Before the downturn, the attractions for brokers selling their businesses to consolidators were clear. But for some the marriage has lost its convenience, and with restrictive covenants starting to expire and entrepreneurial spirit taking hold once more, the former owners are taking back control
They say the average length of a marriage that ends in divorce is around 11 years. And, in fact, an average of two in five marriages in the UK do not stand the test of time. But did you ever think a similar trend would become so dominant in the broker market?
Since the end of the consolidation boom – which gripped the market in 2007 and particularly in 2008 as firms raced to beat the deadline for a rise in capital gains tax (CGT) – there has been a growing movement in breakaway brokers. These are the one-time entrepreneurs who sold up their businesses in the height of the market, but have been unable to settle happily in their new homes.
With a stream of restrictive covenants now expiring, the market is preparing for an explosion of activity over the rest of the year. The entrepreneur brokers are back, doing what they do best, and sometimes even competing with their one-time employers.
It’s also not uncommon for former vendors to buy back chunks of their business from consolidators, as Deloitte insurance partner Ian Clark explains. “Sometimes these guys who have sold businesses have not taken all their money, because they may have taken shares as part of the transaction. And there may be pressures on the financing structures of the business they have sold to, and they are no nearer an exit where they might get value.
“In that kind of scenario, some of those guys come up with an offer to take it back, because either it is not fitting culturally or alternatively it hasn’t shown the growth that was envisaged under the ownership of the new business.”
In the majority of cases, the separation is amicable. But when there is no love lost, painful legal action can follow. A classic example took place back in July 2007, when Towergate won a high-profile court battle with Bob Beckett following the departure of 15 staff from his former firm Country Mutual, shortly after Towergate bought it, to join his new business, Insurance Risk Solutions.
Here, we talk to some breakaway brokers about their experience and ask the consolidators how they deal with a relationship that doesn’t last the distance.
The breakaway brokers?
Andrew Tett: bought it back
Tett sold his business, Tett Hamilton, to Oval in December 2007. Two years later, the Bristol-based broker was negotiating with the consolidator to buy it back.
“We just felt we were going in different directions,” Tett explains. “We were entrepreneurial brokers and we just didn’t really fit into the corporate mindset. It is something you either take to or don’t. We amicably agreed we would separate. We are still using Oval for placing business. It was on pretty good terms.”
Since the deal, Tett along with other directors have rebranded the business to AJP Insurance, which has joined Broker Network. Its premium income is now around £9m, compared to £14m when the business was sold in 2007.
Tett explains: “We did not buy all that we sold. Some bits had gone off elsewhere within Oval. The market price was quite different six months ago to what it was three years ago. We felt we paid what was a fair price based on conditions at the time.”
Tett says he had initially planned to retire, but does not ultimately regret the sale to Oval. “We went in with good intentions. But these things don’t always work out. Two years ago, we didn’t know what we know now and the price was right, so we have no regrets about it.”
He says it is “immeasurably unlikely” that the company will ever sell to a consolidator again. “Our intention is to recruit younger people who can come up through the ranks and become the future partners. Three years ago, the prices got to such stupid levels that it became impossible to do.
“I don’t think those prices will come back again, but our strategy is to recruit people to take the business forward. Emphatically the intention is not to sell in that way; the intention is for an internal sale.”
At the same time, Oval also sold back Huddersfield-based Wilkinson Rodgers to owner Steve Manning. Oval chief executive Phillip Hodson insisted it was a “one-off situation that was sensible at both sides and was very amicable and professionally handled”, and was unlikely to happen again.
Geoff Bradford: exit and reformed
Bradford is the former managing director of Layton Blackham. The broker was sold to AXA in January 2007 and now forms part of its broking arm, Bluefin. Earlier this year, Bradford joined a team of former Layton Blackham colleagues, who had left Bluefin, at start-up Aquilla Insurance Brokers.
“The team felt there wasn’t enough emphasis on customer service and dealing with clients,” Bradford says. “Where these were very important in the Layton Blackham set-up, when they went into a larger outfit they just felt that some of the ‘oxygen’ had been lost. And they felt they could service their clients a lot better from being outside of a larger organisation.”
Bradford stuck around for 18 months after being made integration director at the AXA-owned business. “I left because, being part of a smaller business and going into something much, much bigger, it just wasn’t for me – it wasn’t something that I was going to enjoy. I prefer the smaller environment where you are closer to the daily action. I think that’s what really motivated me to get out.”
Bradford has also assisted former Layton Blackham owner Chris Blackham in the launch of Endorphin, a business designed to invest in start-up and existing small brokers. “What motivated me to start up Endorphin with Chris after our restrictive covenants expired was to work with smaller businesses.
“There are lots of people within all sorts of organisations who feel locked in without that ability to grow and, particularly with the consolidators taking over lots of businesses, I think people feel somewhat trapped in those environments.”
Kevin Elliott: Click here to read about Kevin Elliott's consolidator experience.
The consolidators’ story
Stuart Reid: ‘very little leakage’
Bluefin chief executive Stuart Reid says it is common for senior management or the owner of a business to use a sale as an exit strategy. “In some respects, that mitigates some of the risk of people leaving and taking the business,” he says.
But Reid acknowledges that, in certain cases, the marriage doesn’t work. “It is important for both the business and the individual concerned to come to that conclusion as quickly as possible and depart amicably. We’ve had very little leakage of senior people.”
Reid also admits that he has a personal irritation with former owners that have been paid for the business and left, but then go back and try to steal the business that they have sold. He says: “I think that sort of behaviour at best shows a complete lack of integrity.”
Andy Homer: ‘breach and we’ll sue’
Towergate chief executive Andy Homer says that former vendors of acquired business are free to do what they like, as long as they don’t breach the contractual restriction.
“What we’ve always promoted is, provided you don’t breach your sale and purchase agreement, and provided you don’t breach your employment contract, then it’s a free world. That’s all we’ve ever asked.”
But he emphasises that Towergate will come down hard on those that cross the line. “In the examples we’ve had in the past, we’ve made it clear that we sue people who we believe have breached their contract. We always do that; we’re consistent.”
He admits that you cannot buy loyalty with incentives such as bonuses and share options, however. “If they want to go off and do something else, then there’s a point in which they should. But if we are just paying people to stay, I don’t think in the long term that is a sensible strategy.”
Alex Alway: ‘it’s about the relationships’
Jelf chief executive Alex Alway admits that consolidators have learnt vital lessons from their acquisition sprees of recent years. “To beat the CGT changes a few years ago, there wasn’t sufficient due diligence done on the style and culture of the firms. That’s the one big lesson I think all of us have to learn: we have to buy businesses that are prepared to work within a bigger company.
“There is no doubt that, at the top of the boom when there was a lot of businesses being bought and sold, all of us bought companies that you would probably have a second look at again at this stage.”
However, he explains that one of the keys to making an acquisition work is building relationships with the people involved. “Whether you are a consolidator, a breakaway or an existing broker within the consolidator, it’s all about the people around you. There’s no magic formula, there’s no point in chucking cash at it – really it’s about actually building working relationships within the people in the business.” IT