There's no question about it. There's a lot of mergers and acquisitions (M&A) activity among insurance agencies and brokerages. There were 300 announced insurance agency mergers and acquisitions in the first half of 2024, and while it's a drop from last year and certainly not a return to the white-hot market of 2021, it is a steady flow of deals. To take advantage of the opportunities available, buyers and sellers need to be prepared. 

Here are a few trends influencing the M&A market and how you can take advantage of them: 

1) Market motivators. Both buyers and sellers have reasons to be interested in M&A deals. Buyers have had time to adjust to the new normal of elevated interest rates and may be ready to dive back into the market. With a possible Federal Reserve rate cut under discussion, buyers may be even more motivated to start shopping for acquisitions they can finance with a potentially lower-rate loan. 

Owners who want to exit their businesses or partially cash out may be looking to move their timelines forward because of uncertainties about their tax position after the upcoming presidential election. The future of the capital gains rate is unclear, and the Tax Cuts and Jobs Act (TCJA) will sunset in 2025, so some owners may be motivated to sell now under what they perceive to be more favorable tax conditions. 

2) Valuations bucking trends. Conventional wisdom dictates that when interest rates are higher, valuations are pushed lower as the cost of borrowing puts negative pressure on buyers' price ceilings. That logic seems to have gone out the window in the current market, however. For instance, Sica Fletcher reports that insurance brokerage valuations are the highest it's seen in a decade. There are variations, however, among sizes and types of agencies. 

Buyers, especially private equity firms, are attracted by the fact that insurance products are a must-have purchase for most customers, so they provide a reliable revenue stream in uncertain economic times. It also helps that insurance premiums have tripled in this recent period of inflation, further bolstering revenues, according to Sica Fletcher. 

3) Stock as part of the deal. In the first half of 2024, nearly one-third of insurance M&A deals involved equity, nearly twice as many as in 2022, according to Sica Fletcher. In some instances, sellers are holding onto stock to remain active in the firm's operations. In others, it serves as a sort of guarantee from the seller—skin in the game—showing confidence that the firm is as profitable as portrayed in the negotiations.

Preparing for a Deal 

For an M&A deal to be successful, both buyers and sellers need to be prepared. Here are four steps to make the most of the current market: 

1) Financials. Three to five years' worth of financial statements and business income tax returns should be available for review by the other party. For sellers, it may be a good time to consolidate debt and clean up the balance sheet to make the financials as transparent as possible. It may also be worthwhile to review expenses and make appropriate cuts to improve overall profitability. 

2) Staff and management. Both buyers and sellers need to manage employee expectations around the sale. Oftentimes, buyers are interested in a firm because of certain types of expertise held by members of the target firm's staff. Will those staff be staying on? Do employees feel confident about keeping their jobs under new management? Does the buyer's staff know their roles? Clear communications about these issues early on will help the transition go smoothly. 

3) Deal management team. M&A transactions have a lot of moving parts. It pays to have a team of experts working together to anticipate issues and work out problems. At a minimum, the team should include the firm's CPA, attorney and lender. An independent M&A advisor is also a valuable addition. 

4) Timeline. It's never too early to start planning for a sale or acquisition. Even before a target or buyer is identified, take the time to get the business in order. Correct or improve any operational issues that require attention. Talk with several lenders and learn about their approval process. Every lender has a different style, and it's important to find one whose approach is a good fit for the business. 

Experts see plenty of activity in the current insurance M&A market and little evidence of it slowing down. With the right preparation, now could be a good time to take advantage of opportunities to buy, sell or consolidate. 

Alicia Chandler is president of Indianapolis-based Oak Street Funding.