Broker M&A is complex and administrative discrepancies must be ironed out if deals are to complete, says partner

Biba 2024: Clarity around renewal rates and the weight of regulation are two key reasons why broker M&A deals collapse, according to John Needham, partner in the financial services team at accountancy firm PKF.

Speaking during a fringe session at Biba’s 2024 conference on 15 May 2024 – entitled Buying or selling an intermediary – insights from the front line – Needham explained: “Very few of the deals we are involved in are abandoned. Where they have been [abandoned], it is often down to regulation or tax where the seller cannot get comfortable.”

As an example, Needham noted that differences in risk appetite around taxation or regulation between the buyer and seller can often be a deal breaker.

Furthermore, there are additional areas where the seller needs to ensure they deliver clarity from the outset – for example, around revenue.

Needham cited a reliance on broker software systems as complicating transactions because these can lead to revenue figures being disputed as an audit turns up a different total to the one recorded on the broker’s system.

“You need internal or external finance experts who are knowledgeable about the nuances of intermediary operations as we have seen different figures come from an external accountant compared to the internal systems around revenues,” he explained.

“For example, commission should be recognised when the work has been done and not before. That is usually at the inception of the policy.”

Red flags

Needham continued: “Renewal rates can be another area where there can be a degree of uncertainty. It is, in many ways, the core value of the business.

“We have asked an intermediary what [its] renewal rate was and [it] replied 110%. Clearly that cannot be the case, but [it was] basing the figure on the premium levels that renewals generated compared to the previous year.

“Anyone interested in buying your business will be very keen to understand how many clients you have been able to retain.

“It is your core value, so its importance cannot be underestimated.”

Needham said the way in which client money is managed is often another hurdle to be tackled if a deal is to be completed.

“A red flag to us is any time we see a seller deliver a clean audit,” he explained.

“There is no such thing as you will always find some tweaks and errors that need to be addressed.

“Therefore, if we are presented with a clean audit, we will question the capabilities of those who have carried it out.”