Many brokers who set up in the 1970s are heading towards retirement age, but as Rachel Gordon reports, some have failed to plan for their succession.
They say 60 is the new 40 and, if it is, then many brokers should almost certainly be looking forward to a fun-packed retirement instead of running a business. However, if they have not sold up in the past 18 months or so, they almost certainly will not be sunning themselves on a yacht, saying 'cha-ching'.
Business prices have crashed, but are those who failed to sell up also guilty of poor succession planning? And, if they want to get out - or indeed have to for age reasons - what are the options?
Graeme Trudgill, technical and corporate affairs executive for the British Insurance Brokers' Association, comments: "There are a lot of older brokers about because many decided to set up shortly after the formation of the Insurance Brokers' Registration Council launched in 1977. Many are heading fast towards retirement age and they now face stark choices."
He says while many brokers do adopt a more sophisticated approach and have a formal succession plan, there are some that have failed to plan properly. "Basically, you can sell up, pass on to a family member or allow the second tier to buy the business."
The last option, he says, can be highly effective in driving business forward if the managers involved know the model and have plans for growth. However, there are relatively few management buyouts and, as Mr Trudgill says, obtaining finance in the present market is difficult.
But, along with others, he says castigation for not selling is unfair. "You can say some brokers should have sold earlier, but who knows when the top of the market is? I also know there are a good number of brokers who care enormously about their businesses - they are almost sentimental about not wanting to lose the name or control - and don't want to see community brokers disappear."
He says in such cases, the "softer" approach taken by CCV - owned by Towergate - may be pressing the right buttons. CCV sales and marketing director David Perry explains: "We allow brokers to sell us a partial share of their business, which they can increase later. But equally importantly, they keep their brand and we also help them develop the existing people - something many broker owners care about."CCV is also looking at backing more start-up ventures, he adds.
Tim Johnson, now chief executive officer of Paymentshield, formerly ran CCV and chips in: "Right now it is even harder, but if you can allow staff to have a minority shareholding, which is something we could arrange, it can really boost loyalty and means the business owner can be far more comfortable about the future in that they won't have to sell to a consolidator. It is also true that brokers often want to see their names kept over the door."
He adds while there are buyers around, some brokers will fail to sell altogether. "If that brokerage is all about one individual and they have just one major client, then they will probably struggle to sell."
Succession planning issues are nothing new. However, there are no excuses with a number of top-flight professional advisers on hand. David Roberts, a partner with accountancy firm Littlejohn, comments: "Brokers that failed to sell and now regret it can¹t blame themselves. If you sold at the top of the market, then it was pure luck. Now is probably not going to be the best time to sell, but the market will improve ‹ although it is going to be more realistic. Brokerages are also likely to have fallen in value because insurers are paying less commission or intend to cut back on this, and many brokers are producing less in premium income.
"What matters is having a proper strategy and taking time to investigate options - ideally doing this over five years or if not, at least over two to three years."
But, even if there is a reduced price, where are the most likely buyers? Mr Roberts points out that consolidators such as Towergate have now taken a step back, although he adds a managed succession - say to second-tier managers - can be achieved if the right funding partner can be found. "Clearly banks are doing little, but this is not across the board. Macquarie is keen to speak to brokers and some insurers may also be prepared to invest in brokers," he adds.
Some brokers may be better organised in this area, but as Mark Flenner, head of insurance mergers and acquisitions at KPMG, says: "This issue has not gone away and while consolidation has solved a number of brokers' succession planning problems, there are others that still have problems."
He agrees selling a share of the business - as with the CCV model - can be one option. He adds that brokers might also want to look at so-called mergers of equals. "Of course, something like this will also come down to the personalities involved - can they work together and work out a succession plan going forward?"
In addition, he says more brokers would do well if they focused on creating more attractive equity packages for their up-and-coming managers. "If you don't want to sell, then there needs to be a clear arrangement as to who will take over," he adds.
Not all brokers will be in a position to pay for specialist consultants to advise them on succession planning, but doing deals without this could be a huge mistake, warns Matthew Gilchrist Bennett, director of client services at business continuity specialists Crisis Survivor who previously worked in the law and financial services. "I think independent financial advisors are more organised than general brokers in this area. They also have better knowledge of the many tax issues involved."
He says brokers should be aware of entrepreneurial and holdover relief, as well as inheritance tax issues. "Brokers may have a trusted accountant, but are they experts in disposals? If not, then it is vital to work with someone who can maximise any sale and provide advice. Equally, an adviser in a bank may also only have a passing acquaintance of these areas."
He agrees that taking time to plan for the future can make a massive difference. "If you start the process over five years, then you may be able to move into a defined niche and, hence, increase the value. You can sort out any areas of poor compliance, which can drag down the worth of the business and, of course, start talks with potential purchasers."
Although details are sketchy, RSA has recently pumped some £9m into broker Oval, but are others willing to do the same? Brigid Murphy, Aviva's director of trading, comments: "Our strategy is to support independent brokers, which we are doing in a number of ways - whether through our Broker Independence Group or even our TV advertising. Despite the growth of consolidators, independent brokers are thriving and have shown how resilient they are. So yes, we are looking to work in partnership with them, we do have funds available and we will talk to brokers about projects."
Meanwhile, Phil Bunker, managing director at ABC Insurance, explains: "When I was at NIG, we were involved in a number of acquisitions, and these all went extremely well. Now as we are not part of a bank, this is not something we are looking at, but there are ways for brokers to effectively pass their businesses on."
One of the most obvious is to family members. Certainly, if a broker does not have interested children, then this is a non-starter, but as Mr Bunker says: "Think of David Flux of Adrian Flux, Shona Robertson at Hanson & Robertson or Julian Edwards of MCE. There are some very good sons and daughters working in broking. So much so, that we are planning to hold a dinner to recognise this second generation."
Failed to sell
Brokers that failed to sell at the peak of the market should not be too despondent. As Simon McGinn, director of commercial broker markets for Allianz, says: "The gravy train has stopped, but there are deals still happening and in some ways, you can see these are now more savvy and there is more focus. It is also wrong to say that there is no capital - brokers are obtaining funding and the odd MBO is also taking place, but have fallen under the radar."
One MBO that was reported, however, was London Market specialist SBJ Global Risks, which last year announced a buyout from Bluefin, the Axa-owned broker. Chief executive Simon Rice says: "We felt an MBO was right because Bluefin¹s focus was more retail broking and employee benefits. We did not really fit into the stable, but found when we talked to Axa, there was a lot of support."
He says he cannot reveal any details of how funding for the deal was arranged, other than "it wasn't easy because of the credit crunch, but we managed it". The benefits, he adds, are now a more entrepreneurial organisation that is already attracting new teams of staff, and more freedom for all those within the business."
The golden times in terms of realising huge cash sums for sales may have passed. But, solid success planning remains a perennial and crucial part of business planning. And if enough work is put into a resolution, then succession planning can still result in a happy ending.
Succession planning guidance
Jonathan Hughes, lead insurance partner at Bain & Co, gives brokers the following advice:
1. Face up to reality. "Broking is a people business, so for the owner of a small broking firm, the choice is stark: if you don't develop your own people, then you will eventually be forced to sell to a third party, which is likely to be a consolidator or possibly the broker network you belong to."
2. Are you a good manager? "The problem is that most broking entrepreneurs are salespeople first and managers second. And sometimes they have big personalities that can make it hard for talented second-in-commands to work with them."
3. Study alternatives. "Given the binary nature of the choice, if brokers don¹t want to be placed in the position of selling their business to a consolidator, they need to start thinking now about a few key issues."
In order to study the alternatives, he says:
Quantify the gap: "Figure out how big you will be in the future, what type of business you will be involved in (personal v commercial, specialist v vanilla), and how you will be reaching your customers (more office locations, online or on the phone) and then translate that in to the new talent you need: what sales, commercial, operational, IT talent will your business require as it grows?"
Make the most of your available talent: "Make sure that the people underneath you are getting the right kind of training and development opportunities. This may mean some uncomfortable decisions, including giving up control of some things to allow potential successors to flourish, such as giving them the lead on a key new initiative or business account. It will also mean installing effective performance management and ensuring consequences (good and bad) for performance (good or bad)."
Reduce your demand for talent: "Keep each role in your organisation focused on a few core skills, as it is easier to find good specialists than highly talented general managers. But when you find that great general manager, nurture them, as they may be your successor."
Ainsbury Insurance Brokers : Case study
CCV acquired 85% of Manchester-based Ainsbury Insurance Brokers at the end of July 2009, under its partially-owned broker scheme. The shareholders of the business had conducted a management buyout three years earlier and were looking for investment to finalise the arrangement and grow the business.
According to managing director Guido van den Berg: "The shareholders are young and are committed to the business, so it was crucial for us to find an investor that would enable us to retain an active role and influence within the management.
"Having had discussions with a number of interested parties, we had decided it was vital to be able to keep our own brand and offices, which CCV¹s proposition enabled us to do."
He adds: "One of our primary concerns was the impact of any acquisition on the staff that had worked hard to make our business successful. We feel that the deal CCV offered provides them with opportunities for personal development within a larger business.
"Another important consideration was the fit of our books of business with that of the acquiring broker. We have a strong healthcare division in Edinburgh and CCV is supporting us in growing it further."
"As a result of the deal, we have more market influence, and the financial constraints we had before which meant that we had to be cautious with growth have been lifted. We might even be in a position to consider acquisitions of our own one day."
He concludes: "I'd advise other brokers considering acquisition to weigh up what's really important for them, what their driving forces are and where they want to be in the medium to long term. CCV has been very supportive, but you must be comfortable with the fact that inevitably things will change for you as an owner if you take this route. If you¹re not prepared to change - then don't do it."
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