Caroline Jordan says that acquiring an independent broker could be good business for both buyer and seller
Prospects have never looked so good for commercial insurance brokers prepared to give up their independence. The question is whether there are sufficient good businesses out there to satisfy the circling consolidators and larger broker firms looking to snap up smaller rivals?
When it comes to quality, few acquisitions can surpass AXA’s purchase earlier this year of Smart & Cook, Stuart Alexander and Layton Blackham.
All three firms are strong commercial brokers that had established management teams behind the scenes and high profile individuals at the helm in Paul Meehan of Smart & Cook, Stuart Reid of Stuart Alexander and Chris Blackham of Layton Blackham.
And the brokers concerned insist that it will all be for the good. According to Paul Meehan, group chief executive of Smart & Cook: “I am confident that this move will be beneficial for our people, our clients and our stakeholders. It is important that we continue to trade independently and AXA will run this business at arms length, leaving market issues to Stuart, Chris and I. It delivers a secure and exciting future for the group.”
But now that AXA is in on the act, are other insurers scouting for broker acquisitions?
Royal & SunAlliance (R&SA) may be regretting the sale of Swinton to MMA as Swinton recently announced a 26% rise in profits and a growing share of commercial and niche business.
In recent years, R&SA has made disposals and reduced its headcount.
But it is producing excellent financials and its official line, according to a spokesman, is: “We have no formal plans to start acquiring businesses, but we do want to help brokers who are committed to remaining independent.”
This could be in a variety of ways, he adds, and although he wouldn’t go into details, these will probably range from cash injections to business support and consultancy.
Attractive target
Meanwhile, R&SA distribution leader Jim Noakes comments: “Commercial brokers are attractive targets because they generally have such a loyal customer base. There are many firms out there that are keeping as many as 98% of their clients year on year – whereas it is a very different picture in personal lines.”
He says that a lot of businesses can also perform better with some expert tweaking. “If there are good people and a loyal customer base then it is not too difficult to re-engineer the financial margins.
You can put in better IT and often make savings. Right now there is a lot of cheap money out there, so it makes sense to invest now.”
Indeed, Australian bank Macquarie has recently set up a UK operation that will focus on providing brokers with finance for acquisitions. This is a core strength of the bank from down under and it believes there are many opportunities in this market.
But, are quality commercial independent brokers now a scarce resource? According to Noakes, they still exist but may not be for the taking: “There are still brokers out there who value independence and don’t want to sell out. They are turning away consolidators – a lot still treasure freedom.”
Tempting independents
Towergate has a dedicated acq-uisition vehicle to buy up smaller brokers. Cullum Commercial Ventures (CCV), is headed by Tim Johnson. He agrees that it is mainly commercial firms which are in its sights and says a typical ratio would be around 80% commercial and 20% personal lines.
For the broker that has mixed feelings about selling, consolid-ators such as CCV will offer a range of tempting packages. Johnson explains: “There are brokers who want to retain an active role and not sell up entirely. We work a deal where we would buy a partial stake of, say, 30% and then have options to buy the rest over an agreed period, which might be in five years.
“It is a halfway house, as the owner can still control the brand and premises, but also have cash for, perhaps, school fees or the house in Spain.”
Johnson insists this is the classic win-win situation. “Brokers are entrepreneurs that have their eyes open when it comes to a good deal. Many are in their fifties and finding the compliance regime onerous – we have our own team to relieve them of this issue. And if there is investment in their firm, the team can sort out succession issues and help bring in the right people. There are plenty of quality regional business out there – in fact I’m about to announce another deal.”
Last December, broker THB sold its provincial retail operations to Towergate and said the funds it received would be used to boost its balance sheet and invest in the remaining business. Just weeks ago it took on a new wholesale London market broking team from Heath Lambert.
Andy Hawkes, managing director of THB Risk Solutions, the division which provides products and services to over 500 commer-cial brokers, comments: “I meet brokers all the time who want to remain independent. One well-known example is David Slade of Perkins Slade who has frequently stated this is his intention for the business.
“But brokers now have more choice when it comes to exit strategies. CCV, for example, has different models which gives the selling broker more control.”
He says there are “a lot of generalists out there” and emphasises that specialism is alluring to an acquisitor. But, he points out: “There are problems if you have a scheme which is very much run by an individual. The risk is they take the business with them. Then the person buying the firm needs to sort out the succession planning.”
Mark Grice, head of broker services at accountancy firm Mazars, says commercial brokers will remain in demand. “The vast appetite of the consolidators shows no sign of diminishing and recent figures have suggested firms were being bought at the rate of one a week in 2006.”
He says brokers considering a sale should focus on profitability rather than size. “Owners need to factor in both market conditions and growth cycles to decide whether an exit is a sensible and timely decision.
“The business needs to be operating effectively and achieving optimum financial performance to boost value and make it an attractive purchase proposition.
“Ensuring that your corporate and financial documents are up to date is vital in speeding up the sale process and achieving the best price.”
There is no doubt that big money is chasing the switched-on commercial broking firm. And, considering the amount of interest, for the broker who wants to move on, it could well be worth holding on to squeeze out every last penny.
