Will brokerage sellers favour family or take the money and run?
While surveys show brokerage owners want to pass businesses on to family members, or to current employees, the economics can make that difficult.
And sentiment over a family business can quickly be abandoned if an owner thinks a sale to family will place them in significant debt.
“When large consolidators, mid-sized consolidators, or groups that are trying to become consolidators, are willing to pay five times commission or six times commission, it’s hard to go to your family, your management team or your employees and say, ‘Pay me the same value,’” says Andrew Mathias, senior vice president, investment banking with KPMG Corporate Finance.
“The reality is, if it’s family, if it’s employees, if it’s your partners or managers, they’re not going to be able to do that…without taking up significant leverage and financial burden. To maintain the succession of your business and sell to your family or your employees – you just debt burden them.”
Consolidators, by contrast, will pay top dollar because they have predictable cash flow, and the ability to integrate an acquired firm’s operations with others they already own (a process often described with the over-used term ‘synergies’).
Financing advantages
What’s more, some consolidators have financial backing of private equity (PE) sponsors.
“They’ve got all the right tools in place,” Mathias says. “If I’m a 65-year-old shareholder and I have a $10 million brokerage business, I’m unlikely to get $10 million from my family. It’s a hard pill to get your family and your employees to swallow to pay the same value as one of those firms.”
As such, he says, it’s unlikely new capital gains rules introduced by the federal government in late June will shift succession outcomes in favour of P&C brokerage owners’ families.
Related: How capital gains tax changes impact brokerage succession
Where the calculus has changed is that large consolidators are making it clear they’re willing to pay a premium for brokerages they can integrate with their existing operations, Mathias notes.
“If you sell to a consolidator, all your employees now have way bigger pop. In some ways, if you’re trying to look after your kids, giving them a bigger opportunity can be a better thing. And the family itself goes from being an operational family to a financial family,” he says.
“You’ve given your kids and your family [members] within the business a better opportunity. You’ve also got a bunch of money that allows for financial stability within your family, which you just wouldn’t [have] if you were to sell it [directly] to them.”
Taxing concerns
While recent capital gains tax changes did spark a brief rush among some family owners to sell before higher rates kicked in, bank interest rates have been a bigger factor in brokerage business transactions, says Mathias.
Before interest rates began rising in 2022, brokerage M&A strategies focused on geographic market share expansion. A brokerage wanting a presence in, say, Sault Ste. Marie, would seek a seller there.
Rate hikes slowed that type of M&A and replaced it with what Mathias calls patient, but picky, capital.
“If you look at Navacord’s recent acquisitions…none of them were just acquiring market share expansion, geographic expansion,” he tells CU.
“They did a benefits business. They did an MGA. They did Pacific commercial. They did specific niche lines. The [focus is] ‘How do I enhance my existing book,’ or ‘how do I get into a new service line?’”
Related: Can you keep your family brokerage in the family?
Feature image courtesy of iStock/Richard Darko
