Startups: Plotting the first move

Those who have done it say there most definitely is a need for startups. Wanting and doing are different things and, when finding funding, there are few reasons to be cheerful: most industry commentators report that it remains incredibly difficult to obtain.

So what sort of broker is breaking through? Commercial business is the most viable option for the majority of new firms and the most recent Financial Services Authority figures showed that 18 commercial businesses were given regulatory approval in the third quarter of 2009.

Most startup brokers have some private funding, perhaps derived from individual private backers or even from a re-mortgage of the owner's home. They have to start small and rely on a salaried partner to see them through the first year.

These firms often say that they need a network to help them with agencies and other backup, the key benefits of which include enhanced commissions and services such as compliance assistance.

Initial considerations

If taking this route, brokers first need a good business plan and then to contact networks for a confidential discussion. Jelf Group network Purple Partnership's commercial director, Les Brewin, thinks that there will be more startups in 2010; he predicts re-starts as well, with senior brokers who sold businesses to consolidators realising that the arrangements are not for them and then orchestrating buy-outs.

Brewin comments: "You can't blame some brokers who sold; there were some eye-watering prices being paid but big firms are not for everyone. Providing that a right solution can be found, starting up again could well happen more."

Such brokers may have the cash available to buy their way out although, as Brewin warns, abiding by non-compete clauses is vital, even if it puts the brakes on a new business initially.

He emphasises that Purple is not specifically targeting startups (which represent under 20% of its membership) but that it has helped a number of them; its primary focus is established larger commercial brokers.

He says: "We understand small businesses and our founder, Chris Jelf, himself left Royal 20 years to set up on his own. We want to work with startups that are going to make it and are determined to succeed: those with good knowledge, experience and acumen."

Brewin adds that they need "a well-thought-out business plan, clear focus on their chosen markets, a passion for the client and commitment to service". He suggests that it may be worth brokers talking to Purple Finance, an independent finance broking service within the network: "We can assist new businesses through the maze of capital raising in this market, such as the Enterprise Finance Guarantee Scheme introduced by the government earlier this year, to help them develop their plan in advance of presenting to potential backers."

In seeking to put a network through its paces, Brewin advises startup brokers to check the range of agencies on offer, including Lloyd's access for placing specialist risks, niche areas such as healthcare and ancillary products like premium finance.

The fees payable vary greatly, as does the level of business that should be channelled towards the network's agencies. Brewin says: "Our members are independent and can use whichever agencies they wish, though it makes sense to support the network so we can help members."

Facilities

Meanwhile, Nick Houghton, divisional sales and marketing director at the Broker Network, says: "We now have a dedicated startup proposition, which has resulted from more brokers considering this. My first bit of advice would be to spend time on a high-quality business plan. I'd also recommend that brokers push themselves: when you include figures, look at what could be achieved if you really go for it. It's about being entrepreneurial. You should also outline clear strategies for winning new business as well as retention plans."

Lyndon Wood, chairman at the Moorhouse Group, has developed another option for startups with Moorhouse Enterprise. He comments: "I understand what it's like to start on a low budget but I've also achieved fast growth. Where I will differ is through providing hands-on, one-to-one mentoring and coaching, which will help brokers take advantage of opportunities and have strong focus. Too many other networks are just about information technology and compliance; they do not give enough help in driving a business forward."

Moorhouse Enterprise will take an equity stake of around 30% or less in a new business and brokers will be appointed representatives. A full range of support services will also be provided. Wood adds: "I've done it and my message to those wanting to start is to talk to me: I want to meet the individuals and I will quickly get a feeling if they are going to make it."

Some brokers will want to retain directly authorised independent status, yet the appointed representative route can appeal. Ten Insurance Services, launched in 2005, is based on the AR model and now has more than 50 members.

Ten's managing director, Malcolm Lee, says: "There is nothing wrong with starting small: we've had people who've started off with an office at home. What they need is time to focus on winning business and looking after clients. Being an AR means you are not bogged down in areas like client money or doing accounts. Instead, you can focus on networking, getting to know relevant groups in the local community and seeing clients."

Ten charges an IT fee of £175 for a CDL system but, otherwise, Lee says it is one of the most affordable routes into broking because it works on a commission share. It pays members' professional indemnity, compliance and accounting costs, as well as Financial Services Compensation Scheme contributions.

Lee comments: "When I set up Ten alongside the other directors, we did not pay ourselves for the first 10 months. I would say to any broker that you will have a year of pain because there are likely to be restrictive covenants that will hold up business growth. Running any business is hard. If you're someone who just waits for a salary cheque then don't do it, though if you are motivated, are someone who has great relationships and is prepared to put in the effort then there is an enormous amount of enjoyment to be had from running your own business."

Meanwhile, Bernard Farrell, regional managing director at Willis Networks, says that the AR route suits some and can be seen as a stepping stone before opting for full authorisation. He remarks: "We're talking to a number of ARs that now want to be directly authorised and also brokers that are with consolidators. A common theme is that the people behind these startups are ambitious types who, before a sale happened, were in line for an equity stake. They are now frustrated by being in a consolidator, which may offer them limited opportunities."

Bolt-on approach

Willis is an established provider of networks, catering for both large commercial brokers and smaller ventures through its N2 offering. In both cases, the networks target brokers that want direct authorisation but that are looking for a wide range of agencies set up by Willis with higher commission. IT is optional, while there is dedicated marketing support and other backup such as compliance. It can also advise startups on funding sources.

Another possibility is a franchise, like Coversure. Franchise director Bob Darling says new franchisees come largely from commercial brokers who may well have thought: "I can do better than my boss and I'm going to do something about it."

The cost of a franchise is £15,000, which Darling says provides a "broking-in-a-box package." While many Coversure franchisees operate from offices, he says that it may be possible to work from home, although points out that someone who wants to work "with a tray on their lap and taking breaks to go dog walking will not have the discipline to make it".

He adds: "One of the benefits in this market is that office space is competitively priced, so you may find a good deal. Another option is to share premises, perhaps with an Independent Financial Adviser. If you work well together then you can cross-sell."

Darling says that, while networks may suit some, Coversure has a huge amount of experience and that many of its members have done well as a result: "It's a simple and effective way to start. You need a financial cushion while there is no business coming in, although we do help with this.

"Renewals only happen once a year, though, so brokers have to put in a lot of work to make their businesses succeed. We have a head office dedicated to helping them and, notably, there is also often support and guidance on offer from other franchisees."

As 2010 progresses, it will be interesting to see how many brokers crop up this year and whether or not they choose the network route.