Buying and selling - Heading for the door

Over the last few years, an increasing number of brokers have been selling to consolidators as they look to retire. Present economic conditions mean that regional acquisitions are slowing as consolidators cut back on spending, however, there are still many exit options available while brokers remain a popular purchase.

Potential exit routes include private equity investment, sale to another broker or insurer, a management buy-out, or passing the business on as an inheritance. "Seek the advice of your accountants and business advisers as to what alternatives there are," advises David Slade, non-executive chairman at Perkins Slade.

For private equity investors, it has become more difficult to find external capital and, while passing the business down to the next family generation can be an attractive option, a broker can end up sabotaging a future exit by avoiding making a potentially tough choice of which family member should take control.

Sales to other brokers and insurers are still buoyant, despite the prevailing economic climate. Olly Laughton-Scott, managing partner at IMAS, explains: "As a cash-generating business, brokers are quite insulated from interest rises and therefore broadly counter-cyclical." Current deals on the table include a take over of Benfield by Aon, with the directors of Benfield set to pocket £134.3m.

Trade sales vary in structure but up to approximately 50% of the purchase price is paid up front usually, with deferred portions paid over the next two years. Laughton-Scott warns that a broker needs to take advice before embarking on a trade sale: "An adviser can guarantee you are not talking to an unreliable buyer that talks a good game but never completes. Brokers spend their lives advising people on the best forms of risk management, yet when they come to sell their own business they often seek no advice." Slade has recently been going through the exit process and believes that consultants are indispensable, warning: "You would be an idiot to go in without them."

Empathy

One trap that many brokers fall into when going it alone is putting too much emphasis on their own perceptions of the strengths of their businesses. Laughton-Scott advises: "You need to think about the business from a buyer's perspective." He continues, recommending that brokers should make their reporting clear and keep their options open: "If you want the best deal, you need to be in a position to ensure that you can walk away from it at any point and consider offers from other buyers. It puts you in a better position to negotiate."

Normally, buyers want to acquire businesses whole, an approach that can often lead to shareholder resistance. Aden Nguyen, associate director at financial services provider MacQuarie Bank, says: "The key here is to look closely at the pros and cons of all the offers and to decide which best suits the vision the shareholders have for the business." However, the problem can potentially be avoided altogether, notes Tony Cornell of Cornell Consulting: "If the person that wishes to sell is not the majority shareholder then there is usually a shareholder's agreement in place. This agreement will lay down the conditions of any sale, often including an agreed value or a clause stating that if one shareholder wants to sell then the others have to agree to sell also."

Staff approval is also very important for a trade sale. "It is difficult to sell a broker without management approval as broking is a people-based industry," notes Laughton-Scott. "No one will buy without the management on board, therefore you need to make sure early on that all key players have an interest in selling."

While some brokers can exit immediately on the sale of their business, the majority are subject to earn-outs that can last up to two years as part of the contract of sale. These earn-outs tend to be longer where there are strong personal relationships between the exiting management and key clients. "Given the fact that the last few years have been a sellers market, vendors have been in the fortunate position of being able to choose purchasers that offer the most generous earn-out provisions," remarks Nguyen, "However, given the increased caution in the market, we believe that the tide has turned on this."

Concern over the future of his company's staff was a major consideration for Slade when he started looking to sell: "You need to be comfortable that buyers are empathetic to your staff-care approach," he says. Slade, who failed to reach a satisfactory agreement with Oval, avoided potential conflict by appointing three senior staff responsible for answering questions from potential buyers, sheltering the rest of his employees from the sale process. "We recognised the problem and planned for it before it arose," Slade highlights.

Considered

Despite a reshuffle of his business, Slade has put his exit on hold for now: "I am not going to exit the company if it means selling my shares to a third party; I shall retire when I think I am in the way of colleagues' progress and take dividends on the capital. I'm happy leaving capital in a business that I know and the directors of which I trust."

Having poured so many years of their lives into their businesses, trade sales can seem unattractive to exiting management and so some brokers turn to staff in the hope that they will buy them out.

There is considerable variation in the way that management buy-outs are structured (see PB April 2008, p.22-24.) In the majority of cases, there is a portion paid up front with deferred payments then made thereafter. However, the amounts and terms of these payments can vary significantly as both parties are more willing to compromise: "In our experience, MBOs tend to run more smoothly," says Nguyen. "This is because the parties involved in the transaction know the business and each other well and are willing to provide a degree of flexibility to ensure that the transaction is conducted with minimum disruption to the business."

MBOs are also attractive as a "gentler exit" for exiting management: they allow those seeking to leave to maintain an interest in the company, for example by maintaining the ownership of the business premises and then renting them back to the business.

Nguyen believes that management buy-outs are becoming more popular: "The credit crunch has led to a slowdown in acquisition activity from the major consolidators, hence sales multiples have started to come down. This has made prices more affordable for management teams looking to buy a business from existing owners."

However, management buy-outs are not without their issues. "Prices are still beyond what management can afford to pay," notes Cornell: "You may sell them the business for £1.5m when it is worth £2m but there is nothing to stop them then selling the business for £3m the next year."

Patience is essential in the exit process. While some transactions can be completed within a few months, some, especially management buy-outs, can last for years.

Despite this, many managers leave it until they are ready to retire to begin thinking about exiting their business, yet Laughton-Scott believes that they are shooting themselves in the foot in doing this: "Have your exit in mind almost from the day you start your business," he advises. "Make sure your exit strategy has an impact on operations decisions at an early stage in order to minimise the impact on the business later and ease your exit."