How retiring brokers may impact M&A

When it comes to pricing an insurance brokerage for sale, business continuity and the firm’s ability to retain key producers are both critical factors.

“For sellers that are further away from retirement age and who are the key producer, there is an expectation of a significant equity roll and market compensation,” said a recent report from M&A advisory firm Smythe LLP.

“For sellers that are the key producer and who are also near retirement age, there’s a higher perceived risk of client retention, which can impact pricing.”

The firm’s report referenced data from Canadian Underwriter’s 2024 annual National Broker Survey and noted its results resonated with views expressed by many of the firm’s clients.

“Although the preferred option is to keep the brokerage in the family or sell to management, given current valuation multiples driven by M&A, financing an internal succession plan just isn’t practical,” the report noted.

“With the challenges of running a smaller independent operation, and succession planning and retirement at the forefront for many brokerage owners, we expect M&A activity to remain steady in 2024.”

The report also mentioned changes to possible M&A impacts from capital gains inclusion rates tabled in the April 16 Federal Budget announcement.

Those changes increased the capital gains inclusion rates effective Jun. 25, 2024 and pushed some brokerage owners who were contemplating selling their firms to accelerate those plans in hopes of completing transactions before that deadline.

However, the final budget document included the ability to crystallize capital gains under the pre-June 25 regime. That led some to owners to slow down and more carefully consider their succession plans.

Brokers by the numbers

In terms of responses to CU’s 2024 National Broker Survey, 44% of brokerage owners said they’d explore selling their shares to current partners or co-owners.

Close second choices included 43% opting to sell to a consolidator, while 38% said they’d rather sell to family members, and another 38% indicated they’d consider a sale to current managers and employees.

“By selling to a trusted face, it keeps that connection going for them,” said a 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.”

Further, the survey found brokerage owners saw selling to a private equity firm as a less popular option (27%). Respondents also weren’t keen on selling to an insurance company (14%), and only 3% said they’d consider closing the business altogether.

Feature image by iStock/courtneyk