April 16, 2018 by Jason Contant
The market for property and casualty insurance brokerages continues to be intense, with books of business attracting prices from three-and-a-half to five times commissions – and even more for online business, Mike Berris, partner and practice group leader with Vancouver-based Smythe Advisory, said recently.
So how do smaller players compete? They just aren’t able to, Berris said. “I think a real trend you’ll see, and I hope we’ll see, is management buy-outs,” he told Canadian Underwriter in an interview on Friday. “There are way more opportunities to finance, transition from one ownership group to a management group now than there were even three years ago.”
Berris said in a recent blog post that a “properly structured and financed management buy-out gives the current ownership group options on the timing and degree to which they want to divest in their brokerage.”
However, management buy-outs are not without their challenges. “A lack of experience in structuring a deal, unequal levels of power, poor understanding of risk and lack of personal net worth can stand in the way of a successful deal,” Berris wrote. “Owners frequently want to maintain control and may not be clear on how they want to exit their business. Management often resists putting any money down or assuming the business risks that are commensurate with their expected return. Without having a consistent message and view of the future, it is difficult to bring potential financing partners on board.”
A two-stage approach can effectively navigate the challenges of a management buy-out, Berris said.
“Only at this point should ownership approach sources of financing, including banks, insurance companies and management,” the blog said, noting that a well thought out and structured plan will generally attract interest from multiple potential partners both inside and outside of the organization. “If the circumstances are right, owner to manager succession arrangements or management buy-outs are well worth looking at.”
An industry analyst told Canadian Underwriter in January that some of the larger brokers and managing general agents (MGAs) looking to purchase another MGA are transacting for multiples of four times commission just to be able to compete with insurers looking to make the same purchase.
Philip Heywood, partner of transaction services and financial services due diligence leader with PwC Canada, said that these transactions, for sometimes well in excess of four times commission, are particularly true for “niche players and specialty MGAs who have a hold on a particular product line or line of business.”
Berris noted that specialty brokers or MGAs tend to be more profitable and attractive to strategic buyers. “If you’re a broker that specializes in surety and you’ve got the knowledge, you can sort of effectively take another book and plug it into your system at a very low cost which allows you to pay more for it,” he said. “Plus, it’s just so hard to grow organically.”