General insurance brokers are in danger of selling their business for less than its value due to poor planning and a failure to keep up with technological advancements in the industry.
As merger and acquisition activity gains momentum, brokers are falling into the trap of taking advantage of the hive of activity by selling up without having a well thought-out exit strategy.
These are the findings of Andrew Pavuk, principal executive of law firm Pavuk Legal, and author of ‘Nobody else’s business’. He warns that M&A activity also reflects how broker owners grossly undervalued their companies.
‘Our experience is that businesses just close or are sold without the owner realising the full value of it,” he says. “Whether the brokers are big or small, the same problems exist.”
Explaining why brokers undervalue themselves, Pavuk says intermediaries fail to fully grasp how much their clients conduct business online.
“There is a huge disconnect in the industry,” he says. “Brokers are under pressure to transact with clients online but some do not really know how to work with clients online.”
He observes that brokers’ failure to keep up with technological advancements is fuelling M&A activity.
“M&A activity is prolific at the moment and that activity is boosted by disconnect in the broker market”, he says. “This empowers such activity because buyers are looking at the businesses that have not positioned themselves well to sell – businesses that have not adapted to their new environments. Therefore brokers on the market are underselling themselves and the buyer can get a better price.”
Pavuk also highlights that increased M&A activity is also prompting brokers to sell up.
“A lot of people see increasing M&A activity and think it is the right time to sell but because they haven’t prepared to exit, they won’t get the value they could out of the business,” he says.
“Some people just wake up one day and decide they will sell their business by the end of the year
Pavuk urges sellers to carefully prepare for exit and not just put up the “for sale” sign and assume they will get top market dollar for it. He advised:
Pavuk advises brokers to follow these steps:
- Prepare a timeline
“It can take years to sell a company. It took one company ten years to sell.”
- Work out who your prospective buyer is
“Is it another broker? An aggregator? An entrepreneur? Be sure who they are and market your business accordingly. Sellers will look for a business model that can easily transfer or fit into their own business model.”
- Be relevant
“Those companies that keep up with the times and trends will always get greater value out of their business than those who do not.”
- Do your homework
“Understand your business. Only once you truly understand it, can you understand your exit strategy.”