Masterminding the endgame

Oliver Laughton-Scott set up IMAS in 1992 to offer a range of merger and acquisition advisory services for the financial services and insurance industry.

Since then, Laughton-Scott has advised on thousands of deals and has become an expert on achieving a successful outcome for insurance brokers looking to buy or sell.

He spends an enormous amount of time talking to people in the market and has painstakingly built up a database of general insurance brokers and independent financial advisers throughout the UK. The system contains a wide range of information on brokerages including the age of major shareholders and the profitability of individual firms. The database enables IMAS to target potential brokers looking to sell and to match acquisitive brokers to suitable targets, and is an essential tool as few businesses are passed down through the family nowadays, he says.

Most importantly, Laughton-Scott says brokers' owners need to think about their exit route from day one. He says: "When a broker is building a business they should be thinking about who is going to buy the business eventually and we would advise them to come and talk to us now even if they do not intend to sell for another five to ten years."

According to Laughton-Scott, many classic mistakes are made when selling or purchasing a business, which include responding to a direct approach, getting involved in one-to-one negotiations and failing to keep your options open.

He says: "Selling a business is very difficult but often, when there is a direct approach, people think it is easy. The problem is that, although the initial discussions may seem straightforward, with positive noises being made about looking after staff, in reality the sole acquisition position is weak.

"There are lots of 'Prince Charmings' that turn into frogs. What is likely is the buyer is probably talking to three or four other people. He may well be doing another transaction and has no intention of following through with the deal unless the other one falls through.

"Also, if you are in one-to-one negotiations with the seller, you are in a poor position to extract value. It is like buying a house and only paying the last 10% to 20% of the price because you have to. You are not paying the price because you think the property is worth it, but because you realise that, if you don't, you would lose out to someone else. We are in the 'greed and fear' game."

Laughton-Scott's job when acting for clients is to make the other side fearful that they are going to miss out. As a result, he says it is important to have a number of parties in the bidding process. He recommends that brokers always take advice and appoint someone to negotiate on their behalf.

He says: "The Prince Charmings tend to know all the tricks and people can become badly unstuck. It can take up to a year to realise a deal is not going to happen, during which time staff become disenchanted and customers unsettled."

"When someone comes to us we know who is going to reach the end of the process. Anybody can produce a long list of buyers, but the skill is knowing what a broker is interested in buying, what their financial resources are and what their track record is, so we start off with a small list."

There are a host of reasons why a deal may fail, according to Laughton-Scott. He highlights three incidences where it may prove difficult to sell a brokerage, which surprisingly includes doing too well.

Laughton-Scott says: "People often take on acquisitions or develop their business in a way that adds absolutely no value. For example, having a strong brand may not be an asset as many buyers do not want to buy a strong brand because their intention is to rebrand that business. A strong brand can destroy value as, if the brand goes, some customers will go with it."

He continues: "Secondly, if someone is immensely profitable, it is hard to get value for that business. Anyone buying the business will assume that the margins will come down to what they are achieving and they have nothing to add to the process. Occasionally, niches will be so specialised that the market for them is very narrow. Thirdly, some businesses are extremely people-dependent and it is very difficult to separate the person from the business."

Identifying the right buyers

However, for the majority of businesses the key skill is to identify the right two buyers and to ensure you do not talk to a whole host of no-hopers, he says. Although there may be one perfect buyer, this will not necessarily result in a good price as there is no pressure to pay the top price, he argues. Whereas, if you have two perfect buyers then they will bid each other up.

Laughton-Scott says: "We might be in a situation where there is only one buyer for the business and our job is to give the impression that there is a lot of interest. We have to be very disciplined in how we respond to a potential buyer and always give the impression that we are responding to a number of enquiries at the same time. If someone submits an offer we would not get back with an immediate response because that would imply there is no other offer."

It is also important to have a range of options, which may include breaking up the brokerage or putting off a deal.

He says: "If a business is made up of a number of different divisions it is important to be able to sell them separately, for example, separating an independent financial adviser division from a general insurance division. It is all about having options, one of which is not to sell or to be able to put a transaction on hold."

According to Laughton-Scott, the sale of a business can take anything from two to 18 months. One of the major factors in determining the speed of the transaction is the level of competition. The more competition there is, the more you can determine the timetable.

He says: "I have yet to do an easy deal - each one is different. Selling your business is like getting divorced and moving house at the same time. It is extremely stressful."

"A deal is never complete until the ink is dry, and there are a whole raft of reasons why it might fail. The attitude of the seller is very important and, if they are spending a lot of time at their holiday home in Spain for example, they are probably keen to get out and will take a detached approach; whereas those that have made insurance their life will often hang on far too long as the boundaries between them and their business have become confused."

Industry consolidation

Despite all the talk about industry consolidation, Laughton-Scott argues that there are not a huge amount of deals going on.

He says: "There is nothing to support the idea that the industry is going through massive consolidation. Look at the facts. The top-50 UK brokers are in fact deconsolidating and, in particular, the top-10 aren't growing as rapidly as they were. There are a lot of people whose interests are to talk up consolidation. If you ask people if they are expecting consolidation they will say yes but, if you ask if they are expecting to sell in the next 12 months, they will say no. The perception is that there is a significant opportunity to buy, therefore everyone thinks consolidation is going to happen but they are all hoping to be the consolidators and not the consolidated."

Laughton-Scott believes that we are unlikely to see many smaller brokers calling it a day due to the pressures of Financial Services Authority regulation, as predicted by many industry pundits. He says brokers with less than £1m premium income are aware that the FSA will not be focusing on them. Also, these firms cannot afford to sell as the proceeds the sale of the business are unlikely to be enough to see them through retirement.

He says: "Small brokers will continue to work as they need the income. They are not going to be squeezed out because of the cost of regulation. What matters is not the cost but the playing field. As long as everyone's playing field has changed the cost will be passed on to the consumer."

Laughton-Scott believes that one of the biggest factors that used to destroy value in brokers was teams leaving the firm and setting up by themselves. However, this is not happening at the moment, as people cannot be confident of getting a brokerage registered in time for regulation.

He says: "The biggest source of value destruction has been removed. The FSA will be good for existing players and will underpin their value, but it will make it more difficult for new entrants to enter the market."

Consolidation will be driven by age, according to Laughton-Scott. He says: "There are less new brokerages being formed and the older brokers will be looking to retire in the next five to 15 years. The FSA may push a few over the edge but it is not going to change the fundamental position."

Laughton-Scott says: "We are regulated by the FSA and they have visited us once. It is a stressful process as there are lots of horror stories out there but, in reality, if you are seen as a low-risk business and you are focused on looking after your clients and giving the best advice, you have very little to worry about."

"Our personal experience has had a bearing on how we view FSA regulation. There is such a thing as a 'light touch'."

Laughton-Scott does not believe the commercial market will change. He says: "The key relationship is between the account handler and the client. Once you get above the very small risks, businesses want advice, which cannot be provided by a call centre. If you look back on the commercial market, it is still largely the same as it was 10 years ago."

However, to be successful, brokers need to assess which of their clients lose them money. He says: "Good brokers go through a constant process of culling their client base. Where a client loses them money they will sack them or put up their fees. You cannot choose which clients you win but you can choose which clients you rid yourself of.

"It is about doing your numbers and measuring the amount of time and effort your staff have to commit to that client to keep them happy."

Exit routes

Some networks are now offering an exit route, however, Laughton-Scott is sceptical about the effectiveness of networks.

He says: "A lot of what networks offer can be built into a brokerage's accounting and processing systems. A good IT solution is far more appropriate. With regard to compliance, the risks in general insurance are much lower than on the life side and, therefore, the cost of regulating is proportionally lower and can be encompassed within existing processes and systems. Also the independent financial adviser industry is far more fragmented with many sole traders and there is a greater need for networks than in general insurance brokers."

Whether you are a member of a network or not - and even if you are not considering selling in the near future - start looking at the exit route and at whether the brokerage can be broken up effectively. Try not to be too successful - apparently, despite the pressures of regulation, there is time to spend at the holiday home after all.

CV

1992: Founded IMAS

1987: Executive, Cavenove & Co.

1984: Assistant manager, Kleinwort Benson

1981: Qualified as chartered accountant with Arthur Andersen.