Is it more lucrative to sell your brokerage now, or wait?

Is it more lucrative to sell your brokerage now, or wait?

Is it more lucrative to sell your brokerage now, or wait? An industry leader has come forth to suggest that brokerage owners who are interested in selling may want to act quickly, as low interest rates, higher multiples resulting from increased profitability and the sector’s lack of organic growth has created an unprecedented demand for M&A targets.
 
Moreover, because interest rates are bound to rise and it is uncertain how the market will respond to autonomous vehicles and mainstream ride-sharing, the industry may have “hit the ceiling” on the purchase price for brokerages.
 
“The market remains robust for insurance brokerages,” Peter Morris, president, Robertson Morris, writes on Insurance Blogs. “The question at hand is how long these heady days can last.”
 
While other industry execs agree with some of Morris’ assertions, one believes there may be some considerations that Morris may have neglected to bear in mind.
 
“I do agree that and if you have to buy a brokerage, now is a good time since low interest rates means you can afford to pay more,” said Rick Dresher, president, Affiliated Insurance Management Inc. “It’s no different than the current housing boom in Toronto, where potential buyers care about what their payment is, not how much they have to pay for the house itself.”
 
Dresher does not feel, however, that a reduction in auto insurance premiums or a shrinking of its market will necessarily have a drastic effect on mergers and acquisitions.
 
“I don’t know if that’s going to affect multiples. If a multiple is three and a half times annual commissions, just because less of that percentage is automobile doesn’t necessarily mean that the 3.5 will change,” he said.
 
Since the price of a brokerage is typically determined using either a multiple of gross commissions or by employing EBITDA (earnings before interest, tax, depreciation and amortization), auto policies are just one component used when assessing a sales price.
 
“If you compare someone with $1 million in revenue now with someone with $1 million in revenue five years ago, if a lower percentage of that is auto revenue, that doesn’t necessarily correlate to a lower multiple of EBITDA or a lower multiple of annual commissions,” he said.
 
Dresher notes that this is particularly true given that auto premiums are “probably one of the least profitable portions of a book.” Home insurance, on the other hand, tends to be more static and unlike auto, does not require frequent transactions that fail to generate premiums or commission.
 
In addition, the premiums for personal property appear to be on an upward projection.
 
“In our brokerage, any decrease in auto premiums has been offset by homeowners’ premiums that are increasing due to climate change and related weather events,” Dresher said.
 
And while Dresher does acknowledge that brokerages that are forecasting lower revenues may intuitively seem less appealing to acquirers, the market often acts contrary to expectations.
 
“For example, you’d think people would have paid less when the Liberal government said they were going to reduce auto premiums by 15% in two years, but we didn’t see that happen. It would have made sense, but based on everything I’ve heard, multiples have remained high,” he said.
 
“They made a pretty clear announcement that auto premiums would go down and individual brokerages’ future revenue would be lower, but it didn’t end up making a difference,” Dresher added. “So it’s hard to say.”