The week after Thanksgiving is a time for reflection: What exactly did my uncle say at dinner? Why do we all have to watch the Lions play football every year? How will I ever feel normal again after ingesting half my weight in carb-rich foods? The answer to this last question is quite simple: gradually, and patiently return to your regular eating and exercise regime.
For many private equity-backed or public insurance firms, ‘gradual’ and ‘patient’ are words not to be found in their mission statements. According to recent reports, there have been more than 500 insurance agency “ingestions” (also known as a type of acquisition) in the United States this year. That rate of “ingestion” of smaller companies into their (new) parent’s bigger bellies is on a level that makes last Thursday’s meal look like a midnight snack. (Title insurance and property management companies, along with law firms, are seeing similar ingestion trends. Better order up a bucket of Tums.)
‘Ingestion’ is a process of absorption (e.g., food, information and, yes, companies too) of a smaller company by a bigger one similar in operations. An ingested company is usually in the same business or industry but is smaller in size. Sometimes ingested companies are combined to form a kind of ‘mothership’ to ingest other companies in future.
Private equity-backed firms with stockpiles of cash fueled by low borrowing costs are leading this “ingestion” movement, and it’s a fairly simple numbers game: individual smaller private businesses are valued at (best) 8x (8 times) their profits (EBITDA) and once “ingested” these same operations add value equal to 16x the absorbed profits. Essentially, for every dollar of value ingested, once part of the mothership, that dollar is miraculously worth double (of course, the multiples may be different depending on many factors, but generally they follow these patterns).
Let’s make this simple to understand with some sample numbers:
|Less operating expenses||– $60,000|
|Resulting operating profit (for simplicity, call this EBITDA).||= $40,000|
Assume a valuation (“ingestion”) multiple of 8x, then this $40,000 in profit is equal to $320,000 in value.
Assume now that you switch from an expensive e-signature service to one that is more affordable, and you therefore reduce operating cost by 10%, from $60,000 in operating expense to $50,000, then profitability will increase to $50,000.
Now, the valuation is 8x $50,000 or $400,000.
So, in this scenario as a potential future “ingestee”, by reducing e-signature costs sufficiently to reduce overall operating expense by 10% you are able to increase overall company value by 25%. And the value is double this if you are an “ingestor”.
By now you may be thinking: Am I reading Tech Essentials or The Wall Street Journal? What does this have to do with my company and RMail or RSign?
Well, let’s say for example that your decision to switch to RSign can reduce operating cost by 10%; and then you are ingested — now you are reaping the benefit of this 8x multiple on your current “tech-enabled efficient” earnings (Or, 16x the savings if you are an acquisition company).
While we tried to make the above example simple, we fear we missed the mark. You are better off hearing how tech should be part of the acquisition (ingestion) value consideration directly from experts. And now, you can do this – by reviewing our Expert Webinar Series for Insurance Professionals with Steve Anderson, Co-Founder & CEO at Catalyit™, Frank Sentner ACORD / InsurTech Expert of 45+ years, and Jim Dahoney, SVP and Chief Information Officer and Director of Strategic Acquisitions at Marshall & Sterling.
This exclusive webinar is about how insurance firms can make a potential future ingestion more fun (i.e., more profitable) without the undesirable side effects. If you register now, you can re-live some of the key insights our panel provided. If you’re in the insurance (or any financial services) business, you won’t want to miss this.
Feel free to contact us to discuss and/or demo RSign and RMail, and find out how your firm can reduce tech operating costs, become more profitable and, yes, become a target for ingestion—not unlike that leftover pumpkin pie.
May 20, 2022
May 13, 2022
May 06, 2022
April 29, 2022
April 25, 2022