Can you keep your family brokerage in the family?

Canadian Underwriter research on succession planning shows brokerage owners want to pass their businesses to family members, but today’s environment presents two key challenges — a potential lack of family members available to take over, and possibly fewer wanting to get into the brokerage business?

“We hear quite a lot of times that it’s not the [children’s] preferred path. For example, kids may not want to go into a business that is tied to one location. Or…they have other options,” says Colin Simpson, CEO of Insurance Brokers Association of Ontario.

“Not everybody wants to do insurance brokering, but there are plenty of examples out there of children who have stepped up and said, ‘Yeah, we want to keep this going.’”

If the children want the business, family succession is a good option, provided those family members are able to finance the buyout.

“One of the challenges is, ‘How does a business [owner] then extract the money from the business…to retire comfortably and not put whoever’s succeeding [them] under so much financial pressure that they feel threatened by the debt load?’” as Simpson frames the challenge.

Buyout barriers

Another barrier to family succession is that consolidators find brokerage businesses attractive. That, Simpson notes, can drive up prices and make family successions more financially difficult.

“But there are plenty of [financing] options out there,” he tells CU. “The banks look upon brokerages quite favorably, and family succession quite favorably. That provides choices regarding which route a company takes to succession.

“Given that so many options are out there right now, and the attractiveness of the businesses, I think it’s a family discussion as to what the preference would be.”

Plus, market dynamics exert other pressures on smaller brokerages, Simpson says, such as being able to access employees within their local communities, and the ability to continue investing in key technologies.

“These bring added pressures on the smaller businesses [around whether] continuing at their current size or amalgamating with bigger entities makes more sense,” he tells CU. “We see some businesses that are being bought out, and the family owners may continue within the larger organization for a period of time. Some prefer it that way.”

Time on their side

Industry demographic studies show many brokerage owners are considering retirement and consequently planning for succession. But most sales don’t need to happen on short notice unless an owner is in poor health.

“We hear about business owners who are very concerned about what happens to their staff afterwards,” Simpson says. “Therefore, [they might seek private equity (PE) or other] partners that not only provide the best outcome for the departing principals, but also for the remaining staff and operations.”

That option can also allay concerns about debt burdens being placed on heirs or former colleagues.

“A seller is always going to have concerns about that, and has to weigh the balance between, ‘Okay, I’m going to be selling this to people who I know and love, but it also does put them into debt, or a potential consolidator or PE firm that could put a great deal more money on the table, and then the heirs don’t have that debt.’”