Business Combinations

During the nine months ended September 30, 2015, Brown & Brown acquired the assets and assumed certain liabilities of nine insurance intermediaries and four books of business (customer accounts). Additionally, miscellaneous adjustments were recorded to the purchase price allocation of certain prior acquisitions completed within the last twelve months as permitted by Accounting Standards Codification Topic 805 — Business Combinations (“ASC 805”). Such adjustments are presented in the "Other" category within the following two tables. All of these acquisitions were acquired primarily to expand Brown & Brown’s core business and to attract and hire high-quality individuals. 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 Condensed 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 ASC 805. For the nine months ended September 30, 2015, several adjustments were made within the permitted measurement period that resulted in a decrease in the aggregate purchase price of the affected acquisitions of $503,442 relating to the assumption of certain liabilities.

Cash paid for acquisitions was $109.9 million and $720.1 million in the nine-month periods ended September 30, 2015 and 2014, respectively. We completed nine acquisitions (excluding book of business purchases) in the nine-month period ended September 30, 2015. We completed six acquisitions (excluding book of business purchases) in the nine-month period ended September 30, 2014.

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



(in thousands)
Name	Business Segment	Effective Date of Acquisition	Cash Paid		Other Payable		Recorded Earn-Out Payable		Net Assets Acquired		Maximum Potential Earn- Out Payable
Liberty Insurance Brokers, Inc. and Affiliates (Liberty)	Retail	February 1, 2015	$	12,000	$	—	$	2,981	$	14,981	$	3,750
Spain Agency, Inc.	Retail	March 1, 2015	20,706		—		2,617		23,323		9,162
Bellingham Underwriters, Inc.	National Programs	May 1, 2015	9,007		500		3,322		12,829		4,400
Fitness Insurance, LLC	Retail	June 1, 2015	9,455		—		2,386		11,841		3,500
Strategic Benefit Advisors, Inc.	Retail	June 1, 2015	49,600		400		14,441		64,441		26,000
Other	Various	Various	9,158		95		3,749		13,002		6,267
Total			$	109,926	$	995	$	29,496	$	140,417	$	53,079

The following table summarizes the estimated fair values of the aggregate assets and liabilities acquired as of the date of each acquisition. The data included in the ‘Other’ column shows a negative adjustment for purchased customer accounts. This is driven mainly by the final valuation adjustment for the acquisition of Wright.



(in thousands)	Liberty			Spain Agency, Inc.			Bellingham Underwriters, Inc.			Fitness Insurance, LLC		Strategic Benefit Advisors, Inc.		Other			Total
Other current assets	$	2,486		$	—		$	—		$	—	$	—	$	170		$	2,656
Fixed assets	40			50			25			17		41		32			205
Goodwill	10,010			16,036			9,608			8,084		39,865		17,029			100,632
Purchased customer accounts	4,506			7,430			3,223			3,740		24,500		(4,105		)	39,294
Non-compete agreements	24			21			21			—		21		123			210
Other assets	—			—			—			—		14		—			14
Total assets acquired	17,066			23,537			12,877			11,841		64,441		13,249			143,011
Other current liabilities	(42		)	(214		)	(48		)	—		—		(3,458		)	(3,762		)
Deferred income tax, net	—			—			—			—		—		2,576			2,576
Other liabilities	(2,043		)	—			—			—		—		635			(1,408		)
Total liabilities assumed	(2,085		)	(214		)	(48		)	—		—		(247		)	(2,594		)
Net assets acquired	$	14,981		$	23,323		$	12,829		$	11,841	$	64,441	$	13,002		$	140,417

The weighted average useful lives for the acquired amortizable intangible assets are as follows: purchased customer accounts, 15 years; and non-compete agreements, 5 years.

Goodwill of $100,632,000 was allocated to the Retail, National Programs and Wholesale Brokerage Segments in the amounts of $78,018,000, $18,009,000 and $4,605,000, respectively. Of the total goodwill of $100,632,000, $62,735,000 is currently deductible for income tax purposes and $8,401,000 is non-deductible. The remaining $29,496,000 relates to the recorded earn-out payables and will not be deductible until it is earned and paid.

For the acquisitions completed during 2015, the results of operations since the acquisition dates have been combined with those of the Company. The total revenues from the acquisitions completed through September 30, 2015, included in the Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2015, were $9,218,000 and $16,640,000, respectively. The income before income taxes, including the intercompany cost of capital charge, from the acquisitions completed through September 30, 2015, included in the Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2015, was $397,000 and $1,243,000, respectively. If the acquisitions had occurred as of the beginning of the respective periods, 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 three months ended September 30,				For the nine months ended September 30,
(in thousands, except per share data)	2015		2014		2015		2014
Total revenues	$	432,276	$	431,703	$	1,267,812	$	1,212,241
Income before income taxes	$	112,855	$	115,712	$	311,429	$	310,302
Net income	$	67,442	$	70,166	$	187,738	$	187,952
Net income per share:
Basic	$	0.48	$	0.49	$	1.33	$	1.30
Diluted	$	0.47	$	0.48	$	1.31	$	1.28
Weighted average number of shares outstanding:
Basic	137,684		140,915		138,181		141,253
Diluted	140,041		142,964		140,446		143,102

As of September 30, 2015 and 2014, 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) as defined in ASC 820-Fair Value Measurement. The resulting additions, payments, and net changes, as well as the interest expense accretion on the estimated acquisition earn-out payables, for the three and nine months ended September 30, 2015 and 2014, were as follows:



	For the three months ended September 30,						For the nine months ended September 30,
(in thousands)	2015			2014			2015			2014
Balance as of the beginning of the period	$	90,113		$	52,696		$	75,283		$	43,058
Additions to estimated acquisition earn-out payables	2,363			(221		)	29,496			14,586
Payments for estimated acquisition earn-out payables	(12,899		)	(463		)	(26,937		)	(11,892		)
Subtotal	79,577			52,012			77,842			45,752
Net change in earnings from estimated acquisition earn-out payables:
Change in fair value on estimated acquisition earn-out payables	(365		)	(247		)	(30		)	4,981
Interest expense accretion	824			561			2,224			1,593
Net change in earnings from estimated acquisition earn-out payables	459			314			2,194			6,574
Balance as of September 30,	$	80,036		$	52,326		$	80,036		$	52,326

Of the $80.0 million estimated acquisition earn-out payables as of September 30, 2015, $32.3 million was recorded as accounts payable and $47.7 million was recorded as other non-current liabilities. Included within additions to estimated acquisition earn-out payables are any adjustments to opening balance sheet items prior to the one-year anniversary date and may therefore differ from previously reported amounts.