M&A deals driven by EBITDA can ‘create turmoil’

M&A deals driven by EBITDA can ‘create turmoil’ | Insurance Business

M&A deals driven by EBITDA can ‘create turmoil’

Selling a brokerage is one of the biggest business decisions a lot of brokers will ever make. After years of sweat equity, there’s a certain finality to selling off your business, so it’s important to get the transaction right.

The Canadian insurance industry is experiencing a “frenzy of consolidation activity” at the moment. Mergers and acquisitions (M&A) are happening almost daily, with particular interest stemming from huge American brokerages and venture capital funds.

A lot of transactions taking place today are driven by EBITDA - earnings before interest, taxes, depreciation and amortization. Essentially, acquirers and sellers have their eyes on the cash prize and are less interested in the business continuity and organic growth of the broker target.  

“The average age of the brokerage owner in Canada is mid to late-50s. What we find is that a lot of people are ready to retire and so they look to cash out quickly. They’re attracted by the big dollars that are out there. Meanwhile, many buyers are driven primarily by EBITDA,” commented Bruce Rabik, chief operating officer at Rogers Insurance, and speaker at Insurance Business Canada’s upcoming ‘How to sell your insurance brokerage’ webinar. 

“Transactions driven by EBITDA can create turmoil for the acquired business in the shape of lay-offs, staff turnover and general post-acquisition chaos, and that’s because they’re not focused on organic growth. With all of this attention to EBITDA at the insurance distribution level, I would worry as an insurer about the lack of investment going into new producers and production talent.”

EBITDA is also used by some acquirers as a bargaining chip in an earn-out scenario. The purchaser will offer the broker a guaranteed price but will then ask them to run the brokerage for a few more years. If the owner can increase the EBITDA of the firm during the earn-out period, the acquirer will increase the purchase price.  

“A lot of brokers get sold on the concept of the earn-out. It’s a very common model in the US and a lot of American buyers are bringing it into Canada,” Rabik told Insurance Business. “My question is: why would you sell you brokerage and then work really hard for two or three years for somebody else? The reality is, very few people are able to dramatically increase their EBIDTA in a two or three-year earn-out period. I don’t think many brokers turn around at the end of it and say ‘WOW, that was a great deal!’

“For a brokerage owner who wants to sell but really cares about their clients and their staff, I would advise patience and due diligence. There are lots of consolidation opportunities out there in the Canadian marketplace, including with acquirers like the Canadian Broker Network, Westland Insurance Group or a firm like BFL Canada, who have maintained their independence and aren’t dictated by a venture capital play.”

For more information on how to prepare a long-term exit plan or how to sell your brokerage in the near future, sign up for the exclusive ‘How to sell your insurance brokerage’ webinar, taking place on September 19.