NOTE 2 Business Combinations

Acquisitions in 2013

During 2013, Brown & Brown acquired the assets and assumed certain liabilities of ten insurance intermediaries, all of the stock of one insurance intermediary and a book of business (customer accounts). The aggregate purchase price of these acquisitions was $519,794,000, including $408,072,000 of cash payments, the issuance of $552,000 in other payables, the assumption of $106,079,000 of liabilities and $5,091,000 of recorded earn-out payables. All of these acquisitions were acquired primarily to expand Brown & Brown’s core businesses and to attract high-quality personnel. Acquisition purchase prices are typically based on a multiple of average annual operating profit earned over a one—to three-year period within a minimum and maximum price range. The recorded purchase price for all acquisitions consummated after January 1, 2009 included an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of earn-out obligations will be recorded in the consolidated statement of income when incurred.

The fair value of earn-out obligations is based on the present value of the expected future payments to be made to the sellers of the acquired businesses in accordance with the provisions outlined in the respective purchase agreements. In determining fair value, the acquired business’s future performance is estimated using financial projections developed by management for the acquired business and reflects market participant assumptions regarding revenue growth and/or profitability. The expected future payments are estimated on the basis of the earn-out formula and performance targets specified in each purchase agreement compared to the associated financial projections. These payments are then discounted to present value using a risk-adjusted rate that takes into consideration the likelihood that the forecasted earn-out payments will be made.

Based on the acquisition date and the complexity of the underlying valuation work, certain amounts included in the Company’s Condensed Consolidated Financial Statements may be provisional and thus subject to further adjustments within the permitted measurement period, as defined in Accounting Standards Codification (“ASC”) Topic 805—Business Combinations.

For 2013, several adjustments were made within the permitted measurement period that resulted in a reduction to the aggregate purchase price of the applicable acquisition of $504,000, including $18,000 of cash payments, an increase of $117,000 in other payables, the assumption of $82,000 of liabilities and the reduction of $721,000 in recorded earn-out payables.

The following table summarizes the aggregate purchase price allocation made as of the date of each acquisition for current year acquisitions and adjustment made during the measurement period for prior year acquisitions:


*(in thousands)*
Name	Business Segment	2013 Date of Acquisition	Cash Paid		Other Payable		Recorded Earn-out Payable		Net Assets Acquired		Maximum Potential Earn-out Payable
The Rollins Agency, Inc.	Retail	June 1	$	13,792	$	50	$	2,321	$	16,163	$	4,300
Beecher Carlson Holdings, Inc.	Retail; National Programs	July 1		364,256		—		—		364,256		—
ICA, Inc.	Services	December 31		19,770		—		727		20,497		5,000
Other	Various	Various		10,254		502		2,043		12,799		7,468

Total			$	408,072	$	552	$	5,091	$	413,715	$	16,768

The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition:


*(in thousands)*	Rollins			Beecher			ICA		Other			Total
Cash	$	—		$	40,360		$	—	$	—		$	40,360
Other current assets		393			57,632			—		1,573			59,598
Fixed assets		30			1,786			75		24			1,915
Goodwill		12,697			265,174			12,377		5,696			295,944
Purchased customer accounts		3,878			101,565			7,917		5,623			118,983
Non-compete agreements		31			2,758			21		76			2,886
Other assets		—			—			107		1			108

Total assets acquired		17,029			469,275			20,497		12,993			519,794
Other current liabilities		(866	)		(80,090	)		—		(194	)		(81,150	)
Deferred income taxes, net		—			(22,764	)		—		—			(22,764	)
Other liabilities		—			(2,165	)		—		—			(2,165	)

Total liabilities assumed		(866	)		(105,019	)		—		(194	)		(106,079	)

Net assets acquired	$	16,163		$	364,256		$	20,497	$	12,799		$	413,715

The weighted average useful lives for the acquired amortizable intangible assets are as follows: purchased customer accounts, 15.0 years; and non-compete agreements, 5.0 years.

Goodwill of $295,944,000 was allocated to the Retail, National Programs, Wholesale Brokerage and Services Divisions in the amounts of $257,196,000, $27,091,000, ($812,000) and $12,469,000, respectively. Of the total goodwill of $295,944,000, $41,663,000 is currently deductible for income tax purposes and $249,190,000 is non-deductible. The remaining $5,091,000 relates to the recorded earn-out payables and will not be deductible until it is earned and paid.

The results of operations for the acquisitions completed during 2013 have been combined with those of the Company since their respective acquisition dates. The total revenues and income before income taxes from the acquisitions completed through December 31, 2013, included in the Condensed Consolidated Statement of Income for the twelve months ended December 31, 2013, were $63,797,000 and $872,000, respectively. If the acquisitions had occurred as of the beginning of the period, the Company’s results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.


(UNAUDITED)	For the Year Ended December 31,
*(in thousands, except per share data)*	2013		2012
Total revenues	$	1,439,918	$	1,329,262
Income before income taxes	$	373,175	$	329,291
Net income	$	226,562	$	198,826
Net income per share:
Basic	$	1.57	$	1.39
Diluted	$	1.55	$	1.36
Weighted average number of shares outstanding:
Basic		141,033		139,634
Diluted		142,624		142,010

Acquisitions in 2012

During 2012, Brown & Brown acquired the assets and assumed certain liabilities of 19 insurance intermediaries, all of the stock of one insurance intermediary and a book of business (customer accounts). The aggregate purchase price of these acquisitions was $667,586,000, including $483,933,000 of cash payments, the issuance of notes payable of $59,000, the issuance of $25,439,000 in other payables, the assumption of $136,676,000 of liabilities and $21,479,000 of recorded earn-out payables. The ‘other payables’ amount includes $22,061,000 that the Company is obligated to pay all shareholders of Arrowhead on a pro rata basis for certain pre-merger corporate tax refunds and certain estimated potential future income tax credits that were created by net operating loss carryforwards originating from transaction-related tax benefit items. All of these acquisitions were acquired primarily to expand Brown & Brown’s core businesses and to attract high-quality personnel. Acquisition purchase prices are typically based on a multiple of average annual operating profit earned over a one—to three-year period within a minimum and maximum price range. The recorded purchase price for all acquisitions consummated after January 1, 2009 included an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of earn-out obligations will be recorded in the consolidated statement of income when incurred.

The acquisitions made in 2012 have been accounted for as business combinations and are as follows:


*(in thousands)*
Name	Business Segment	2012 Date of Acquisition	Cash Paid		Note Payable		Other Payable		Recorded Earn-out Payable		Net Assets Acquired		Maximum Potential Earn-out Payable
Arrowhead General Insurance Agency Superholding Corporation	National Programs; Services	January 9	$	396,952	$	—	$	22,061	$	3,290	$	422,303	$	5,000
Insurcorp & GGM Investments LLC (d/b/a Maalouf Benefit Resources)	Retail	May 1		15,500		—		900		4,944		21,344		17,000
Richard W. Endlar Insurance Agency, Inc.	Retail	May 1		10,825		—		—		2,598		13,423		5,500
Texas Security General Insurance Agency, Inc.	Wholesale Brokerage	September 1		14,506		—		2,182		2,124		18,812		7,200
Behnke & Associates, Inc.	Retail	December 1		9,213		—		—		1,126		10,339		3,321
Rowlands & Barranca Agency, Inc.	Retail	December 1		8,745		—		—		2,401		11,146		4,000
Other	Various	Various		28,192		59		296		4,996		33,543		14,149

Total			$	483,933	$	59	$	25,439	$	21,479	$	530,910	$	56,170

The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition:


*(in thousands)*	Arrowhead			Insurcorp			Endlar			Texas Security			Behnke		Rowlands			Other			Total
Cash	$	61,786		$	—		$	—		$	—		$	—	$	—		$	—		$	61,786
Other current assets		69,051			180			305			1,866			—		—			422			71,824
Fixed assets		4,629			25			25			45			25		30			158			4,937
Goodwill		321,128			14,745			8,044			10,845			6,430		8,363			21,085			390,640
Purchased customer accounts		99,675			6,490			5,230			6,229			3,843		3,367			13,112			137,946
Non-compete agreements		100			22			11			14			41		21			243			452
Other assets		1			—			—			—			—		—			—			1

Total assets acquired		556,370			21,462			13,615			18,999			10,339		11,781			35,020			667,586
Other current liabilities		(107,579	)		(118	)		(192	)		(187	)		—		(635	)		(1,477	)		(110,188	)
Deferred income taxes, net		(26,488	)		—			—			—			—		—			—			(26,488	)

Total liabilities assumed		(134,067	)		(118	)		(192	)		(187	)		—		(635	)		(1,477	)		(136,676	)

Net assets acquired	$	422,303		$	21,344		$	13,423		$	18,812		$	10,339	$	11,146		$	33,543		$	530,910

The weighted average useful lives for the acquired amortizable intangible assets are as follows: purchased customer accounts, 15.0 years; and non-compete agreements, 5.0 years.

Goodwill of $390,640,000, was allocated to the Retail, National Programs, Wholesale Brokerage and Services Divisions in the amounts of $57,856,000, $289,378,000, $11,656,000 and $31,750,000, respectively. Of the total goodwill of $390,640,000, $52,730,000 is currently deductible for income tax purposes and $316,431,000 is non-deductible. The remaining $21,479,000 relates to the recorded earn-out payables and will not be deductible until it is earned and paid.

The results of operations for the acquisitions completed during 2012 have been combined with those of the Company since their respective acquisition dates. The total revenues and income before income taxes from the acquisitions completed through December 31, 2012, included in the Condensed Consolidated Statement of Income for the twelve months ended December 31, 2012, were $129,472,000 and $898,000, respectively. If the acquisitions had occurred as of the beginning of the period, the Company’s results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.


(UNAUDITED)	For the Year Ended December 31,
*(in thousands, except per share data)*	2012		2011
Total revenues	$	1,230,408	$	1,163,341
Income before income taxes	$	315,051	$	313,706
Net income	$	190,228	$	190,174
Net income per share:
Basic	$	1.33	$	1.33
Diluted	$	1.30	$	1.31
Weighted average number of shares outstanding:
Basic		139,364		138,582
Diluted		142,010		140,264

Acquisitions in 2011

During 2011, Brown & Brown acquired the assets and assumed certain liabilities of 37 insurance intermediaries, all of the stock of one insurance intermediary and several books of business (customer accounts). The aggregate purchase price of these acquisitions was $214,822,000, including $167,444,000 of cash payments, the issuance of $1,194,000 in notes payable, the assumption of $15,659,000 of liabilities and $30,525,000 of recorded earn-out payables. All of these acquisitions were acquired primarily to expand Brown & Brown’s core businesses and to attract high-quality personnel. Acquisition purchase prices are typically based on a multiple of average annual operating profit earned over a one-to three-year period within a minimum and maximum price range. The recorded purchase price for all acquisitions consummated after January 1, 2009 included an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in the fair value of earn-out obligations will be recorded in the consolidated statement of income when incurred.

The acquisitions made in 2011 have been accounted for as business combinations and are as follows:


*(in thousands)*
Name	Business Segment	2011 Date of Acquisition	Cash Paid		Note Payable		Recorded Earn-out Payable		Net Assets Acquired		Maximum Potential Earn-out Payable
Balcos Insurance, Inc.	Retail	January 1	$	8,611	$	—	$	1,595	$	10,206	$	5,766
Associated Insurance Service, Inc. et al.	Retail	January 1		12,000		—		1,575		13,575		6,000
United Benefit Services Insurance Agency LLC et al.	Retail	February 1		14,283		—		2,590		16,873		8,442
First Horizon Insurance Group, Inc. et al.	Retail	April 30		25,060		—		—		25,060		—
Fitzharris Agency, Inc. et al.	Retail	May 1		6,159		—		888		7,047		3,832
Corporate Benefit Consultants, LLC	Retail	June 1		9,000		—		2,038		11,038		4,520
Sitzmann, Morris & Lavis Insurance Agency, Inc. et al.	Retail	November 1		40,460		—		6,228		46,688		19,000
Snapper Shuler Kenner, Inc. et al.	Retail	November 1		7,493		—		1,318		8,811		3,988
Industry Consulting Group, Inc.	National Programs	November 1		9,133		—		3,877		13,010		5,794
Colonial Claims Corporation et al.	Services	December 23		9,950		—		4,248		14,198		8,000
Other	Various	Various		25,295		1,194		6,168		32,657		12,865

Total			$	167,444	$	1,194	$	30,525	$	199,163	$	78,207

The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition:


*(in thousands)*	Balcos			AIS			United			FHI			FA			CBC
Cash	$	—		$	—		$	—		$	5,170		$	—		$	—
Other current assets		187			252			438			1,640			77			227
Fixed assets		20			100			20			134			60			6
Goodwill		6,486			9,055			10,049			15,254			7,244			6,738
Purchased customer accounts		3,530			4,086			7,045			8,088			3,351			4,046
Non-compete agreements		42			92			45			10			21			21
Other assets		—			—			4			9			—			—

Total assets acquired		10,265			13,585			17,601			30,305			10,753			11,038

Other current liabilities		(59	)		(10	)		(728	)		(3,790	)		(3,706	)		—
Deferred income taxes, net		—			—			—			(1,455	)		—			—
Other liabilities		—			—			—			—			—			—

Total liabilities assumed		(59	)		(10	)		(728	)		(5,245	)		(3,706	)		—

Net assets acquired	$	10,206		$	13,575		$	16,873		$	25,060		$	7,047		$	11,038


*(in thousands)*	SML			SSK			ICG			CC			Other			Total
Cash	$	—		$	—		$	—		$	—		$	—		$	5,170
Other current assets		1,372			247			336			—			1,059			5,835
Fixed assets		465			45			100			60			65			1,075
Goodwill		31,601			5,818			9,564			8,070			18,465			128,344
Purchased customer accounts		13,995			2,726			7,161			6,094			13,746			73,868
Non-compete agreements		42			12			11			23			187			506
Other assets		4			—			5			—			2			24

Total assets acquired		47,479			8,848			17,177			14,247			33,524			214,822

Other current liabilities		(791	)		(37	)		(1,096	)		(49	)		(867	)		(11,133	)
Deferred income taxes, net		—			—			—			—			—			(1,455	)
Other liabilities		—			—			(3,071	)		—			—			(3,071	)

Total liabilities assumed		(791	)		(37	)		(4,167	)		(49	)		(867	)		(15,659	)

Net assets acquired	$	46,688		$	8,811		$	13,010		$	14,198		$	32,657		$	199,163

The weighted average useful lives for the above acquired amortizable intangible assets are as follows: purchased customer accounts, 15.0 years; noncompete agreements, 5.0 years.

Goodwill of $128,344,000, was assigned to the Retail, National Programs and Services Divisions in the amounts of $108,420,000, $11,853,000 and $8,071,000, respectively. Of the total goodwill of $128,344,000, $84,105,000 is currently deductible for income tax purposes and $13,714,000 is non-deductible. The remaining $30,525,000 relates to the recorded acquisition earn-out payables and will not be deductible until it is earned and paid.

The results of operations for the acquisitions completed during 2011 have been combined with those of the Company since their respective acquisition dates. The total revenues and income before income taxes from the acquisitions completed through December 31, 2011 included in the Condensed Consolidated Statement of Income for the twelve months ended December 31, 2011 were $40,291,000 and $7,223,000, respectively. If the acquisitions had occurred as of the beginning of the comparable prior annual reporting period, the Company’s estimated results of operations would be as shown in the following table. These unaudited pro forma results are not necessarily indicative of the actual results of operations that would have occurred had the acquisitions actually been made at the beginning of the respective periods.


(UNAUDITED)	For the Year Ended December 31,
*(in thousands, except per share data)*	2011		2010
Total revenues	$	1,058,142	$	1,059,857
Income before income taxes	$	283,404	$	291,944
Net income	$	171,805	$	177,464
Net income per share:
Basic	$	1.20	$	1.25
Diluted	$	1.19	$	1.23
Weighted average number of shares outstanding:
Basic		138,582		137,924
Diluted		140,264		139,318

For acquisitions consummated prior to January 1, 2009, additional consideration paid to sellers as a result of purchase price earn-out provisions are recorded as adjustments to intangible assets when the contingencies are settled. The net additional consideration paid by the Company in 2013 as a result of these adjustments totaled $873,000, all of which was allocated to goodwill. Of the $873,000 net additional consideration paid, $873,000 was issued in other payables. The net additional consideration paid by the Company in 2012 as a result of these adjustments totaled $2,907,000, all of which was allocated to goodwill. Of the $2,907,000 net additional consideration paid, $2,907,000 was paid in cash.

As of December 31, 2013, the maximum future contingency payments related to all acquisitions totaled $130,584,000, all of which relates to acquisitions consummated subsequent to January 1, 2009.

ASC Topic 805—Business Combinations is the authoritative guidance requiring an acquirer to recognize 100% of the fair values of acquired assets, including goodwill, and assumed liabilities (with only limited exceptions) upon initially obtaining control of an acquired entity. Additionally, the fair value of contingent consideration arrangements (such as earn-out purchase arrangements) at the acquisition date must be included in the purchase price consideration. As a result, the recorded purchase prices for all acquisitions consummated after January 1, 2009 include an estimation of the fair value of liabilities associated with any potential earn-out provisions. Subsequent changes in these earn-out obligations will be recorded in the consolidated statement of income when incurred. Potential earn-out obligations are typically based upon future earnings of the acquired entities, usually between one and three years.

As of December 31, 2013, the fair values of the estimated acquisition earn-out payables were re-evaluated and measured at fair value on a recurring basis using unobservable inputs (Level 3). The resulting additions, payments, and net changes, as well as the interest expense accretion on the estimated acquisition earn-out payables, for the years ended December 31, were as follows:


	For the Year Ended December 31,
(in thousands)	2013			2012			2011
Balance as of the beginning of the period	$	52,987		$	47,715		$	29,608
Additions to estimated acquisition earn-out payables		5,816			21,479			30,525
Payments for estimated acquisition earn-out payables		(18,278	)		(17,625	)		(10,212	)

Subtotal		40,525			51,569			49,921

Net change in earnings from estimated acquisition earn-out payables:

Change in fair value on estimated acquisition earn-out payables		570			(1,051	)		(4,043	)
Interest expense accretion		1,963			2,469			1,837

Net change in earnings from estimated acquisition earn-out payables		2,533			1,418			(2,206	)

Balance as of December 31	$	43,058		$	52,987		$	47,715

Of the $43,058,000 estimated acquisition earn-out payables as of December 31, 2013, $6,312,000 was recorded as accounts payable and $36,746,000 was recorded as other non-current liabilities. Of the $52,987,000 in estimated acquisition earn-out payables as of December 31, 2012, $10,164,000 was recorded as accounts payable and $42,823,000 was recorded as other non-current liabilities.