---

Transcript

[00:00:25] Ryan: All right. Welcome to another episode of the insurance podcast. I'm Ryan Eaton, your host, and thrilled to have one of the leaders in the acquisition space nationally on our show. Now might just be me, but it seems like every time I turn around another agency is merging. In 2020 alone, there was close to 650 insurance agencies acquired in the U S. Given this substantial amount of purchases, we thought it would be beneficial to discuss some of the ins and outs that you should know if you're looking toward the next chapter for your business. Whether that is retirement, succession planning, or just realize that you want to keep doing what you're doing, but partner with the larger organization.

[00:01:01] So today we have Mike Sullivan, who is the co-founder and chief growth officer for one digital with us. For those of you don't know who one digital is, they are one of the top 20 largest agencies in the U S and in 2020 alone, they acquired 37 new agencies.

[00:01:16] Mike is the man behind their acquisitions and partnerships in the health, wealth, and retirement sectors. A little background on Mike-- prior to creating one digital, he spent 13 years with mass mutual where he was a regional vice president of sales. He later joined now care, which became part of Aetna and serve as a VP of east coast national sales.

[00:01:35] Now briefly before co-founding one digital with Adam Brockman, he also worked with a venture capital funded technology company. Then in 2000, he and Adam moved forward with the formation of one digital. He has a wonderful wife, three adult children, and is living in the Virginia suburbs of Washington DC.

[00:01:51] Mike. Thanks for being on the show today, buddy. How are you?

[00:01:54] Mike: My pleasure, Ryan, it's a pleasure to join you and look forward to the chat.

[00:01:57] Ryan: Well, spend a few minutes. If you don't mind telling our listeners what brought you into the insurance industry. I know you spent some time studying at Oxford university in England, and I'm a little interested in kind of what that transition looked like.

[00:02:10] Mike: So, you know, I'm the product of a liberal arts education in new England. So, I've learned how to read and write and think a little less math, a little more reading and writing. And, you know, started interviewing when I was getting ready, thought I would go to wall street. I ended up going into the insurance business with mass mutual, largely because I met a guy who spent some time talking about what the employee benefits space was all about.

[00:02:32] And it seemed interesting. I'll still remember to this day when I called home to tell my dad that I was going into the insurance business and I got this long silence on the telephone with him, trying to figure out that's not why I thought you went to college, going into insurance. But you know what? It's, it's turned out to be a pretty good run.

[00:02:50] Ryan: Fantastic.

[00:02:50] Well, look, as we mentioned in the intro, one digital has been a leader in the acquisition space roughly 40 last year. Will you give us a little overview into the thought process and what you're looking for in an agency?

[00:03:03] Mike: Look, I think that there's a lot of introspection I think that goes on when it comes to how we align, who we align with, the things that are a little different about one digital.

[00:03:14] We don't really do almost any of our deals through bankers, right. We spend all of our time, we've got a big team and every single day, week, month, and quarter of the year, we're out talking to people and we're trying to understand cultural fit. We're trying to understand where people are in their career paths.

[00:03:34] And if there's anything I would impart, there is absolutely positively, no one size fits all for these kinds of things. There are certain markets where we're a big player already. There's certain markets we're trying to get into. There's markets where we just have benefits and are trying to find retirement.

[00:03:52] There's all kinds of things. But the alchemy, I think of what works is we find people and we understand whether or not we could be a good fit and by and large, we're looking for people with the right attitude, energy and intelligence who've got gas in the tank and still want to start to figure out what's next.

[00:04:10] And the line sort of, I always use with folks that I ended up talking with: it's more about, do you want to sell your agency, or do you want to join a team, right? And oftentimes there is a finality to selling, like, you know what, I've had my run I'm going to pass it on to someone else versus could I really see joining a team and the next phase be better than it is today because you're part of a bigger team with more weight.

[00:04:39] And a lot of good folks that are trying to figure things out, getting your head around that simple construct is something we spend a lot of time trying to figure out because in our environment, if people leave after the sale, we almost feel like a failure. We've failed to be the right solution set. So, it's a different approach, but it's one that works for us.

[00:05:01] Ryan: I like that approach. I think that's I like that. Do you want to sell, or do you want to join a team? That's a, that's a great way to look at it.

[00:05:07] Mike: And I honestly don't think enough people spend enough time thinking about that concept of really where you're at because most people don't think like, could I actually get involved with a bunch of people, learn new things and sort of re-scope the engine, right. And that's kind of what we're looking for.

[00:05:25] Ryan: Well, talking about a team, I went to your website yesterday and I was looking at a one of the corporate videos from where you had the whole team together. And I saw the energy that was in the room and just all the faces. Y'all have done a phenomenal job of building a quality culture there.

[00:05:41] Kudos to you guys on that. So, look, next question I have is: if I'm an agency owner and I am looking to sale, what are some of the things that I can do to help increase the evaluation or the appeal of my agency?

[00:05:56] Mike: Look, I think that all of us generally speaking are trying to understand, you know, we have a line that we use in the business, Ryan, that's sort of like you are what your book of business says you are. Right? So, a lot of folks are like, yeah, I'm really strong in middle middle-market, but you look at their block of business and 97% of all the cases are under 50 lives are under a hundred lives. If you sort of take a look at how we look at blocks of business and how we look at talent, we're really trying to understand: what is the agency, how is the agency constructed?

[00:06:30] What's your organizational chart look like? Are you built to grow or not? Right. So, we look at top line, we try to understand bottom line. We build a proforma that says, what is the math of the agency look like as we come together? Where are there opportunities to understand how we would build together.

[00:06:49] But I think sort of this assessment of like, are you built to grow? When you're in our shoes, we think about it pretty simply. If we're adding revenue to one digital, right, and we can't grow it? We look at that very differently than maybe other firms do because people in the outside world-- investors, wall street-- people look at our business and they're really interested in one fundamental thing:

[00:07:18] what's your organic growth rate? Not your acquisitive growth rate, your organic growth rate. So, if you're adding a bunch of teams that have no shot whatsoever of growing and probably over time, may lose a couple of big cases because of how they're positioned competitively. We look at that 20 years later very differently than we did when we... actually, we've been in existence for 21 years.

[00:07:44] We only did our first acquisition 11 years ago. So, we were building for almost half of our lives before we ever did an acquisition. But what we know now is the numerator and the denominator matter in terms of organic growth. And so, if you're an agency owner kind of understanding where you're at.

[00:08:03] Understanding can you grow or not? I think will help you begin to understand how you're aligning and who you align with because you're going to need different things and, you know, the positioning around how your staffed today. Can you grow today? Those are the kinds of things we spend the vast majority of time talking to folks about.

[00:08:25] Ryan: Now, that's good. You mentioned something, you said you are what your book of business says you are. I love that quote. I'm gonna use that and reword it a little bit where it's my own.

[00:08:36] Mike: I'm sure that was not an original thought for me as well. So that's fine.

[00:08:42] Ryan: Let me ask you is most businesses are being purchased right now based on a multiple of EBITDA. At least that's what I hear from the different people that I talk with. Can you give us a brief overview of that? Kind of what are maybe some of the factors that yeah, it's based off EBITDA, but here's also what we kind of see, could you hit on that a little bit?

[00:08:59] Mike: Yeah. Yeah. Sure. So, think about it. If I were to simplify that, I would say, think about what EBITDA does.

[00:09:04] And so if you have, let's just use simple math. Let's say you're a million-dollar agency. So, we'll look at top line being a million dollars. One of the things we look at relative to top of line is okay, so you're a million dollar to revenue, but how much of that is contingency revenue? Right? How much of that is coming as a bonus or an override?

[00:09:23] And is there a consistent pattern or predictability to the override piece? Because you know, that can be problematic for someone like us, if you just had a great bonus year, but it was an anomaly, right? We look at that piece of the revenue differently, but you take a look at top line and then you basically say your rents, all of your expenses.

[00:09:44] You know, everything that goes into your staffing and your rent. We take a look at that. And then are there reoccurring expenses? Are there certain expenses, like you don't need ENL because you come on our ENL, are there certain things that we just absorb and we'll do an allocation for that, but if you factor in all your expenses, then the next biggest thing that comes into play is what is the agency owner going to go?

[00:10:06] Most of the agency owners took all the leftover money out of the agency. What do you, what is your income going to be on a go-forward basis? Because ultimately you have to get to, you know, a million dollars of revenue, there' s something like $750,000 in total expenses, including salary. So, your earnings are $250,000.

[00:10:27] That's what we're going to price off of because you don't have EBITDAs earnings after taxes, interest, depreciation, amortization. You really don't have a bunch of that stuff in a smaller agency. So top line, factor in your expenses, what's the bottom line we're going to price off. And the big variability is, agency owner,

[00:10:47] what are you going to take home in your income? Our view of that is we don't want to take someone down to an unsustainable earning because you're going to leave, right? If you're a million dollars revenue and you were taking a half, a million dollars a year out of the agency, your lifestyle is a half a million-dollar lifestyle.

[00:11:06] If you go down to making $150,000, we might as well say three years later, you're gone. That's right. So, we don't really like to do that. We're like, we think you should be settling in at a 300,000 or 350,000. And then how quickly can we grow together to get you back to 500,000? That's the way you set you up to stay for the long run.

[00:11:28] So that's kind of a broad-brush stroke of how we look at that stuff.

[00:11:32] Ryan: Now, this is good. So, Mike, my understanding, you mentioned just a second ago kind of about staying on for three years. And you've also mentioned that you'd love people to be able to stay on as long as they can, right? And my understanding is the most owners stay on with the company for a period of time and have an earn-out period.

[00:11:49] What does this look like? And if they're having a blast several years down the road, is this something that can stay for the next 10, 15 years? What does kind of that process typically look like?

[00:11:59] Mike: Again, I'll go back to our approach has been different. It's why we spend so much time on the cultural fit. We're looking for people to stay for the long term, right?

[00:12:06] When everyone talks about culture, Ryan, it's like the ultimate arbiter, from my perspective, of culture is do people stay after their earn-out or not? Okay. If you look at one digital 95% of all agency owners that made the decision to join us, they're still here 11 years. 95% are still here and thriving.

[00:12:29] We've had some health issues. We've had some age issues where some people have retired, you know, certain things kind of come up along the way. But our view is we want you to find a home here for the next phase, join and stay. And a lot of times when you're looking at price, right, if people look at purely the multiple of EBITDA, one of the big things they need to think about is do the vast majority of people joining that firm stay or leave after the earn-out.

[00:12:58] Because if I knew you, if I was acquiring your agency, Ryan, and you're making $300- 350,000, but I pretty much knew you were either leaving after the earn-out or wouldn't even make it to the earn-out. I can pay a higher multiple, because that 350,000 is going right to the bottom line when you leave. So, it's an often-overlooked fact that people are hearing, like I got paid eight times or nine times or 10 times or 11 times.

[00:13:23] Of what? And then did you stay, or did you not stay? And what one digital's pricing in is, our expectation is in our earlier example, we're trying to get you back to half a million dollars of earnings and above that, well, you got a price based upon that being in there. So. You know, I think from an industry standpoint, you'll probably have something like 30% of agency owners stay for the long-term and ours is just different, but we have a different.

[00:13:53] Ryan: Well, you're looking for partners and you're looking for the win-win scenarios, which is crucial, right.

[00:13:58] That's for building a business long-term and having everyone happy and a good culture. That's just what it takes. So, tell me this. So, when you mentioned earlier about kind of looking for value in organizations, what can you do? Like maybe what pockets hit new markets, et cetera. What does that look like?

[00:14:16] What does it look like from your perspective when you're trying to figure out agency growth and what potential there is through the power of one digital through the power of the brand, the power of all the agencies coming together and increase knowledge. What does that look like from a growth standpoint?

[00:14:29] Mike: So, it's really, I mean, I was saying to you before, like I do feel like we're a team coming out of the locker room at halftime. In the second half, we're going to play a different game. The first half, we were a benefits firm. We were like a horse running down the track with those blinders on that say we're a benefits firm, we're just going to be benefits.

[00:14:47] And we ran hard to be a good benefits operation. Well, if you look at the industry, everybody else by and large in the industry is built around being a PNC firm that does benefits, not a benefit only firm. We're going to rotate into the PNC business. We made a big push 15 months ago into the retirement space.

[00:15:07] So we're a major player in the retirement space. But if you look at the teams that are joining us in the retirement space, it is like a who's who of the best talent in the industry who's joining. And we're basically saying. Look, if you've got 60,000 benefit clients and retirement folks are talking to the same people in that employer, let's get a really good retirement team and start cross-pollinating opportunities.

[00:15:31] Once you're in the retirement business, you realize you could be in the wealth business, you can bring financial literacy in through the employer and begin to help people manage whatever assets they do have outside. So, we're taking a different path, but at the same time, we're going to rotate into the PNC business as well.

[00:15:48] What we know now after our first big PNC acquisition is it is easier to cross sell PNC into a benefits block than it is benefits into a PNC block. So, we're going to take advantage of that as well. PNC is more transactional, benefits isn't, right. Benefits impacts everybody's life. When it comes to health insurance, PNC is much more transactional, much more volume-based much more risk-based, but it's not people's lives that are being impacted the same way.

[00:16:16] So I like the bill that we have going on and I love the fact that it's not quite like anyone else, right. It's just, we're building a different kind of company. We want to build a company of consequence that 10 or 20 years from now, every employer and every individual and family knows the name one digital, that's a pretty cool thing to aspire to.

[00:16:37] We spend no time basically saying we need to get bigger, to the company, to a new investor or do an IPL. We spend no time talking about getting bigger. We're basically saying, how do we get better? And that's the conversation we want to go have with agency owners. Do you help make us better?

[00:16:54] Ryan: Like it. That's good, you mentioned something about PNC versus the benefits side of it. And I think for, we've said for years that, you know, when you're going into a group and selling benefits, you know they're going to use it. Like, you know, within the first week, someone's going to use the benefits and it's so much different with PNC. It's, everyone's hoping you don't use it. You know, that's the game plan.

[00:17:17] Now look not to get too much into the weeds, but when it comes to buying a company and then keeping employees, keeping their staff on board, what does that look like? Do they usually get to keep their people? Do you bring on a few people maybe to help with HR? Is it kind of a combination of both?

[00:17:35] Mike: We have a big HR team. We have a big finance team. We have a big technology team. So, we try to leverage those shared services as much as possible agencies above a certain size will have and need those people in local markets, the smaller you are. You know, if you're an agency under a couple million dollars, you don't need a full-time HR person, or the owner takes care of HR issues.

[00:17:59] So depending upon the firm we're talking to, the size of the firm, there's different issues. Here's ultimately, you know, again, I've been at it long enough that I just have a few things I believe. So, I would come to you, Ryan, and say the following: it's a big deal to transition to a new firm.

[00:18:15] Just think about it this way. We don't want to come in and be the heavy afterwards. We don't want to be the ones that come in and say, “Hey, Tina, or Barry or Sam or John, you don't have a job anymore.” Our view is this: look internally as an agency. You know everybody better than we do. Who would you not rehire today, knowing what you know? Who would you not?

[00:18:36] And everyone's got folks hanging around. It's hard, it's easy to hire. It's hard to fire, but if you wouldn't hire them again, knowing what you know, they should not come across in part of the deal. This is time to clean up some of the people issue. You can hang it at us and say, well, you know, it's a one digital thing, but what we're asking is look inwardly and make good decisions.

[00:18:59] Because if you haven't been able to do it before, at point of transaction is when you should. And take care of them, right?

[00:19:05] Ryan: That's right.

[00:19:06] Mike: During a transition, take a piece of your money and make people's lives a little bit easier, but don't bring them along if you wouldn't do it again.

[00:19:15] Ryan: There's a guy I've listened to, Dave Ramsey. He says, if you have someone on your team today that you wouldn't hire tomorrow, it's your fault. They're on your team today.

[00:19:25] Mike: That's so right. And it's a hard thing to do, right? We all, we're all caring human beings. But what you lose sight of is a person, it's a drag on everyone around you.

[00:19:35] Like other people in the firm are like, why is Mike still here? He's a pain in the butt. So that, that's a pretty simple thing that we, that we look towards, everyone else should come across.

[00:19:44] Ryan: We call them energy killers around here.

[00:19:47] Mike: Absolutely.

[00:19:49] Ryan: So, looking at, obviously the past year, you guys rocked it. 37 new agencies, extremely impressive, but it was a weird year, right.

[00:19:59] We dealt with COVID March kind of changed everything. You know, what did that look for you guys over that course of period? And then also how did it affect company's financials or the evaluations you gave to companies? Because there was so much going on. We were talking about it earlier before this call, you know, some people didn't know if the businesses they were insuring were even going to be around.

[00:20:21] So how did you guys take that into account and played into your evaluation?

[00:20:25] Mike: Well, as you and I were saying, it was a very interesting time because it went, you know, if you think back to like February, we're all kind of puzzled by what was going on. March was kind of the first like, wow, this is scary.

[00:20:36] Right. Everything starts shutting down. The market goes down 25%. The irony is like we had just gotten into the 401k space. We were in the 401k space for a cup of coffee and the market went down 25, like perfect timing. The reality is like, we're when you're playing the long game, like stuff like that is going to come up.

[00:20:56] But as you and I were talking about, the interesting thing about March, April, May was at any given time, we have a big merger and acquisition team where we spend a lot of time getting to know folks. We had hundreds and hundreds of ongoing conversations with people. Some were going on for weeks, some were going on for years, but we're two decades into this.

[00:21:19] If you're out there listening to this podcast, you've probably gotten a call by one digital, basically saying, “Hey, we'd like to talk to you.” So, when everyone's all of a sudden sitting home in their home office, wondering about the future, it led to hundreds more conversations than we may have had otherwise when people were in their busy lives.

[00:21:36] Right? So, and at the same time, people I think were sitting home going, wow, this is a little scary right now is going it alone the right thing for me. So, it was the perfect storm in terms of introspection, the ability to have conversations. It led to a very busy year for us. I think there's looming, you know, blue state, red state taxes issues that got people thinking about this.

[00:22:03] So it led to a very busy year, a very good year for us. From a valuation standpoint, we did some short-term things like protecting ourselves on the downside. So, if you had earnings of half a million dollars, we put stuff into the contract that said, if you drop to 400,000 then, you know, it's going to impact downstream payments.

[00:22:25] So we held back a little money to see how bad it was going to be, and then would release the money as long as it didn't get bad. So, some of those things short term, just during the height of the scariness, by almost July, we were back to normal everything, and it's a very busy marketplace out there. And investors love the insurance business.

[00:22:45] Reoccurring revenue is a good thing. So, people who are selling their agencies, I'm not sure you'll ever find a better time to look at the value of your firm. The most important thing I think is to continue to look back at what do you really want to do? What makes you happy? Right. What makes you and your team happy?

[00:23:04] And trust me the difference between getting eight times or nine times or nine times or 10 times that is not going to impact your happiness at all. And not a lot of people think about that the right way. So, I would encourage you to really get to know the people that you're actually talking to and understanding one fundamental question.

[00:23:25] Am I looking to sell, or am I looking to join? And if I'm looking to join, how many people over the past five or 10 years actually stay here. If you understand that, you understand a lot more about the firm, you're talking to.

[00:23:37] Ryan: Ah, that's a great perspective and thought process for people in that space.

[00:23:41] What does it look like? How many people stayed on with the company? If, if all these other people have liked it, there's a good chance I'll enjoyed as well. But if all these other people have left the organizations after they were acquired, it might be a little bit of a red flag to me as well. Now that's, that's very good advice.

[00:23:55] So look, last question we got for today is what is the most common characteristic that you've seen ingrained in the organizations, maybe it's a leadership principle, maybe it's just a core value. What has been that most common characteristic?

[00:24:10] Mike: You know, I would say that you can get to know affirm by talking to the leader and understanding does a leader talk about we and us, or do they talk about me?

[00:24:25] Right. It is such an easy thing to understand, and we're really trying to understand and talk to firms that talk about the web. They tend to have better talent across the entire organization. You know, when we go in and talk to affirm and there's like, “Hey, the average age of everybody who's at our firm from a tenure standpoint is like 25, 30 years.”

[00:24:45] No one leaves. They think that a buyer is going to think that as a positive thing, it's an absolute red flag. Right. It's like working for the government, you stay forever. That's not what somebody like one digital's looking for. Pete, you don't always get hiring. Right? People change in terms of evolving in their lives.

[00:25:05] We look for young talent being brought into a firm and some new energy being brought into the firm. It's something we're trying to do now. Hire young, trained people in the business. We don't have enough young people coming into this industry. But more than anything you should be talking or thinking, and don't be a poser, make this real, but understand it.

[00:25:25] If it's all me, me, me and I, you're probably thinking about selling your agency. If it's about we, then you can actually talk more broadly I think about joining a team and it being a really good thing for your people long-term. You're the one that's making the money. Your people need to find a home.

[00:25:43] Right. And so, I think a little more about the we and that fits us. You know, 20 years in, you're not going to find, you know, I'd like to think you can talk to a hundred people at one digital. They're all going to talk about we and us. There's a healthy dose of humility about we've been blessed to be in a good industry.

[00:26:01] We kind of joke it's where C students went to make A money. If you approach it that way, I think you're probably going to fit the one digital culture.

[00:26:09] Ryan: Man. I love it, Mike. That was awesome. Great advice. For anyone who is in that, in that spot where they're considering their acquisition of their company, merging with another company, joining another team, definitely would encourage you to give Mike a call and his team and touch base with them. This was some great advice. You might also want to re-listen to this podcast once again, because this was some really good information. Mike, I can't tell you how much I appreciate it.

[00:26:33] Mike: Hey, my pleasure and good luck to everyone. I have a lot of empathy for folks out there with this decision because it's not easy to understand. Everybody's got a bunch of good M and A folks that talk a good game understanding the difference between firms. It's hard. I'd encourage folks to dig beneath the surface, get to know a bunch of people and good luck with what, what folks are trying to do.

[00:26:53] I appreciate the opportunity to chat with you.

[00:26:55] Ryan: Well, that's great, Michael, thank you again for being on the show that wraps up this episode of the insurance leadership podcast. Thank you for joining us. And remember that a good plan today is better than a great plan months from now.

[00:27:10] Intro/Outro: Thanks for listening to today's episode of the insurance leadership podcast. Make sure you subscribe on your favorite podcast app. So, you'll be notified of future episodes or stream online at insuranceleadershippodcast.com.