Business Combinations

During the nine months ended September 30, 2016, Brown & Brown acquired the assets and assumed certain liabilities of five insurance intermediaries and all of the stock of one insurance intermediaries. 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 businesses 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, 2016, several adjustments were made within the permitted measurement period that resulted in a decrease in the aggregate purchase price of the affected acquisitions of $917,497 relating to the assumption of certain liabilities. These measurement period adjustments have been reflected as current period adjustments in the nine months ended September 30, 2016 in accordance with the guidance in ASU 2015-16 "Business Combinations". The measurement period adjustments impacted goodwill, with no effect on earnings or cash in the current period.

Cash paid for acquisitions was $115.3 million and $109.9 million in the nine-month periods ended September 30, 2016 and 2015, respectively. We completed six acquisitions (excluding book of business purchases) in the nine-month period ended September 30, 2016. We completed nine acquisitions (excluding book of business purchases) in the nine-month period ended September 30, 2015.

The following table summarizes the purchase price allocation made as of the date of each acquisition for current year acquisitions and adjustments made during the measurement period for prior year acquisitions. The purchase price allocation for Social Security Advocates for the Disabled ("SSAD") and Morstan General Agency, Inc. ("Morstan") are provisional as they are based on initial valuations. The primary areas of the preliminary purchase price allocations for SSAD and Morstan that are not yet finalized relate to the fair value of certain tangible and intangible assets acquired and liabilities assumed, assets and liabilities related to income taxes and residual goodwill. During the measurement periods, the Company will adjust assets or liabilities if new information is obtained about facts and circumstances that existed as of the acquisition date that, if known, would have resulted in the recognition of those assets and liabilities as of that date. With the Company's adoption of ASU No. 2015-16 in the first fiscal quarter of 2016, these adjustments will be made in the period in which the amounts are determined and the current period income effect of such adjustments will be calculated as if the adjustments had been completed as of the acquisition date.



(in thousands)
Name	Business Segment	Effective Date of Acquisition	Cash Paid		Note Payable		Other Payable		Recorded Earn-Out Payable			Net Assets Acquired		Maximum Potential Earn- Out Payable
Social Security Advocates for the Disabled (SSAD)	Services	February 1, 2016	$	32,526	$	492	$	—	$	971		$	33,989	$	3,000
Morstan General Agency, Inc. (Morstan)	Wholesale	June 1, 2016	66,050		—		10,200		3,091			79,341		5,000
Other	Various	Various	16,737		—		305		(234		)	16,808		5,722
Total			$	115,313	$	492	$	10,505	$	3,828		$	130,138	$	13,722

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



(in thousands)	SSAD			Morstan			Other			Total
Cash	$	2,094		$	—		$	—		$	2,094
Other current assets	1,042			2,482			753			4,277
Fixed assets	307			300			47			654
Goodwill	22,352			51,454			11,876			85,682
Purchased customer accounts	13,069			26,481			7,201			46,751
Non-compete agreements	72			39			84			195
Total assets acquired	38,936			80,756			19,961			139,653
Other current liabilities	(1,717		)	(1,415		)	(3,153		)	(6,285		)
Deferred income tax, net	(3,230		)	—			—			(3,230		)
Total liabilities assumed	(4,947		)	(1,415		)	(3,153		)	(9,515		)
Net assets acquired	$	33,989		$	79,341		$	16,808		$	130,138

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 $85.7 million, which is net of any opening balance sheet adjustments within the allowable measurement period, was allocated to the Retail, National Programs, Wholesale Brokerage and Service Segments in the amounts of $11.9 million, $(1.0) thousand, $51.5 million and $22.4 million, respectively. Of the total goodwill of $85.7 million, $60.5 million is currently deductible for income tax purposes and $21.4 million is non-deductible. The remaining $3.8 million relates to the recorded earn-out payables and will not be deductible until it is earned and paid.

For the acquisitions completed during 2016, 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, 2016, included in the Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2016, were $12.6 million and $21.5 million, respectively. The income before income taxes, including the intercompany cost of capital charge, from the acquisitions completed through September 30, 2016, included in the Condensed Consolidated Statement of Income for the three and nine months ended September 30, 2016, were $1.0 million and $2.4 million. 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)	2016		2015		2016		2015
Total revenues	$	462,684	$	445,672	$	1,350,014	$	1,295,027
Income before income taxes	$	117,144	$	115,749	$	332,101	$	315,824
Net income	$	71,650	$	69,171	$	201,996	$	190,387
Net income per share:
Basic	$	0.51	$	0.49	$	1.45	$	1.35
Diluted	$	0.51	$	0.48	$	1.43	$	1.32
Weighted average number of shares outstanding:
Basic	136,461		137,684		136,002		138,181
Diluted	138,182		140,041		137,584		140,446

As of September 30, 2016 and 2015, 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, 2016 and 2015, were as follows:



	For the three months ended September 30,						For the nine months ended September 30,
(in thousands)	2016			2015			2016			2015
Balance as of the beginning of the period	$	73,447		$	90,113		$	78,387		$	75,283
Additions to estimated acquisition earn-out payables	1,437			2,363			3,828			29,496
Payments for estimated acquisition earn-out payables	(16,988		)	(12,899		)	(27,555		)	(26,937		)
Subtotal	57,896			79,577			54,660			77,842
Net change in earnings from estimated acquisition earn-out payables:
Change in fair value on estimated acquisition earn-out payables	2,883			(365		)	4,704			(30		)
Interest expense accretion	727			824			2,142			2,224
Net change in earnings from estimated acquisition earn-out payables	3,610			459			6,846			2,194
Balance as of September 30,	$	61,506		$	80,036		$	61,506		$	80,036

Of the $61.5 million estimated acquisition earn-out payables as of September 30, 2016, $23.0 million was recorded as accounts payable and $38.5 million was recorded as other non-current liabilities. Included within the additions to estimated acquisition earn-out payables are any adjustments to opening balance sheet items within the allowable measurement period, which may therefore differ from previously reported amounts.