Preparing Your Brokerage for
In a 2006 survey, the Canadian Federation of
Independent Business asked its members about their succession plans.
It found that even though two thirds of business owners plan to exit their
business in the next 10 years, only 10% have a formal plan in place to sell,
transfer or wind down their operations; 38% have an informal plan; 52% have
no plan at all. The risks to business owners and the Canadian economy
as a whole are significant. Without a plan in place, owners may be
forced to wind down or sell their companies in less than ideal conditions,
resulting in a discounted sales price. The risk is compounded for
owners of insurance brokerages who have a disproportionate amount of their
assets tied up in their company.
The ideal lead time to prepare for a sale to a successor
is seven to 10 years. If there is no plan to sell to an insider, a strategy
is still required to prepare the company for a sale to a third party. This
article discusses some of the issues insurance brokerage owners should
consider when preparing their company for a sale.
- What is the company’s sustainable
competitive advantage? And how can it
be leveraged to the fullest extent in order to increase market share and
profitability? A SWOT analysis (Strengths, Weaknesses, Opportunities and
Threats) is one way to get the process started. Other techniques may be
used as well.
- What is driving the inherent value of the
company? Note that the industry rule of
thumb is most brokerages are valued at anywhere from 2 to 3 times
revenue. But consider the example of the following two brokerages where
current valuations are at 2 times revenue:
Which brokerage is the most valuable? Based on revenues only, they would have
identical values of $4 million each. Based on EBITDA however, Brokerage #2 is
clearly more valuable. Assuming a 6 times multiple, Brokerage #2 is worth $4
million whereas Brokerage #1 is only worth $3 million.
|5 Yr. Avg. Annual Contingent Profits
But what about contingent profits? Based on this, Brokerage #1 is clearly more
valuable given that its annual contingent profits are significantly higher.
However contingent profits usually don’t form part of valuation calculations
since they can’t be counted on year after year. But all things being equal, if a
brokerage has a history of generating significant profits relative to another
broker, it would probably be considered the more valuable of the two.
- What are the customer retention rates? The
retention rates of brokerages’ customers illustrate how “sticky” the
revenues are. The higher the retention rate, the more valuable the
company. In the example above, Brokerage #1 would be more valuable.
- Are the company’s financial reporting and management information
systems top notch? Brokerage #1 uses a proprietary system developed
in-house 10 years ago to administer its business. Reports are custom
made and new development is costly. Brokerage #2 operates on an
administration system used by many brokerages called Total Agency
Manager or “TAM”. Reports are standardized and can be easily modified to
provide relevant information. If a buyer is on the same or similar
system, it makes the integration and conversion of the target broker’s
information a relatively simple exercise. In this instance, Brokerage #2
has the advantage.
- Are your current and two years prior annual financial statements
compiled, reviewed or audited by an outside accounting firm? A
review engagement would be the minimum required for many buyers to
consider an acquisition. An audit would be ideal since it provides more
assurance to a buyer that the statements are fairly presented. However
it is more expensive than a review. Brokerage #1 has a clear advantage
given its statements are audited. A buyer will have more comfort that
their numbers present fairly the results of operations. Given Brokerage
#2’s numbers are only compiled, there may be some concern that their
statements cannot be relied on and further due diligence may be
As can be seen above, valuing a
brokerage is not as simple as taking its revenue and multiplying it by 2 or
3. There are a number of other metrics (both quantitative and qualitative)
that need to be considered.
So if an
owner plans to sell his brokerage in the next few years, it follows that the
sooner a plan is put in place to enhance the value drivers and reduce or
eliminate the value destroyers, the better given the numerous issues to be
dealt with prior to a sale.
Regelle Partners Inc. can assist you with the development and execution of a
strategic sales plan of your brokerage. We can identify all issues an owner
should review and rectify in order to improve shareholder value. And when it
comes time to sell, we will be uniquely qualified to assist you with the
sales process. Please contact us at
firstname.lastname@example.org, 416-572-2110 to see how we can help.