Selling your brokerage? How to look attractive for buyers

Portfolio analysis is key when buying or selling brokers, and some portfolios are more attractive than others, said Herb Cline, president of CF2K Strategic Consultants, at a session at the recent Insurance Brokers Association of Ontario meeting.

“The trend of the day, as you can probably see if you look at the insurance purchase announcements week by week, is focused on the business, the specialty, and the assets and benefits,” he said. “These acquisitions happen all the time,” said Cline, who advises insurance brokers and MGA owners on transactions and valuations.

Funding is key, he said, whether the goal is to increase market share and reach more communities, or transfer ownership to the next generation or new owners.

He gave the example of a selling agent who wanted to ensure his daughter and two key producers took over his business. In such cases, Cline says, banks typically fund between 50% and 80% of the acquisition.

“The way it was structured, we did a tranche with the bank. And then what was left, the principal decided that he would take it as the seller’s redemption mortgage. He would do it himself,” he said. “They got that [the remaining] 20% if divided by 10 could be paid out over 10 years.”

To reduce the likelihood that the buyer would lose potential capital gains on the capital used to prepay the debt, Cline created a “dividend with special shares” that allowed them to receive the equivalent of the bank interest rate.

“It was a great family offer. And that mediation has now paid off,” he said. “Those are the things I really like to get involved in because you see it being passed down from generation to generation. You see this independent broker remains independent.”

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When evaluating a broker’s commission before the sale, on the other hand, a multiple of the commissions or earnings before interest, taxes, depreciation and amortization (EBITDA) accrues.

When an acquirer looks at a business, their key considerations are:

  • Consistent profitability – A buyer wants to see 30% EBITDA. “And that doesn’t include CPCs (contingent profit commissions),” Cline said. “You get paid for your CPCs, this is typically a five-year historical average, [added to that] commission number, and then it’s multiplied by the multiple they want to offer.”
  • Strong, consistent organic growth.
  • diversification of customers. “They like to see that you don’t have a key customer engagement and that you’re diversified by product line and industry,” Cline said.
  • human resources. “This is a great talent acquisition opportunity for an acquirer to bring exciting young producers into their fold,” he said.
  • Strategic alignment with the acquirer’s portfolio and growth strategy, which Cline says can be complementary or complementary.

Cline noted that the acquisition market is hot right now and multiples are high compared to historical levels.

“From my point of view it’s all opportunity and it’s not a window,” he said. “A lot of capital is still being pumped into Canada for broker acquisitions. They want to maximize their returns, but they’re also looking for something that’s safe.”

Featured image from iStock.com/Gwengoat

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