Consolidation in the insurance brokerage industry is continuing at
a rapid pace in Canada. It is expected to continue as baby boomers
reach retirement age and seek to exit the industry by selling their
Opportunities exist for acquisitions by brokers who plan on working
for more than a few years. Yet even though prospective targets exist, a
buyer must first consider how to finance an acquisition.
There are a number of ways to do this. A
few of these are discussed below.
There will usually be some form of cash down payment required on any
acquisition. If there is excess cash available, using some of it to acquire
a high performing brokerage that is expected to generate greater than
average returns is a good idea.
Debt may be
obtained through one of the large Canadian Schedule A Banks. However, an
interesting dynamic in the insurance brokerage industry is that some
insurance companies finance brokerage acquisitions as well. The advantage to
this is insurance companies understand the industry and as a result, may be
able to finance a higher percentage of the acquisition than a bank. The
disadvantage is the risk of loss of independence as the insurance company
financing the deal will usually expect a higher percentage of business to be
underwritten through it as a condition of financing.
Forecasts should be prepared with the proposed
debt structure to ensure all scheduled principal and interest payments can
be made with relative ease. Sensitivity analyses should be performed to
ensure all lender covenants are met in a worst case scenario.
3. Vendor Take Back ("VTB")
A selling broker may be unwilling to take
back a loan as part of a sale. But if third party debt financing is at its
maximum and a VTB is the only way to get a deal done, they will definitely
consider it f the buyer requires a guarantee of
accounts, the seller should fully understand the terms and conditions of
this guarantee. Some items that should be included are.
If the brokerage is a company, it can
issue shares to the seller as part of the consideration. This is a great
alternative in situations where the selling broker stays on to run the
target on behalf of the buyer. It will align the seller’s goals with the
buyer’s since everyone benefits from a higher share value.
Prior to embarking on an acquisition
strategy, it would be prudent to sit down with an advisor to review capital
structure options and to discuss potential financing sources. Ideally the
buyer would have the financing commitment secured prior to approaching
prospective targets. This will allow the broker to waive financing as a
condition of purchase and will give him an advantage over other buyers in a
competitive bid process.
As can be seen, there are a number of
things to consider when financing an acquisition of a brokerage. The key is
to review all of the possible options and to select the alternative that
will generate the best return from an investor perspective .
Partners can assist you with the development of a financing strategy for
insurance brokerage acquisitions. We can present capital structure options
and financing sources and assess the merits and shortcomings of each. We
will then recommend which scenario is the best for your particular
situation. And finally, we will assist you with the execution of the
© Regelle Partners Inc. 2011