Value Maximization Series: Growth

Video Transcription

Hello, I’m George Bucur, managing director and co-head of MarshBerry specialty practice. Working with MGAs (managing general agent), MGUs (managing general underwriter), wholesale brokers and program managers, we’re here today to bring part one of a five-part series around value maximization.

Now, why is that relevant? Well, it’s relevant because whether you want to remain independent or sell externally, understanding what drives value is critical because value is predicated off of cash flows. And those cash flows translated to EBITDA (earnings before interest, taxes, depreciation, and amortization) in this marketplace are then multiplied against a multiple, and that multiple is influenced by five factors, and those five factors are what this series is going to dive into.

And first, we have growth. So why is growth important: both historical and looking forward? Well historically, it’s important because, well from a buyer’s lens anyway, prior results are an indication of future outcome. Often times there could be extending circumstances, but nonetheless, that is a great indicator of what a firm is able to do in the future. And why is future growth relevant? Well, when you’re receiving the valuations that are at all-time highs as we are seeing today, buyers need growth to create more cash flows in the future to pay for the investment that they made in the past. That’s how acquisitions work, use cash flows from an organization to pay for the purchase price of that organization. And specifically, when it comes to growth, commissions, and fees and those that are recurring in nature have more value from a valuation perspective than that of non-recurring type items. And you think of recurring type items, you have commissions and fees, yes. When it comes to delegate authority, for example, you might have profit share which may or may not be as recurring or high-risky at least compared to other revenue sources. So, from a valuation perspective you want to not just know where is the source of my growth coming from, but what is the riskiness or the likelihood that that cash flow will continue in the future.

If you have questions around the overall growth spectrum and how buyers perceive different types of growth, we ask that you reach out, because there is very much more to be explored on this topic. Until next time, keep growing and be well.