Selling your brokerage? How to look attractive for buyers

Window sign indicating a business is for sale

Portfolio analysis is key to buying or selling brokerages, and some portfolios are more attractive than others, Herb Cline, president of CF2K Strategic Consultants, told a session at the Insurance Brokers Association of Ontario’s recent convention.

“The flavor of the day right now, as you’re probably seeing, as you look at insurance acquisition announcements week after week, are those focused on commercial, specialty, and wealth and benefits,” he said. “You see those acquisitions happening all the time,” said Cline, who advises insurance brokers and MGA owners on transactions and valuations.

Financing is key, he said, whether the goal is to grow market share and get into more communities, or to transfer ownership to the next generation or to new owners.

He used the example of a selling broker who wanted to ensure his daughter and two key producers took over his business. In such cases, Cline said, banks will typically finance between 50% and 80% of the acquisition.

“The way it was structured, we did a tranche with the bank. And then what was left over, the principal decided he would take that as a vendor take-back mortgage. He would take that himself,” he said. “They figured out that [the remaining] 20%, if they divided it by 10, could be paid out over 10 years.”

To reduce chances of the buyer losing out on potential investment income on the capital used to prepay the debt, Cline created “a dividend with special shares” that allowed them to get the equivalent of the bank interest rate.

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“It was a great family deal. And that brokerage has now paid everything off,” he said. “Those are the types of things that I really like getting involved in, because you see it handing off from generation to generation. You see that independent broker staying independent.”

Valuing a brokerage prior to sale, meanwhile, comes down a multiple of either commissions, or earnings before interest tax, depreciation, and amortization (EBITDA).

When an acquirer is looking at a business, its primary considerations are:

Consistent profitability – a buyer wants to see a 30% EBITDA. “And that doesn’t include CPCs (contingent profit commissions),” said Cline. “You will get paid for your CPCs, it’s typically a five-year historical average, [added to that] commission number, and then it’s multiplied by whatever multiple they’ve chosen to offer.”
Strong, consistent organic growth.
Diversification of clients. “They like to see that you don’t have a key client exposure, and that you’ve diversified by product line and by industry,” said Cline.
Human resources. “This is a great talent-acquisition opportunity for an acquirer to bring exciting young producers into their fold,” he said.
Strategic alignment with the acquirer’s portfolio and growth strategy, which Cline said can be complementary or supplementary.

At present, Cline noted, the acquisition market is hot and multiples are high compared to historical values.

“From my viewpoint, it is all opportunity and it’s not a window,” he said. “There’s still lots of capital being pushed into Canada for broker acquisitions. They’re looking to maximize their returns, but they’re also looking for something that’s safe.”

 

Feature image by iStock.com/Gwengoat

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