Canada’s national broker association is asking brokers who want to sell their businesses to take a deep breath and consider their options before rushing headlong into a deal with a high bidder outside the broker channel.
“Primarily, we are trying to educate the brokerage community that there are options out there, and you don’t always have to go with the first one that presents itself,” Stephen Halsall, president of the Insurance Brokers Association of Canada (IBAC) told Insurance Business. “A lot of the time, consolidators may have you sign a confidentiality agreement so that you can’t even discuss your options with someone once they start to talk to you…
“There are a number of willing buyers [who are brokers] out there. The biggest problem is a lot of them say they didn’t know the opportunity [to acquire a brokerage] was there, because you only hear about it after the fact. I’ve heard a number of cases over the years, where a seller says: ‘I didn’t think you would be prepared to pay that multiple.’ Well, it would have been a lot easier to give you an answer if I was asked the question. We’re just saying, keep your options open.”
IBAC is currently exploring financing options for brokers interesting in acquiring other brokerages and keeping them within the channel.
“We are looking at alternative ways to finance purchases, such as longer amortizations,” said Halsall. “Sometimes when you are paying a higher multiple, it’s tougher to pay it over 5-7 years. If you buy a house for 15-20 years and it doesn’t provide any return, why couldn’t you buy a brokerage for 12-15 years?”
Halsall said this type of arrangement would benefit brokers around 40 years old. They could pay the amortization rate over a longer period than the standard five to seven-year period.
IBAC is seeing a number of family-owned brokerages put up for sale. A number of different dynamics currently favour the sale of brokerages in Canada.
First, the age of broker principals is such that succession planning is at the top of mind. New research from the Insurance Institute of Canada shows that the median retirement age for Canadian brokers in 2012 was 61 for males and 60 for women.
The concern is at the senior management levels of brokerages. IBAC information suggests roughly 70% of broker principals are currently 55 years of age or older.
“Aged 55-plus in these financial conditions, that’s certainly a point where you want to have some kind of succession options or plans in place,” said Halsall.
Economic conditions have been difficult for both individuals and businesses. In Canada’s insurance brokerage industry, growth has been slow, with an annual growth of only 1.3% between 2008 and 2013, according to a recent report by IBISWorld. Insurance companies and financial institutions looking to gain market share in such a slow-growth environment are eager to pay brokerage multiples as high as three times net commission. (A decade ago, multiples stood at closer to two times net commission.)
“As multiples of brokerages get higher, it’s tougher to pay them over a shorter time frame,” said Halsall. “Another brokerage in your area is not going to have the same kind of cash flow that some of the consolidators have, where they can just walk in with a chequebook.”
