot





Founded in 1886, fifth generation of owner
$10MM in premium
$1.4MM commission revenue
50% personal and 50% business lines
9 employees including 3 producers
33
Perpetuation Plan
Seller


Purchased agency in 1998
Decided to perpetuate to the current Vice President
of the agency and developed a solid perpetuation
plan in 2011
34
Perpetuation Plan
Buyer



Joined the agency as a producer in 2002
Groomed to become owner, gradually took on
responsibility for carriers and client relationships.
Became Vice President in 2008
35
The Challenge


A solid perpetuation plan was put in place in 2011 and
no set date was established to execute the plan.
However, the owner was diagnosed with a terminal
illness shortly thereafter and passed away in February of
2012.

Executor of estate requested a change in the finance
structure

The perpetuation plan needed to be expedited along
with a quick change in the finance structure.
36
The Challenge

The buyer contacted the agency’s bank to execute
the transaction, but they lacked the understanding
of the industry, the agency’s financials and the
overall situation. They required lengthy
explanations before considering the proposal.
37
The Solution

The buyer then contacted InsurBanc who was able
to respond quickly under the tight timeline and
offered a solid proposal within weeks of the initial
meeting.
38
The Structure

$3MM agency price
◦ 2x commissions




$1,500M 7 year term loan
$1,500 seller note, subordinated
Security interest/Pledge of stock
$25M demand line of credit for general working
capital.
39
Points of Emphasis

Developed internal talent for succession

Well-crafted perpetuation plan absorbed shock of
unforeseen circumstance

Well-run Trusted Choice Best Practice Agency

Utilized local, trusted advisors

Ultimate capital accessed by multiple sources
40
Seek Out the Advice of Professionals

Industry-Specific Consultants

Accountants

Attorneys

Bankers
41
Now that you’re an owner,
continually work to build value!

Management skills

Financial understanding

Developing and diversifying book of business

Institute drivers of value
◦
◦
◦
◦
Operational efficiencies
Staff and staff training
Recruiting producers
Producer development
42



Prepare to borrow before you need it.
Attend to your own personal financial
picture.
Open dialogue with the seller make
transactions go smoothly .
Agencies are all unique and each M&A
requires an independent approach.
43
Questions & Answers
44
Thank you!
David Tralka
860-674-2300
dtralka@insurbanc.com