How brokerage owners want to pass on their businesses

Where would you like to leave things? It’s a critical question for Canada’s property and casualty (P&C) brokers, especially given the seniority of brokers represented in Canadian Underwriter’s 2024 annual National Broker Survey.

More than 200 brokers nationwide shared views about challenges for the broker distribution channel. The CU survey is sponsored by Sovereign Insurance.

In keeping with industry demographic studies conducted by the Insurance Institute of Canada over the past decade, a significant proportion of brokers filling out our survey over the past five years has been 50 or older.

That spurred CU to add questions to 2024’s survey about how brokers will pass their businesses on to new ownership and retire. In many ways, results for those questions aren’t surprising given the home-grown character of many Canadian P&C insurance brokerages.

Ownership options

Brokers were asked to select from several potential options for transferring their businesses to new ownership. The question permitted them to pick multiple viable strategies, so the total doesn’t add up to 100%.

Forty-four percent of brokers say they’d explore selling their shares to current partners or co-owners. Close second choices include 43% opting to sell to a consolidator, 38% saying they’ll sell to family members, and another 38% considering sales to current managers and employees.

“By selling to a trusted face, it keeps that connection going for them,” says a woman respondent looking to sell to existing managers and employees. “And we believe if the manager/employee knows they will buy into the business, they will work for it like it is theirs to build.

“It encourages loyalty and hard work.”

Selling to a private equity firm is a less popular option (27%), as is a sale to an insurance company (14%), and only 3% say they’d consider closing the business altogether.

Preferred options

But when those same brokers were asked to select their preferred method of business transfer, 27% see sales to family members as the best option. And there’s a three-way tie, at 16% each, among owners wanting to sell their shares to current partners or co-owners, current managers and employees, or to brokerage consolidators.

One respondent at a medium-sized firm (between 20 and 99 team members) plans to “pass my successful company to my family members for stable income and for the good of the employees.”

Still, family succession isn’t always practical. “The business has grown too large to sell to employees who are not willing to take the chance or bear the debt,” says one broker with three decades in the business. “Nor do I want to extend terms or risk of carrying to the same employees. No third-generation family members [are] interested.”

The idea of selling to a private equity firm is less popular, at 11%, and only 2% of respondents prefer the thought of selling to an insurance company. If given their druthers, none of the respondents would see their businesses close for good and 11% say they’ll find some other way to make succession work.

Practical matters

Interestingly, respondents with more than 30 years in the business are most likely to sell to a consolidator (23%), although 27% of that group would still prefer to sell to family. And those with fewer than 16 years of service are most keen to continue family ownership (43%).

Women respondents are evenly divided at 20% each on four sales options: selling to family, selling to partners and co-owners, selling to consolidators, and selling to private equity. Ten per cent choose a sale to current managers and owners, while another 10% would prefer some other option.

“[My] current partners couldn’t afford nor be able to fund the purchase price and loan repayment,” notes one woman respondent who’s leaning towards selling to private equity.

Brokerage size also impacts succession choice, with most respondents from firms with 100 or more employees saying they’ll sell to either a consolidator (40%) or private equity (40%). The remaining 20% in that group prefer a sale to current managers and employees.

One owner of a firm with fewer than 20 employees says he’s seeking a merger of like-minded equals to enhance the firm’s focused strategy.

“We have developed a highly specialized operation and [by] selling to a larger enterprise we would lose that success. Additionally, our specialization and expertise challenges the large players in the market; that’s our edge,” he tells the survey.

This article is excerpted from one appearing in the April-May 2024 print edition of Canadian Underwriter. Feature image courtesy of iStock.com/Gwengoat