Acquisition can be good but be ready for the problems

Aware of the accusation that I may be "talking the market up" there is no doubt whatsoever that sales activity in our industry has increased dramatically over the past few months and will surely continue to do so until 2005.

Brokers are naturally considering the various options open to them, be it to buy, sell, merge or become part of the plethora of networks.

So then, should you buy? At its most basic, acquiring a similar business is a good way to grow, provided that the cultural fit and finance can be worked in a way to satisfy both the vendor and the purchaser.

Currently, multiples remain at similar levels to those enjoyed for the past few years, but if consolidation does occur as many predict, this will not continue. It's basic economics - supply will exceed demand and prices will drop.

The impact of regulation, if only in a financial sense, is going to be severe for all, but arguably more so for the smaller broker. If this proves to be the case, where would further monies be available for an acquisition? On the other hand, acquisitions may be cheaper.

Forgetting the financials, let's look at the cultural fit, which tends to be the most difficult problem of all. If selling to a very large organisation the problems are obvious, but not insurmountable. On the other hand, smaller brokers might find the straight-jacket of larger organisations restrictive even if part of the problem is FSA led.

Acquisitons made by small-to-medium sized brokers may be better culturally, but problems occur because of a lack of experience.

There are a huge amount of things to consider, do you buy the company with all the associated liabilities or do you buy the goodwill, what about TUPE (what are you going to do with the additional staff), what about the two premises, the vendor's trading name, are the insurers the vendor used the same as yours, do they prefer fee business rather than commission, do they have a life business... I could go on.

Critical mass is going to be one of the issues for brokers over the next few years. Are you big enough to cope with compliance and the e-commerce way of transacting business that insurers will increasingly demand? Are you big enough to remain or become key partners with insurers with the service, commission levels, credit terms needed to allow you to trade?

If this critical mass cannot be achieved by natural growth then an acquisition might make sense, but who do you buy and what size do you need to be?

The point is that no one knows what changes are going to occur. Yes, we now know a lot more about how the compliance regime will look but if the FSA does not know how many brokers are out there, how can anyone know what consolidation will occur and at what speed?

No one even knows what changes will occur to the old insurer/broker relationship. All we do know, with new agency agreements being drawn up as I write, is that the relationship will change.

Historically, brokers have been a resilient bunch and they may continue to be so. It is the size and, increasingly, their profitability that are becoming the benchmarks for future trading.

So, acquiring a similar business is a very good way to build and may allieviate some of the inevitable pain that is coming. However, do not underestimate the problems that may occur, particularly those associated with the cultural fit. I talk from experience, it can be tough.

Stuart Reid is managing director of Stuart Alexander