What’s on Dec? | Episode 1 | Brokerage M&A

Intro: You’re listening to What’s On Dec?, the Canadian Underwriter podcast, focusing on the hottest topics in the P&C community, featuring insights, analysis, and interviews with subject matter experts throughout the year.

Pete Tessier:

Welcome to What’s on Dec?, the Canadian Underwriter podcast, sponsored by Taycon Risk. And if you recognize my voice, well, I’m Pete Tessier, and I am the founder and host of The Insurance Podcast, Canada’s leading podcast on the P&C insurance sector. And guess who’s with me? None other than my co-host and partner in crime, Curt Wyatt.

Curt Wyatt:

Hey, Pete. It’s great to be here, co-host of what is going to be a super exciting podcast for the Canadian P&C market. We love talking insurance on The Insurance Podcast, but let’s face it, there is topics galore in our industry. There is never a time where there isn’t something to talk about at the water cooler.

Pete Tessier:

Oh, it’s ridiculous how many things we could talk about. And as you know, we probably like to talk and talk and talk. So let’s talk about something fantastic, which is probably the biggest issue going on in the P&C industry in Canada right now. And that is mergers and acquisitions. Curt, that’s all anyone talks about.

Curt Wyatt:

Well, let’s face it, Pete, you and I both did this. Not only did we buy, but then we sold. So I think it’s something that we’re pretty near and dear to the topic. We’ve been through the process of finding people who needed to retire and finding solutions for them and their teams. And then we went on to say, at a fairly young age, “Hey, why don’t we try the opposite? Why don’t we try the idea of selling our brokerages and not talking to each other about it?”

For everyone that’s listening, it’s a different feeling when you go to sell your brokerage and you’re trying to figure out what to do because you don’t feel that it’s maybe safe to go out and talk to your peers when you’re making this major decision in your life. And it’s crazy to think, you do rely on consultants and you do rely on professionals, one of which we’re going to have on the show soon. But there’s something about it that’s really different, and it’s something that you, Pete, can relate to.

Pete Tessier:

Yeah. For those who don’t know, Curt and I both sold our brokerages within three months of each other, and neither of us knew the other was going to do it. That’s how secretive we were about it. And yet here you are trying to drive up market value, trying to have negotiations, yet we don’t talk about it with other people. We don’t make it a known experience for maybe others who are interested. We try to find who the right people would be and that may not be the best way of doing things.

Curt Wyatt:

Yeah, absolutely Pete. And to your point, it’s one reason why the podcast started. You wanted to go out and start delivering the message about what’s going on in insurance to the Canadian P&C market, bringing it in a condensed format where we can talk about multiples, talk about M&As in this case, and a whole bunch of host of other topics that we’re going to bring you over the coming months. But in this case, there’s wild numbers out there. I mean, we thought we were hitting some big numbers five years ago. I mean, today, there’s unicorns coming in at 15 plus times EBITDA.

Pete Tessier:

And if you don’t operate in the EBITDAC world, we are seeing multiples that are standardized that start with a four. There have been a couple unicorns that start with a five, and we’ve got an expert who’s going to come on and explain a little bit about how these multiples are arriving and what kind of businesses are getting them.

Curt Wyatt:

I think it’s super exciting. Again, the Canadian market is just continuing to mature, grow. It’s just doing a ton of fun things. We’re going to be talking about it and let’s bring our guests on.

Pete Tessier:

It’s great to have Mike Berris from Smythe LLP with us. And so let’s lean in and chat with Mike now.

Okay, we got Mike Berris now to talk a little bit about mergers and acquisitions. And if you don’t know who Mike is, Mike’s a leading advisor with Smythe LLP and they help brokers figure out what to do with their businesses. So hey Mike, thanks for joining us on What’s On Dec? with Canadian Underwriter.

Mike Berris:

Thanks, Pete.

Pete Tessier:

So Mike, let’s get into the meat and potatoes, what people want to know. What’s driving the market right now?

Mike Berris:

We have uncertain economic times, but I think you’ve got to look at the basics of the insurance industry and it’s still a good bet for investors, even in uncertain times. It’s in elastic demand. People need to insure assets. It’s a really important part of the economy and the demand is there, and we can see that with M&A.

Curt Wyatt:

Mike, great to see you here.

Mike Berris:

Thanks, Curt.

Curt Wyatt:

And hear you on the line. I think it’s awesome we’ve got you on the first Canadian Underwriter podcast and you were the very first guest of The Insurance Podcast, good to have you back.

And let’s say face it, there’s some history here with us and you, Mike, and we’ve always talked multiples in that room, whether it’s over a beer or over coffee and ties on, ties off and all sorts of things. So it’s not always about the multiple when it comes to buying and selling a broker. That’s not the only reason that pushes the sale, but let’s face, it’s a big factor.

Mike Berris:

Absolutely.

Curt Wyatt:

And so right now… Yeah, thanks… And right now we’re seeing this, call it a run on price. What do you think is the key driver of that?

Mike Berris:

You know, I’ve just summarized over the last two years, we’ve done about 20 deals and I’ve just ranked them chronologically, and you can just slowly see in those multiples… I don’t think it’s really good time to throw out numbers today, but I’ve seen those numbers slowly rise to some really high numbers. And I think it’s a couple of things.

One, like we just spoke about, it’s still an attractive industry to invest in. I think the second factor is supply and demand. There’s fewer good brokerages out there. In fact, an increasing number of people that want to do acquisitions, so that’s partially driving. And I think a real important part of it is, I would call it sort of the arbitrage play. And by arbitrage, we can say, if we look at the public markets, some of the big publicly traded brokerages, they’re trading for 17, 18, 19 times EBITDA. The large scale consolidators that operate in Canada, they’re probably seen valuations 15, 16 times EBITDA.

So for them, they could pay 12 or 13 times EBITDA and on day one, they’ve already made some money. Their IRR calculation is already positive on day one. So I think that’s what’s propping up the high prices to a certain extent.

Pete Tessier:

It’s never easy to predict the future. Are we seeing any trends or actions in the financial markets right now in the economy that may affect mergers and acquisitions? How long can this price run go? Are there things that are going to settle it down? What do you think could happen? Are there things that are going to influence it?

Mike Berris:

We can’t ignore interest rates. Interest rates, with certainty, will have an impact. And I think the amount of dry powder or cash that is available for, especially in the private equity space… It’s still pretty flush, but if they have to borrow that money, it is going to have an impact. And I don’t think, at the moment, we’re not seeing it. But I’m not going to make any predictions. But when we see interest rates double or potentially triple by the end of this month, it has to affect the ability of people to service that debt and therefore how much they make.

Curt Wyatt:

Assuming that that does play a factor into, let’s call it the sale price of a brokerage or the purchase price of a brokerage, what can we share with brokers who are listening in on the, call it a low hanging fruit, that you see that a broker should be doing if they’re thinking of selling to their brokerage to make sure that they still get that higher multiple, regardless of what the Fed and Bank of Canada is doing? On the opposite side, what should the broker who’s buying be thinking that they need to do to that book of business?

Mike Berris:

Yeah, I mean, let’s just talk about the sale. I mean, I think the first thing that I like to talk to brokers about when they approach me about potentially selling their business is understand the dynamics, that in fact what they’re doing is they’re exchanging shares in a company that they understand and they’re making a good return and a good income for cash, which then minus the income tax they have to invest. So I like people to really think that through and deal with their financial reality rather than kind of worry about, “Oh, hey, prices are going to go continue to go up, or are they going to go down?” But if they go through that and they still want to sell, it’s just a lot of basic things that they have to look after. Ensure their broker management system is clean, all their employees have employee contracts, non-disclosure, noncompete, non-service, that their systems are good.

Ultimately, the highest price is going to come from a purchaser who you make it easy for, that they really understand what they’re going to get. Because ultimately it always comes down to two things. What is the future cash flow? And what are the risks associated with maintaining that cash flow? On the sale part, that’s what I would do. And if you can continue to grow your sales, I mean, that is always really, really important.

From a buying perspective, I still think there is opportunities for the small brokers. They have to go to the broker conventions. They have to talk. They have to know people. They have to phone people and tell them that they’re interested in potentially buying and people are buying books of business. They’re being creative in… I’m still seeing a lot of regional and small local brokerages buying other brokerages, and I still think the opportunity’s there, but you have to go and look for that opportunity, and that’s what the big guys are doing. They’re working the phones.

Pete Tessier:

Hey Mike, thanks so much for joining us and talking about that and sharing some of your expertise. Again, you’re a leader in this industry and you just showed why.

Curt, Mike hit on a bunch of things. But I think the biggest one that I really come back to is the idea of there’s a lot of preparation if you’re looking at either buying or selling, and you need to understand that being prepared is a good business practice. And Mike really hit on some things. You and I have both gone through this. What are some things you remember about when you were looking at selling?

Curt Wyatt:

Hey, Pete, you are on a desert island and finding someone to help you prepare your business to do this is an absolute must. Like Mike, there’s experts out there can help you. And that process is so critical because you’re talking about a legacy here that you’re creating for your family by selling your company. And the difference can be astronomical if you do it right versus, let’s say, rushing into it. And Mike does a great job of bringing you through that process and understanding the differences.

Pete Tessier:

Yeah, it’s important to think about using a professional. You may make contact with someone you know is a great succession for your business, a great successor, whether it be in the business or a friendly competitor who you’d like to hand your clients off to in your book of business and your legacy. But you need people to help navigate the transition. I think that’s the biggest one.

So networking in your community, that business community, fellow brokers is a huge thing. As someone who has sold a brokerage, you can sell to a lot of different entities, but if you grew up and built your reputation, your business with your clients, we all tend to care about who those clients end up with. And I think that’s really important, right? You’ve got to understand who’s taking ownership and you can make a lot of wrong turns that way. And if you think about your clients and you care about your clients, you want them to believe that you’ve made a good and proper choice for them. The best choice for them, because that’s their business.

Curt Wyatt:

Sure and the proper choice to take you into your future, which Mike speaks to this, is that there’s elements of that. There’s strategy to that. And the auction component of what professionals like Mike bring to the table, makes a big difference. You can combine picking the right buyer along with the element of getting the right price for you so that you leave at a multiple that you feel is fair to you. And that started our story today is, are you getting the right multiple? What is the right multiple? How do you leverage that right multiple? Whether it be selling your brokerage or leveraging it for other things along the way.

And it’s critical that you spend some time at this, I would say once a year and then after that, take it, put it on the shelf and leave it, get back to doing business. But once a year, you should take a hard look. Where do I stand? Where am I upside down on some of my figures? If something was to happen to me or if I do choose to put this thing into a leverage sort of a environment.

Pete Tessier:

Yeah, that’s a really good point. You don’t have to live this 24/7. You can take your time. If you’ve been lucky enough to start and own a brokerage and have success in it, this is like sending your child off to be married or something. It’s like watching them leave the house. It’s a nerve-wracking process. You’ll have fears. You’ll have a lot of self-doubt and things that’ll creep into your mind. And you don’t have to live it 24/7. You can take time off, focus back on your business, think about things too.

But the one thing I’d also add in this, Curt, is know the people you’re working with too. Know who they are, know what they want as well. We recently heard of a great business that sold to employees, and that’s a refreshing change. It’s nice to know that the owner believed that the people who he worked with and had with him were able to take over that business and he supported that goal and let more dreams grow. And I think, don’t rule out all sorts of possibilities. It’s not always about the final multiple number or the end amount of dollars that you get. At the end of the day, it’s about making the best decision too. And in that case, what more can we say about this? It’s a tough decision and there’s a lot of things out there, but it is more than just a multiple. But the multiple does drive a lot of factors.

Curt Wyatt:

So thank you for everyone who’s tuned in. This will be an exciting year to be bringing you important issues relating to the insurance industry with Pete and myself.

Pete Tessier:

Yeah, thanks for listening to What’s On Dec?, and we’ll see you next episode.

Outro: Thanks for listening to What’s On Dec?, the Canadian Underwriter podcast.