Did you hear that sound? It could be opportunity knocking. Despite the slowdown in merger and acquisition activity in the first part of 2023, the climate for growth in the insurance sector is promising, now and into 2024. The chance to grow or sell a business can present itself quickly, so it’s wise to be prepared. How can you be ready when opportunity comes knocking?
Outlook for M&A in insurance
The early-year turmoil in the banking industry, due in part to rapid acceleration in interest rates since March 2022, had a cooling effect on M&A activity in the first half of 2023. Many signs, however, point to a potentially better atmosphere for deal-making. The long-predicted recession still has not occurred, inflation is cooling and mortgage interest rates have declined. In the insurance sector, deals continue to be made, even in this challenging environment. PwC describes insurance M&A activity as resilient despite macroeconomic headwinds and predicts insurance deal activity to remain very active through the remainder of the year.
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How to be ready when opportunity knocks
If expanding or selling your agency is in your future, it makes sense to prepare yourself and your business so you can act quickly if the right opportunity arises. Here are five key steps that will help you to be ready.
1. Review and reflect on what your business needs. Do you have strong producers and enough of them? Are your technology tools – and the staff who manage them – up to date? Is there an area of service you’d like to expand into but haven’t had the capacity or talent pool to handle? Having a wish list of attributes to look for, including staff with specific skill sets, will make it easier to recognize a good acquisition target.
2. Be conscious of your company culture and values. Insurance is relationship-based, so working with people who share your company’s ethics and approach to business is vital. Whether you want to acquire or sell, finding the complementary fit for current and future employees will lead to a more successful transition.
3. Have your house in order. Nothing can sink a deal faster than incomplete or inaccurate financial records or problems with regulatory compliance. Lenders like to say, “Run your business every day as if you’re going to sell it.” Make sure that all records are up to date and complete, and that you’re in full compliance with all industry regulations. It will save time, money and headaches in the long run.
4. Maintain a strong cash position. In insurance deals, the majority of the valuation in a deal is cash flow, rather than physical assets. If you’re a seller, being able to demonstrate a strong and predictable cash flow makes your business an inviting target for acquisition. If you’re looking to buy, being in a liquid position can help facilitate a deal quickly.
5. Stay in close contact with your lender. It’s never too early to let your lender know you are looking for opportunities to buy or sell, even if you don’t have a specific deal identified. Your lender can help you get a general deal structure in place so you can respond quickly when a potential acquisition target becomes available. Setting up a structure also reduces the chance of surprises arising that could derail the deal.
If you’re intending to sell, especially as part of an internal succession plan, you may need to hold some of the debt. Lenders can help put together the bones of a deal that can be fleshed out over time as your plans become more definite. The length of time a deal takes is almost always up to the borrower and how quickly they respond to requests for information and documentation. Communication is critical.
While market forces – unemployment, inflation, the possibility of recession and interest rates – are always uncertain, opportunities for growth are always available. The temporary slowdown in M&A deals of the past several months means there is capital out there waiting to be deployed.
Whether you’re looking to buy, sell or facilitate succession, following management best practices and staying in close communication with your lending partner will help you meet opportunity when it comes knocking.