When it comes to selling your brokerage, timing is everything. Principals considering selling their brokerage should always ask themselves when is the best time to exit in terms of career and family situation, and then work backwards to plan from there, a P&C transaction advisor recommends.
It’s critical to allow adequate time to prepare for the exit, advises Mike Berris, a partner at Smythe Advisory, a B.C.-based property and casualty insurance advisory and consulting firm.
“In my view, a well-run process takes… four to six months,” Berris says in an interview. “And I think you’d need another six months before [that] to get ready.”
Berris made his comments in response to a question from Canadian Underwriter about what brokerages can do to make themselves more attractive to a buyer.
Some brokers are “leaving money on the table because they’re not going prepared,” Berris says. Notwithstanding current market conditions, many brokers that want to sell are in a good place financially. “They’re not on a burning platform.”
Once the decision to sell is made, principals should step back and understand where they fit into the market. The approach will be different for large commercial brokers compared to small retail brokers, those with online capabilities, specialized brokerages, or MGAs.
For example, the strategy for MGAs might focus on what their contracts with Lloyd’s look like, their specialized markets, and geographical regions. If an MGA has some unique product offerings that could be rolled out throughout the country, that could gain enough traction from a purchaser to help seal the deal.
The value of your brokerage ultimately comes down to future cash flow and associated risks expected by the purchaser, Berris explains. He recommends brokerages use a firm specializing in property and casualty insurance and transactions to prepare a “quality of earnings review” consisting of:
An analysis of the composition of the book (what it looks like and how it has evolved over time);
Customer behaviour, in terms of renewals and share of total insurance spend (mono vs. multi policies);
A detailed review of expenses to look for redundant and unnecessary expenses;
Staff composition, organization, and renumeration; and
A review of leases, legal, tax, and other regulatory requirements to ensure all contracts are in place and everything is up-to-date.
“Basically, going through the same due diligence process a purchaser would to better prepare you for the actual exit process,” Berris says. “[Then] implement the changes identified.”
Berris says Smythe Advisory normalizes a firm’s income statement and uses EBITDA (earnings before interest, taxes, depreciation, and amortization) to determine which expenses are unnecessary. “It’s way more powerful, though, if they cut those expenses out before the sale,” Berris says. “It just looks better, feels better, and it creates more value in my view.”
A quality of earnings review can be done in about three weeks, Berris says. “And then you can spend six months doing what you can. I know from experience it makes a big difference on the momentum and the interests of potential purchasers.”