September 1, 2018 by Jason Contant
Looking to sell your brokerage?
Don’t assume your brokerage will eventually sell for an ever-increasing multiple of revenue, or that you will be able to sell at the high end of the current ranges, a P&C advisory and consulting firm said recently. If that’s the case, what are your best exit strategies?
If you’re not selling to an insurance company, you are likely looking at three other options: selling to a specialty brokerage, forming a strategic partnership or auctioning off your book. But these days, much of the discussion revolves around selling to a buyer such as an insurer or another brokerage.
Mike Berris, partner and practice group leader with Vancouver-based Smythe Advisory, said in a blog earlier this month that direct writers and underwriters with broker partners or subsidiaries have been very active in the M&A marketplace.
“They are generally looking for a specific type of book composition and undertake a rigorous due diligence process,” Berris said. “While you can usually extract top dollar for the business, you must be able to demonstrate the value of the book.”
It’s not uncommon for purchasers to pay a rate of three to four times multiples of gross revenue of the seller, Berris said. For most buyers, assuming the selling brokerage has 28% earnings before interest, taxes, depreciation and amortization (EBITDA), a 4X multiple translates into a return on investment of less than 7%. “Frankly, I don’t think anyone should pay 4X unless they are very clear on where the profit comes out in the end,” Berris told Canadian Underwriter.
At this rate of return, buyers may not get the financing they need; even if they did, would the return justify the risk?
Berris explained in order for an organization to buy a brokerage for a 7% ROI, it would have to be “comfortable with the risk, feel premiums are going up and have favourable financing generally with an underwriter.”
Selling to insurers is not your only option, of course. Berris outlines three other streams:
Selling to a specialty brokerage
Specialty brokerages, including large commercial brokers, are very active in the marketplace; if conditions are right, they might pay a premium price for a high-quality book of business. The transition of the book of business and key personnel are important. Also, a successful deal can often require a lot of creativity to bridge any pricing gaps. A clear understanding of the value of the book, any available synergies, and even sharing in the prospective risk, can yield a great return for the selling broker.
Partnerships or mergers
Entering into partnerships or merging several brokerage entities can offer tremendous benefits for brokers that lead to an eventual path out of the business. While often not offering an immediate full payout, they can be a good option, Berris said. He has worked with several brokerages on arrangements that ultimately generated returns significantly greater than a one-time divestiture transaction.
Auctioning a book of business
If brokers are looking to divest, and if they have mixed books of personal, auto and commercial business with normal underwriting profit, they may be able to extract the highest price in a controlled auction process, in which the business is offered broadly to a pool of potential buyers.
Smaller brokers, as well as regional and national consolidators, are being careful about their acquisitions, Berris observes. They are picking up fewer acquisitions and are looking for those who are either unaware of market conditions or who do not want to run an auction.
“It can be a challenge to get multiples at the high-end of the range unless they can demonstrate that the book can easily be bolted onto to an existing brokerage,” Berris said.
“We want to be very clear that there is no burning platform forcing a broker to make quick choices on succession. If conditions change, this ultimately will impact the pricing of brokerages and their related book of business. Knowledge, experience and careful planning can pay big dividends.”