Life insurance MGAs have historically been privately held, owner-managed entities.
Selling was a straightforward process and the valuation rules were based on assets under administration net service fee revenue.
“The current and future owner would kick the valuation ball back and forth to come up with a price that suited both,” says chartered business valuator Daryn Hobal.
That model meant there was little available information on purchase and sale transactions involving MGAs. But the business climate has changed. More institutional and private parties have been buying MGAs as investments. That’s changed the type of valuation done to establish the worth of the MGA, significantly impacting the final selling price.
“Public companies want to make acquisitions that will enhance their earnings per share. Private equity investors are looking for a rate of return of 18%-to-20% and want to take a hands-off approach to managing the investment.
“They finance the acquisition and use the business profits to amortize the debt and get a return on equity; and are far more concerned with how a company is run and less concerned with assets under management.”
This focus changes the metrics that potential investors use to evaluate MGAs. Many business-specific expenses will be normalized to reflect market conditions—which changes the fair market value.
Institutional and private equity investors will be willing to pay for the identifiable intangible assets which provide the “rights to future revenue” of an MGA’s in-force book of business and associated goodwill. They’ll also be willing to pay a premium to acquire any future synergies.
“MGA owners usually have a strong sense of the value of their existing book of business and assets under management, but there is often less clarity with respect to quantifying their goodwill and the goodwill that an acquirer may pay in a transaction,” says Hobal.
A professional valuation by someone who specializes in quantification of goodwill and other intangibles can help a buyer or seller come to a fair market value and provide goalposts to evaluate an offer to purchase. This, in turn, should reflect the normalized value, plus post-acquisition synergies.
Private equity and institutional investors are more focused on earnings or cash flow than assets under management or service fee revenue. This represents a significant change in how MGAs will be evaluated. By understanding the needs of purchasers, MGAs can ensure that they sell for the best price.
Lisa MacColl is an Ontario-based financial writer.
Originally published in Advisor's Edge Report
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