Changing Ownership

Insurance brokers need to consider several factors when seeking new talent as part of their succession plans. Not only is experience in the insurance industry a must, but candidates also need experience at a brokerage and a holistic view of the different components of a brokerage.

Principals must also be ready to accommodate producers without enough cash readily available to buy a stake in the business.

It is easy for brokerage owners to love life. They get to work directly with customers, see the direct impact of their efforts on the operation’s success, savour the freedom of making autonomous decisions and pursue areas of personal interest. While it has never been easy to become a brokerage principal, today it can be even more challenging than in the past.

Brenda Rose, Vice President and Partner, FCA Insurance Brokers

The number of outside investor groups competing for ownership has proliferated. Like individual entrepreneurs, these investors – whether venture capital firms, private equity groups, international conglomerates or general insurance companies – are keen to buy into brokerages because they are viable, vibrant businesses with excellent growth prospects.

With heightened competition, existing owners can expect higher, harder-to-finance returns for relinquishing shares in their firms.

Another hurdle for individuals seeking ownership opportunities is the need for clear perpetuation strategies within existing firms. Sometimes, brokers can be guilty of working more “in the business” than “on the business,'” neglecting the recruitment of the necessary entrepreneurial talent in favour of growing operations.

Don Anderson, senior partner at FCA Insurance, testifies to this.

“I joined a firm of 10 people 42 years ago,” Anderson reports. “In my first 10 years, we brought in young staff and they developed into partners and shareholders of a firm now employing nearly 100 people – but we were working so hard at effectively building our company that we forgot to keep hiring people who would eventually become our replacements. We did not specifically look for people who could develop into owners and then we had to correct our strategy,” he adds.

The search for potential candidates requires planning and clarity around what qualifications are needed. Many people believe they possess ownership capabilities, but judging whether or not someone has the potential not only to succeed but to lead others to success, is a complex process. Culture is all important, unique to each organization. It can be difficult to find people with the right mix of experience, spirit, ambition and knowledge to fit in with an existing senior team.

In addition to technical insurance knowledge, specialized expertise and demonstrated sales skills, candidates need to possess leadership capabilities that are harder to define.

John McNeil, manager of learning and development at RSA Canada, and co-ordinator of RSA’s Making Partner program for brokers, provides an inventory of minimum criteria, including the following:

• the willingness to view problems as opportunities;
• a contagious positive attitude and energy;
• professional, but personal demeanour;
• the desire to make those around them better;
• the ability to empower those around them and showcase their success;
• high, but realistic expectations for continuous improvement and reflection;
• a dedication to lifelong learning; and
• passion for their role to make a difference.

McNeil elaborates on his shopping list.

“I believe that people demonstrate the capacity to lead when they have proven that: one, they care; two, they set their own higher standard that is committed to personal excellence; and three, by motivating, influencing and enabling those around them, to both directly and indirectly commit to greatness,” McNeil says.

Unfortunately, some who have ambitions to be principals do not recognize that helping others, and so building a culture and the organization, is critically important. New leaders need a holistic view, to appreciate how different components contribute to overall success.

Often producers work territorially within their own individual silos, without extending themselves to contribute to the common good; in effect, some sales cultures can perpetuate this narrow approach. Brokerages and individuals all benefit and learn from sharing new perspectives, from openly discussing ideas outside of their own particular expertise and having the opportunity to participate.

Beyond sales, many elements underpin a successful brokerage operation – from financial management and insurer relationships, to operational issues like the use of office space and technology – that prospective owners need to recognize. Failing to internalize the needs of the whole means the individual is unlikely to be a successful partner.

Robert Kimball, president of Pearson Insurance in New Brunswick, has his own perspective on how to cultivate prospective partners’ success. “What we have done, as what several smaller brokerages have done, is look to family for perpetuation,” reports Kimball.

“In my own case, we suggested (our son) Robert look to work with a company for several years. He did this with Wawanesa for four years, doing almost all jobs there except claims. This gave Robert immediate credibility once he started in the (brokerage) office.”

Anderson makes a further distinction about previous experience. “We often look for individuals who have around 10 years experience in the insurance business, of which at least five is as an insurance broker,” he reports.

“Although people working for insurers have their own skills, often the longer they work for an insurer the more difficult it is for those additional skills and experience to translate into the broker end of the business,” Anderson adds.

McNeil also comments on the importance of training and the long-term process of integrating a candidate into an organization.

“To ensure that the individual is successful and confident in their role, I also believe that to help them develop, they need to be surrounded with the right support, coaching, mentorship and ongoing continuous education”, contends McNeil.

“One big factor I would suggest is involving any possible successor in decisions being made,” advises Kimball. “Even early on in the first years of

employment, the involvement will give different perspectives to look at. It also shows the thought process and strengths or weaknesses in decision-making of the successor,” he suggests.

In addition to mentoring and training within the brokerage, candidates may also tailor more structured education to their own needs, choosing among courses provided by brokers’ associations, insurer programs or leadership sessions outside the industry.

Even once skills are identified and located, and development nurtured, financial and legal considerations are obstacles to be addressed.

For individuals moving from one brokerage to another to earn a potential partnership, honouring non-compete agreements adds to the initial investments a brokerage must make. That support is significant, so brokerage principals must be careful and confident in their selections; ultimately, there is a leap of faith for both candidates and incumbent principals as there can be no guarantees for results that will become apparent only after several years.

Prospective shareholders also may not have the necessary cash readily available. They may have RRSP funds or a house (often subject to a decent-sized mortgage) but little free capital.

A brokerage seriously looking for partners must be ready to accommodate this lack of funds. At the same time, prospective principals must recognize that one must make some material sacrifices initially, before the benefits can be enjoyed.

A variety of restructuring options may be considered to allow for additional participants, and good legal and financial planning counsel is essential. Advice from objective industry experts, strategic planning consultants or even from friendly competitors can be also be invaluable.

Funds to facilitate buying into a brokerage are available from a number of sources, starting with banks and finance companies, but sometimes even with currently low interest rates, it can be hard to make this work. Other options may include insurance companies that can often tailor attractive terms to a specific situation.

Some insurers, recognizing the value of brokerage independence to their own long-term returns, will not insist on equity or control of portfolios as a condition of loans.

Other more creative strategies may work for some, especially if existing owners are prepared to be patient.

“I have found the structuring of the transition is a multi-year effort in order to make the most financial benefit to all concerned,” Kimball reports.

“In our particular recent approach, we were able to work out a deal internally and that is how we intend to proceed into the future,” says Anderson “It is important that the existing brokerage owners have a commitment to remaining truly independent.”

Taking a long-term view, and postponing short-term windfalls, allows the incumbent leadership to preserve not only the autonomous organization they have built, but also the customer-focused philosophy they have lived by.

Customers can share in marking the perpetuation of the organization and its culture.

“Insurance is a people business, and I believe that announcements should be made publicly with the customers,” says RSA’s McNeil. “New generational leadership changes should be viewed as a celebration to instill a renewed commitment of excellence to both internal and external stakeholders,” he maintains.

Passion, perhaps, is the final essential ingredient, for old and new leaders alike.

“Often colleagues elsewhere in the industry have no idea how hard most successful insurance brokers work and think our job is soft and easy,” reports Anderson. “Whereas, in fact, it is only very rewarding if you work hard, become absorbed in the business and make some ‘luck’ for yourself.”

Independent insurance brokerages need infusions of new talent and the right individuals can take advantage of this, to the benefit of everyone concerned. With careful planning and patience, and, of course hard work, all parties can recoup their investments over time, while seeing their enterprise remain independent and continue to flourish.

—Brenda Rose, Vice President and Partner, FCA Insurance Brokers