The traditional method of growing a business organically is not an option for any business wishing to stay competitive and remain profitable. For many insurance brokers facing a shrinking number of insurers demanding larger amounts of business, the merger or acquisition route is the quickest way to expand their business.
"There is a continuing market of mergers and acquisitions for insurance brokers," comments Jim Heywood, director of Oxford-based Ideal Business Consulting, which recently took over the M&A activities of Moore & Weeks. "For general brokers the main motivations to sell are age and pressure - a typical owner-manager is over 50 and is thinking of retirement options, and pressure comes from the insurance companies requiring larger volumes of business."
Broker marketing consultant John Shetcliffe also believes the phenomenon existing in the provincial intermediary market could be the result of the age of the principals. "A critical mass are reaching early retirement age: mid-fifties, without succession plans in place. Those with a composite portfolio of no particular speciality and a fragile premium income in the £1m to £3m zone are facing the pressures of economies of scale that demand they think about selling or growing a critical mass of customers quickly."
Shetcliffe observes that the hunt is on for mainly commercial insurance portfolios, especially those offering specialist niche pockets of profitable business. "Despite the accelerating consolidation in the intermediary market and a sustained period of soft premiums, intermediary values have gradually increased in recent years. This is as much to do with the rising profitability of many intermediaries, as it is to do with the current sellers' market."
Outright acquisition of another broker will enable the purchaser to enter a business with the greatest chance of success, benefiting from an established customer base, suppliers and goodwill.
The Layton Blackham Group has made 15 acquisitions over the past three years and targets mainly small- to medium-sized UK-focused regional brokers. "It is not about acquisition for the sake of it, it is about adding value," comments Charlie Whitfield, marketing director. "We have a rolling five-year business plan and every single acquisition we have made has improved the business. The majority of owner-managers are very good insurance brokers, but not necessarily good at changing with the sector. In the mid-nineties we invested in many areas of our business and now have lots of added value we can bring to these companies."
Deciding to sell a business is one of the most difficult commercial decisions faced by a broker. Similarly, searching for a suitable acquisition opportunity is a complex and hazardous process involving lengthy negotiations with no guarantee of success. Acquisitions require a substantial investment of time and effort, and often the best deal available is not achieved.
At the outset of an acquisition, consideration must be given to which type of broker to acquire, based on size, location and core activities. Once these fundamentals are in place, there are many advisors to help find the right business.
Initial speculative approaches are made anonymously by a third party in case the approach is unwelcome. Insurers, consultants, accountants and solicitors who specialise in mergers and acquisitions, are all able to make these early approaches on behalf of their clients.
When a suitable target has been found and is willing to talk, undertakings are signed to ensure any information exchanged remains confidential.
Once negotiations have begun, the buyer must decide whether the shares of the business or just its assets and goodwill will be transferred in the sale. During the discussion of outline terms, professional advisers are involved to differing degrees. "Their advice may conflict; for example, the seller's accountants may propose that the shares of a company be sold, not just the business and goodwill," comments Heywood of Ideal Business Consulting. "In practice, this is much more complicated and does not happen on smaller deals. The buyer or his advisers will often hold out strongly against buying the company as a whole. Legal advice is needed on the implications of this, and also on regulatory and employment questions. Financial advisers should be consulted because of the large personal or corporate decisions on investment."
The question of how much to pay is often a difficult matter, and assistance is sought in valuing the business, usually through an accountant. However, Stephen Ross, a chartered insurance practitioner and management consultant, feels some brokers have unrealistic expectations when it comes to the selling price. "The days of huge sums are over, and very often there is less than one chance of hanging onto business at renewal. This will affect the price someone is willing to pay."
Heywood comments that in small professional firms, owner-managers often delay a decision. "They believe the buyer's price is not enough to make them stop working. However, for those who wish to or are forced to retire, the prices are reasonable, given that the buyer takes on the risk of maintaining relationships with a personalised client bank."
Once an initial price has been established, "heads of agreement" are drawn up, setting out the price and key issues to be resolved before completion.
Accountants investigate into the affairs of the business, especially for a share purchase, as all liabilities will transfer to the purchaser. Solicitors then address all issues identified at this stage, to ensure the appropriate warranties are in place - an issue both seller and buyer often have concerns about.
With some considerable foresight in 1979, Eddie Barnes, managing director of Special Risk Services Underwriting Agency, developed an insurance product to cover warranties. "Fundamentally the insurance broker has to worry about the same things as other businesses, but there are specific hazards such as fraud and dishonesty risk, errors and ommission exposure, and the nature and scope of authorities if they act as an underwriting agency." Barnes reports the volume of this business is doubling year-on-year. "Since I started in 1979, the appeal of this insurance has grown in leaps and bounds, and this is largely due to our advisory skills and troubleshooting role in the process."
Legal advisors will usually complete the acquisition, however consideration is given to other operation considerations at this point. Communication to staff, customers and suppliers is vital to ensure the business is properly focused and the acquisition is a success.
"The acquisition is the end of the beginning," comments Shetcliffe, "because it merely signals the start of an array of efficiencies to improve the derived profit from the acquired business base. Initially, there are the efficiencies achieved through process efficiency and leverage with the declining number of powerful insurers. However, the major gain lies in exploiting newly acquired markets to the optimum level, with the execution of professional, business winning marketing techniques."
Mergers generally have the same features as the acquisition of an existing company. A merger is less costly than an acquisition, but is weighed against the fact that part of the ownership remains with the former owners.
To achieve a successful merger, a critical factor is the integration of the merged businesses. Companies that integrate quickly post-merger are rewarded with better customer retention and improved market value. To help speed up the merger process and integration, management from both companies often share merger responsibilities in a co-leadership approach. Measuring and tracking cost savings and employee and customer retention rates in real time allows action to be taken before problems grow.
Heywood concludes there are four key factors for success in a merger or acquisition: "First is having clear intentions of the buyer and seller. Then there is the chemistry between them - insurance broking is a people business but also a professional service and if both parties approach a negotiation in that spirit, they are more likely to succeed. Thirdly, careful discussion with key staff and then all employees about the reasons for the deal, the extra help needed from them, and their future with the firm. Finally, positive communication to clients about the deal is essential. Let them know the reason, timing and practicalities."