Broker M&A Advice: A wise head

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When it comes to a major strategic business decision, it is understandable brokers want some hand-holding. But who is best placed to provide professional advice and how much will it cost?

Merger and acquisition activity is natural in the broker market, whether as a result of firms looking to increase scale or owners exiting the market. But while there may be plenty of activity, these deals are not without their challenges.

The amount of activity can be seen in a report, Commercial Non-Life Insurance Brokers in the UK, which was published in August 2015 by market research company Finaccord. It found that as a result of a clear trend towards consolidation in the market, the top three commercial lines brokers now controlled 36% of the UK market, with the top 10 taking this market share up to 65.4%.

Unfortunately, although plenty of deals are taking place, there are signs that brokers are feeling rather isolated when it comes to support and advice. “There was very little advice, very little help,” says James Woollam, managing director of Hayes Parsons, referring to the management buyout he and one of his fellow directors completed in 2015. “I was the managing director of the firm, so knew it well, but the big problem I faced was knowing who to speak to for advice.”

Need for advice
But accessing this advice is a must. While acquisitions can become addictive with many firms following the first purchase with a string of further ones, the sale of a business or an MBO is usually a one-off event. This means it is highly unlikely that those embarking on these deals will have the experience required to secure the best terms.

What is more, whether or not it is the first time, there are also plenty of pitfalls to avoid. “Things can go wrong with potentially serious consequences,” says Bill Cooper, global head of insurance, commercial banking at Lloyds Bank. “As well as the risk of failing to secure the right price for a business, there can be tax and legal issues. Business owners risk being sued if they get it wrong.”

James Tye, insurance deals partner at PWC agrees. He says that businesses need to think about the regulatory issues if they’re looking to acquire another business. “Anyone considering an acquisition should get some advice on integration,” he explains. “You need to be certain you have addressed areas such as handling client money and money laundering rules.”

As well as the complexities relating to the transaction, overseeing any deal can also put a lot of pressure on a business. Tye says that few people ever appreciate just how stressful and time consuming the process will be. “We often see revenue deteriorate in the months leading up to a transaction as management is so overwhelmed by the deal,” he explains. “Having an expert to hand can enable them to continue running the business.”

A black hole
But, while a large firm will automatically call in one of the big accounting firms to oversee a deal, as well as having the necessary expertise in-house to manage the process, this can feel inappropriate to some of the smaller brokerages. “It’s very hard to justify the expense of getting this level of advice at the smaller end of the market,” says Amber Wilkinson, chief finance officer at Bluefin. “You can easily be looking at a six-figure sum. These firms definitely need the advice but they can’t sustain this type of fee.”

What makes it particularly tough is that, although the broker might be involved with a much smaller deal, the amount of work required is often on a par with that for a larger deal. In some instances it can even be more complicated to arrange a deal where smaller firms are involved. “Smaller firms can be more complex,” says Mark Flenner, head of UK financial services M&A at KPMG. “It could be a family-owned business or there may be special arrangements around how it was set up. It can also be a very personal deal.”

This is exactly the experience of Woollam when he conducted his MBO. “We were negotiating the purchase of the business from its founder George Hayes, who set it up some 51 years ago,” he explains. “I had the advantage of having been the managing director for five years but it was still a very personal transaction. George said to me at one point that he only had this one chance to get it right.”

Networking advantages
Given these factors, it’s essential to conduct as much groundwork as possible when considering a business transaction. For starters there are several sources that brokers can turn to for guidance on deals. “Speak to your peers,” says Ashwin Mistry, chairman of Brokerability. “There are plenty of people out there who’ve already gone through these processes who would be flattered to help.”

Cold calling a chief executive might not be everyone’s idea of fun but this strategy can often be a matter of using existing networks. Some brokers have the benefit of mentors or previous colleagues they can turn to plus there are plenty of networking opportunities through industry events and conferences.

Simon Barrass, partner, financial advisory at Deloitte, says a trusted peer is often a key component in a good deal. “We will often look at a business further down the line and, where the deals worked well, it’s often because they had a good non-executive director or chair they could turn to for guidance.”

But while speaking to one of your peers can give good insight into the process, it’s not without potential catches. “I’d be quite nervous approaching my peer group if I was looking to sell my business,” says Wilkinson. “Yes, it’s a supportive sector and there is plenty of help out there but everyone will have their own agenda. You do really need independent advice.”

In some instances, speaking to peers could even be more damaging. By flagging up your desire to sell your business, you could run the risk of this information becoming market knowledge. This could alarm your employees, leading to a dip in productivity and increased staff turnover, as well as potentially giving your competitors some ammunition to use with your clients. Barrass agrees: “With any deal we’d wait to get the right messaging out there before we’d even consider announcing a firm was up for sale. You won’t get the best deal if this information is out there before you’re ready.”

Support and guidance
Other parties can also provide some support and guidance to firms considering their next business move. Networks can be a good source. For example, Richard Pitt, sales and marketing director at the Broker Network, says his organisation has plenty of experience helping members embarking on M&A, MBO and bolt-on activity. “We can provide plenty of practical assistance and connectivity,” he explains. “If we don’t know the answers we can put it out to our membership too.”

In addition to this support, it also offers matchmaking services, bringing together business buyers and sellers where appropriate, and can help facilitate funding arrangements.

Similarly, insurers can be a good source of guidance. “A thriving regional independent broker market is music to our ears,” says Fraser Edmond, broker distribution director at Aviva. “We fully support broker independence and will provide a range of services to help them run their businesses. These are provided through a number of trusted service providers and include support around funding and finance when conducting a transaction.”

There have also been calls for the British Insurance Brokers’ Association to provide advice to firms keen to undertake a deal. But, although it hasn’t ruled out an arrangement with a strategic development provider if the opportunity arose, it is cautious about providing anything more than signposting.

Flenner believes this position is fair. “It would be tricky for Biba to provide advice,” he says. “It would be better to create a facility with the accounting firms to provide support to its members.”

Existing advisers
Advice can also come from some of the parties that would ordinarily be involved with the deal. For instance, the due diligence a bank conducts when making a decision around lending can provide a valuable insight into the business.

As an example, Cooper says that when any business is looking for finance he will put their business plan through a number of stress tests to identify the key risk factors. “We’ll look for factors such as whether there’s a heavy concentration of customers, a weighting towards a particular insurer on the panel, or if the business is dependent on a key person,” he explains. “We don’t offer advice but this can provide a useful sense check.”

Similarly, the accountants and solicitors that are brought in to oversee these deal may also be able to provide broader advice. However, Andrew Linnell, head of business growth and strategy development at RWA Consultancy, warns against placing too much reliance on these advisers. “They won’t necessarily be experts on the broking sector,” he says. “It’s a complex market: getting it right requires an understanding of how the sector operates.”

Consolidators may also be worth approaching, as long as you’re looking to sell your business to them. For example Wilkinson says that her firm is more than happy to help an acquisition target navigate through the deal so they understand exactly what’s required. “If I was sceptical seller I would question this but it’s in both parties’ interests to ensure everything runs smoothly,” she adds.

This type of support is also endorsed by other players in the market. For example, Barrass says that it’s important from a reputational point of view for the consolidators to strike a fair deal with the businesses they acquire.

Given the limitations of other sources of advice and guidance, it can also be sensible to turn to the professionals. Firms such as Corbett Keeling and RWA Business Consultancy specialise in providing advice on business strategy. “If a business owner is considering their next move, we can give them a realistic view on what they can do,” explains Freddie de Lisle, head of financial services at Corbett Keeling. “They might be intent on selling but our analysis of their business might identify that they’d be better off postponing this for a couple of years while they make some remedial changes.”

This type of analysis may reveal other options for the business too. For instance it may show that it would be better to dispose of elements of the business or build new parts to enhance the existing value. It could also identify potential buyers that might not have been initially considered.

Costs need not be prohibitive either. Linnell says: “Smaller deals aren’t as expensive as brokers might think and there are plenty of ways to put a fee structure together to ensure it suits different transactions and clients. If it helps save or make money, then it pays for itself.”

In some instances there may also be room to negotiate on price. For example, when Mistry led the MBO for Brett and Randall in 2009, the corporate finance team he was working with presented him with a £100,000 quotation for their advice. “We asked for a breakdown of this so we could see whether there was anything we could do to help reduce the fee,” he explains. “One of the services, which was set to cost us £10,000, was to help us negotiate the level of shares I was going to buy. We’d already agreed a price so it wasn’t necessary to have this element of their service.”

He also recommends this approach with the banks. “They’ll sting you for fees if they can so don’t be afraid to question them,” he says. “Threaten to go elsewhere if you don’t believe you’re getting a fair deal. The customer is king.”

But while there may be room for negotiations, de Lisle says there is something slightly ironic about the importance brokers place on advice in these deals. “If I’m an insured, I don’t just call one insurer to take out cover: I get a broker to give me advice and find me the best deal,” he says. “It should be exactly the same principle when a broker wants to conduct a deal.”

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