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Financing Your Insurance Brokerage Acquisition

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 brokerage.

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.

1. Cash     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.

2. Debt     In addition to being cheap given the current low interest rate environment, debt also has the advantage of interest deductibility for tax. It could be argued that one should maximize the debt component of any acquisition given the inherent advantages to this type of financing. The risk of course is burdening the brokerage with too much debt causing financial distress and the risk of bankruptcy.

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.

4.  Equity     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 .

Regelle 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 strategy .

Regelle Partners Inc. 2011