Canadian Underwriter

The downside of selling for 4 times multiple during COVID

October 23, 2020   by Greg Meckbach

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Despite the economic disruption from the COVID-19 pandemic, some brokerage owners could sell their business for multiples of more than four times revenue, but there is potential downside to this, Ontario brokers heard Wednesday at their annual convention.

“About 15 years ago, the multiples that buyers paid to acquire brokerages were in the 2.5 to 2.75 range,” said Colin Clahane, national director and insurance head of Canadian commercial banking at BMO. “We are now in 3 to 3.5 for an extended period.”

Simply put, a “multiple” is the price that a buyer pays for the brokerage, divided by the brokerage’s annual revenues. The higher the multiple, the more the brokerage is valued by potential buyers.

Clahane shared his view of what brokerages are selling for these days during a keynote presentation Wednesday at the Insurance Brokers Association of Ontario’s annual convention, which was held online this year.

He told IBAO members there is wide speculation on the street that the COVID-19 pandemic will lead to a devaluation of assets, particularly downward pressure in pricing multiples for brokerage acquisitions.

“I have been a minority, I have been bullish on pricing,” said Clahane. “Believe it or not, we are starting to gravitate more towards (multiples of) 4.25 and up to 4.75. And I have even seen some of those five-times-commission-revenue deals sometimes cross my desk for the past couple of months despite the pandemic impact.”

But there is a downside to escalating multiples, Clahane warned. “We are starting to get to a point where multiples are so materially challenging that you may, by osmosis, be inadvertently pricing out future generations. Sellers, if you are looking to optimize the price, just be mindful of that concept.”

But he is not going so far as to advise brokerage to reject offers at these multiples.

“I can’t sit here and not advocate that a broker not get top value from the sale of a brokerage if they put their blood, sweat and tears into the enterprise to grow it,” he said. “But that is not the full end of the equation.”

Clahane suggests that sellers go through some “mental gymnastics” and consider how to reduce the up-front price that the buyer has to pay.

“The only thing we are cautioning is, collectively, there could be some thought process put into where we are headed,” he said. “I think that would be appropriate for all parties involved, be it buying or selling. Ultimately we need that localized community entrenchment. We need the independent broker distribution channel to be alive and well. Those small to mid-sized enterprises within our economy are the ones that churn and oil the businesses.”

For Clahane, the amount of deal activity is part of what is driving up the multiples.

“The average age of the broker in Ontario is about 57 years old,” he said. “There could very well be some prospective sellers listening to this discussion and thinking to themselves, ‘I am not sure how much more I want to stomach, from a macro shock point of view, this COVID thing. It is not a whole heck of a lot of fun. I may decide to drift off and this might act as a catalyst and push me towards my exit strategy.’”

Other factors driving brokers to sell could be their health or an opportunity to get a key employee or family member to take over the business.

“When we think about perpetuation or succession plan deals,” Clahane said, “there are going to be operating circumstances that trigger the need for these transactions to transpire, regardless of whatever adverse externalities are going on around us.”

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2 Comments » for The downside of selling for 4 times multiple during COVID
  1. Mark says:

    What else would a banker say? They are getting squeezed out by strategics who can operate the assets and not just slop in the gravy or wine about not being part of the deal’s future accretion. The Canadian Schedule 1 banks have shied away from helping SMEs in Canada so others have astutely entered the market with a much better plan, exit and offering. If the Canadian banks could have they would have changed the Bank Act along time ago in their favour and there would be no broker channel. Let’s get to 5x!!! What the banker fails to note is that multiple is creating an investor class of ex brokers who can, in turn, provide investment capital in Canada for investments in advanced distribution models leveraging technology – with a much diluted need for banks.

  2. I totally understand why brokers are selling their business at 5 times to large insurance brokers. You cannot afford to sell to your son or daughter as the tax man, the federal & provincial governments will whack you for 52 % and they want it now. Its their money and we want it. You sell to your family at 2 1/2 and the government want their money. The banks will not finance the sale 100% , maybe 70% if you are lucky. So the government want their 1.5 Million dollars now. So in order to retire you borrow the money or your savings to pay the taxes. So now you can retire and hopefully the new family owner’s do not default. The IBAO should be lobbying the government for a deferral on tax for the sale of family brokerages. We have a catch 22. The winner is the government who have a license to spend & steal tax dollars for their friends , relatives & the environment. Canadians’ are the only people I know that elect governments who say they will raise taxes when elected. Wake up Canada, you are being hoodwinked.

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