Why insurance firm owner Bill Graham turned down $230 million

Back in 1962, William A. Graham IV followed his dad into the family insurance firm. He has since built William A. Graham Co. into one of the 50 largest U.S. commercial agencies. The firm's high-rise looms over City Hall; its agents write policies for builders, factories, hospitals, colleges, and public agencies beyond its hometown.

Graham, 76, now figures it's time to head to "the back of the bus," as he puts it, and let the team he built own and operate the firm, with its 180 employees and $54 million in yearly sales (up 45 percent from 2011-16).

Instead of selling the company -- he says he was offered $230 million -- Graham has set up an employee stock-ownership plan (ESOP) to give employees -- from clerical workers to specialty underwriters -- a share of the action, with extra "merit" shares for top bosses and producers.

Graham has set up a trust that will use firm profits to buy out the founder's shares and transfer them, at no cost, to new employees. They can sell when they retire, or if the firm is later sold.

"They don't pay federal and state income tax, so you're doubling earnings," says John Wepler, CEO of MarshBerry, the Ohio firm that advised Graham on the deal.

"This is a pretty mainstream idea" for founders who want to turn their employees into owners, adds James G. Steiker, a Philadelphia attorney who advises ESOPs. Local firms with at least partial ESOP ownership include Wawa, Wegmans, and W.L. Gore & Co., professional firms such as Pennoni Associates and Urban Engineers, and industrial companies such as Modern Group, Omni Cable, and New Age Industries.

Graham chose ESOP over faster ways he could have gotten paid. There are 26,000 U.S. insurance agencies, down from 38,000 in 2000, and consolidation is accelerating as prices soar, notes MarshBerry's Wepler. "The Graham Co. is bucking the trend."

Buyers were calling him "three times a week," with offers of up to $230 million, Graham says. "Four and a quarter times revenue," he stressed. A fat price, considering how many businesses struggle to sell at several times profits.   

Why so much, for a family firm? At Graham's scale, "these things don't grow on trees," said Mark A. Dewelle, insurance analyst at RBC Capital Markets.

With low fixed costs and strong cash flow, successful agencies attract offers from publicly traded superagencies such as Arthur Gallagher, banks such as Wells Fargo and BB&T, and private-equity affiliates of Goldman Sachs and Blackstone.

PE investors have agreed to pay what to some look like "crazy" prices for profitable agencies with growing fee income, said Anthony Latini, an investment banker focusing on insurers for Boenning & Scattergood, the area's largest investment bank.

So why didn't Graham, a former part-owner of the Inquirer, take the money and run?  Graham says a buyer would likely lay off staff to boost profits: "People have to leave, for a firm to stay solvent, if it's sold at that price," he told me.

"The Graham way" is supposed to mean a job for life. It starts with six months of classroom instruction, 2½ years of on-the-job training, mastery of thick books of proprietary, detail-oriented underwriting. The staff includes engineers, lawyers, and former military officers charged with working closely with clients to reduce claims. Senior Graham people who didn't get equity in the company used to leave. Now Graham has fixed things so his successors get a piece of the action. 

Staff ownership "is Bill Graham wanting to perpetuate his legacy," says vice chairman Michael Mitchell. "Our culture does not get destroyed because someone buys us and squeezes to get another five bucks from the bottom line."

"There's a tremendous amount of gratitude in our organization toward Bill Graham," added Kenneth Ewell, Graham's successor as president. "The main thing for all us employees is that we retain the Graham way. This is a good deal for everybody."