Break the shackles

THE INK HAS barely dried on the contract and your business is now in the hands of a consolidator. You have banked the cash and been offered a snazzy new job title. But are you prepared for what is coming next? Or do you feel you still got something left to offer as an independent broker?

Over the past five years with broker consolidation prevalent this scenario has been playing out in the minds of broker bosses across the land who have sold their businesses for handsome sums.

New trend emerges

It may have boosted the bank balance and even the ego, but according to industry experts there is a new trend of start-up brokers beginning to emerge from the major consolidators. Existing players are becoming twitchy and a new class of entrepreneurs is emerging. With restrictive covenant agreements, usually lasting between one and three years, coming to an end the entrepreneurial spirit that led to so much consolidation in the first place is now set for a timely return. With leading insurers, led by Norwich Union, doing their upmost to lure and back small independent brokers as more and more look to turn their back on the consolidator model, the lure of a return to the broking market for founders of previously acquired brokers is fast becoming a tempting proposition.

The move is in part being driven by the creaking consolidator model. The broking empires are beginning to feel the strain as the financial crisis has dried up capital and the cost and accessibility of debt has began to hurt the most dominate players.

The sector’s most high-profile player, Towergate, has announced that it is to lose 10% of its workforce, the cash pot and ambition of Giles looks to have been reduced and Jelf’s share price has faced a torrid time.

Olly Laughton-Scott, managing partner of corporate adviser, Imas predicts that brokers emerging out of consolidators will become the new trend. “What you are not seeing is the death of the insurance broker,” he says, “you are seeing a new breed coming through.”

The first quarter of 2009 saw 36 general insurance authorisations, with 10 new commercial lines brokers and nine personal lines brokers among the companies.

Laughton-Scott adds that the FSA has already granted many new licenses to broker start-ups that have emerged from people who have sold businesses to consolidators.

“In many businesses, the consolidation that has occurred has not improved the client experience and therefore creates a significant opportunity for people with the skills, the contacts and the capital [to start-up new brokers],” says Laughton-Scott.

One trend tipped to rock consolidators will see management buy-outs of parts of the businesses that have been sold. Towergate chief executive Andy Homer thinks this could become a real possibility.

“I don’t see any management buy-outs in Towergate but I can see it in other consolidators, history shows that when organisations grow they separate and change in shape. If Towergate had a knockout offer for one of its businesses we would seriously consider it.”

So what is the beef with consolidators? Well the picture is not pretty and consolidators have been shedding staff and downsizing. Stories of consolidators paying mega bucks up front for businesses and owners sitting on their hands before bailing out are all too common. But according to one broker whose company was sold to a major consolidator, it gave a completely false impression. He spent a year at the business before leaving to start a new firm.

“I did not feel comfortable in the way it operated,” he explained. “It was more along the lines of mass selling. It made it clear that the ulterior motive was to go in to new markets and it was all based on commissions.

“It promised the brokers that it would not change. What I did not expect was to be told this should be placed here and that should be placed there. It treated clients like pieces of meat. Clients come first and I don’t think that it did with them.

“It was not the way I envisaged it would be. Everyone was quite shocked at how it started to pan out. It became almost a sackable offence if you did not move a client to a particular market. It was the arrogant approach that I didn’t like. Other senior people were leaving left right and centre. I was one of many.

“There are still other people starting up businesses … you have just got to be pro-active. Next year I have the right to speak to [my old] clients and I have every intention to do so. If the clients want to come back then they will come back, but if they don’t, then they don’t.”

Consultant Tony Cornell says brokers will need to have the backing to start-up in the current economic climate. “There are good people leaving consolidators, people who have sold the business and have got cash in the bank,” he says. “There are ex-employees who are fed up and for them to start a new business they would need quite a lot of capital.”

Successful start-ups

In recent months two former Towergate directors have emerged from Towergate to successfully start-up a new businesses. John McLaren-Stewart, the founder Alliance Corporate Risk Management sold to Towergate in February 2007. Earlier this month he revealed details of his new venture called BrightStar Risk Solutions.

While Ken Davie, who became the head of Towergate’s Scotland operations and regional manager following the sale of JW Group, the company he co-founded and sold to Towergate in April 2007, has a new broker, Insureness, which he has started with support from the Willis Commercial Network.

Davie said it was difficult to switch to the consolidator model. “When you are a business owner and you are used to being a decision maker and in control it is hard to change that. It is almost like you have had your wings clipped and you are slightly neutered,” he says. He said the pressure to make a return on investment also became difficult to achieve.

“It gave us an opportunity to start up in business again and to return to how we were before. I think that is possibly something that will filter through to some other companies. The pressure will be on to achieve their return.”

The outlook is bright however, according to Bluefin chief executive Stuart Reid. “Recession is a good time to start a business because your service levels are better than bigger corporations. If I was to do it again I would buy an existing broker. If they can go in buying a business they are halfway there.”

He blames the models of rival consolidators that have lost staff following acquisitions. “Any consolidator worth its salt who wants to keep hold of certain people they will, within reason do something to do so.”

Consolidators have been warned. You can take the independent out of a broker, but you can’t take the entrepreneurial spirit.