The great escape

There comes a time when even the most successful old hand realises that the time is right to leave the insurance industry. Given all the publicity the matter has received in recent years and with the reality of the brave new world that is statutory regulation, is there an insurance broker of a certain demographic that has not considered whether the time is right to exit?

With the extra bureaucracy that regulation has inevitably brought with it, and the increasing pressures placed upon many small to medium-sized insurance brokers, the temptation to succumb to any one of the tempting offers that has been around recently must have been great.

Yet, in 2006, many such owners must surely be getting a little bit concerned. After all, we are now in a soft market and the question must be whether the most opportune moment to sell the business has been and gone? Is a sale still feasible in the market, where some of the most interesting deals have already been done? Is the appetite still there for consolidation and, if so, does the industry have enough support for the money to still be attractive?

These are genuine concerns for a plethora of good brokerages, which must still be wondering whether their timing is right, or whether they have simply left things too late.

The resounding answer from the industry, and one that will bring a cheer to so many smaller broking houses out there, is that it certainly is not too late for those owner/managers out there that are weighing up their options.

Survey results

According to the latest Insurance Brokers' Survey from Mazars, consolidation continues to be a key issue for the industry, with 87% of respondents expecting the number of insurance brokers in the UK market to continue to decline over the next 12 to 18 months.

The survey also revealed that interest in mergers and acquisitions has increased substantially, with 43% of respondents citing the acquisitions as part of their growth strategy, compared to only 28% in 2005. There was also a noticeable rise in those looking to increase their geographic spread, from 17% in 2005 to 30% in 2006.

The feeling that there is still a long way to go for the industry when it comes to consolidation is backed up by Tony Cornell, who runs specialist broker consultancy Cornell Consulting. "If the appetite for buying brokers was going to go, it would have gone by now," he says. "The worst time to buy is at the start of a soft market cycle, so it would have dried up by now but it hasn't. A lot of brokers will be waiting until 2008, when the hard market starts again."

This is not to suggest that activity is not going to happen in the interim, and there are many possibilities for the canny operator.

"It does depend what size of broker you are," points out Paul Meehan, managing director of Smart and Cook, "but there are lots of consolidators out there - Towergate, Oval, ourselves and The Broker Network." Predators apart, lower down the food chain there also appear to be plenty of tasty morsels for them to feast themselves on, he adds, explaining that there are still lots of good brokers out there who, because of age, regulation, or other factors, are thinking of selling up.

"There's still a lot of appetite for brokers, though the pricing is bound to change a bit. The timing is very difficult and most brokers should sell when the market's hard," he comments but says that this is just the time when they feel reticent to do so because they feel they want to make the most of the good conditions.

Cornell explains that in many ways the simple trade sale can be the best route for many brokers, though it is fraught with dangers: "Another option is to sell your business in order to make as much money as possible and then leave the industry. So that could be anybody at the highest price - the Towergates of this world and the like.

However, a large number of brokers are loyal to their clients, and possibly have staff members that are family members. They may want to marry the best price with some sort of continuity, so they are more likely to sell to a friend, the sort of person they know and think 'he's a nice guy that can look after my people and my clients.'"

If a friend or similar business can not be found, then opting for a consolidator slightly outside the top tier might offer more comfort, he adds: "In the whole of the country there are big consolidators but also large numbers of medium-sized brokers that would like to buy another brokerage to bolt onto their business.

"Such a consolidator will leave the brokerage in question to get on with things, so it's a nice way. However, if the decision is made to sell to one of the big outfits then the danger is that clients might be mucked about, their business might be closed down and moved to another location, and all their staff dismissed."

In his opinion, one route that still makes sense for many business is the network route. "My view is that networks are very viable for SME brokers that aren't going anywhere, the sort that might be coasting and are unlikely to change in the next few years," he comments. "So they might as well join a network and not worry about access to markets.

"It's a very attractive proposition but you have to get used to the idea of giving up your independence. So, if a smaller broker wants to be in this market in five years time, and they don't see themselves going anywhere, they might as well join a network."

Management structure

In the opinion of the British Insurance Brokers' Association, this is not just an issue for the smaller broker. It is also one that affects larger firms as well, which, in the words of spokeswoman Leighann Burtrand, "may have neglected to organise a proper management structure to take over once they retire".

"The larger businesses have the same sort of issues in terms of age and complexity," says Meehan, picking up on the theme. "So in a trade sale environment it's more difficult because the costs are more but there are opportunities outside the broking sector. A trade sale doesn't have to be to a broker here - it can could be a bank, or even to an insurance company. There are still opportunities out there."

He says that one option that does have a time limit on it is the management buy out: "MBOs are becoming tricky because of the goodwill options that come in to force in 2008, so for many brokers a trade sale is the only way they can get out."

Exit strategy

However, whatever the route that is eventually chosen as the appropriate exit strategy, one thing is clear - it is no good just thinking about the benefits to you as the owner of the business, all the parties concerned in any potential transaction need to be convinced that they will benefit from your decision. "You've got to get your business into shape to sell it, and you've got to try and make sure that all your senior people are with you on it, and that it's profitable for them as well," says Meehan.

Whatever option is finally chosen, however, it is clear that the industry is not going to be in such a mood to consolidate at quite such a pace forever - and not all senior brokers looking for an exit strategy are spring chickens. It is not too late to start planning but it can not be left for much longer.

With 2008 tipped to be the start of the new cycle, it is time to get in shape for when the moment arrives to finally exit. Then you can really have time to work on that swing.

EXIT STRATEGY OPTIONS

While the trade sale remains the most obvious option available to the broker looking for an exit strategy in 2006, it is by no means the only one still available. Here we present a quick guide to what each insurance broker that is thinking of changing direction should consider.

- Sell the business.

If continuity is not foremost among your considerations and you are not overly concerned about the long term future of your business, then perhaps the most simple route to take is to sell it outright. Although this might be an extremely difficult to decision to make, it is potentially the one that offers the most obvious an upfront reward, if you are prepared to sell and only sell at the right price. What is important here is to make sure that any potential buyer is a good position to undertake due diligence - so make sure that your financial documentation is up to date.

- Sell to a network.

This option differs from the outright sale in that it offers a degree of continuity to the broker that is perhaps looking to retire. While they may have come in for a fair degree of criticism from various quarters in recent times, the fact remains that a network can be a useful means of selling up for many brokerages. Part of the attraction in this route is that often a key feature of the deal will be that staff are retained and customer relationships remain the same.

- The Management Buy Out.

If the principal of the business is looking for an exit strategy and the existing senior management feel that they want to take the helm, then the management buy out option is the one to go for here. However, the MBO is fraught with difficulties. The need to keep a tight lid on discussions prior to the MBO is obvious but there could also be a difficulty in raising enough capital. The private equity route is the one to go for here but this can be complicated and negotiations can be delicate, with the exact split of the equity subsequent to any deal often a stumbling block. Nonetheless, involvement of private equity specialists can work to a brokerage's favour, and provide incoming management with the capital and connections they need to really push the business forward.

- Turn gamekeeper.

Of course, so much has been said of the various options open to the owner of a business that is looking for an appropriate exit strategy but just because market conditions look tough does not necessarily mean that leaving the play stage left is the right thing to do. If you have the right contacts, or enough money available, then merging or acquiring yourself is always on the cards. If this can be done with a brokerage with a similar business culture then all the better. At the very least, it should put the new business in a stronger position should you eventually decide to exit some years down the line.