Things changed quickly! In the space of a few months, geopolitical and macroeconomic factors have tilted the world on its axis. Slower supply chains and labor shortages stemming from COVID have contributed to an inflationary cycle in Canada that was meant to be a temporary phenomenon. Then came the Russian invasion of Ukraine; which created the conditions necessary to amplify inflationary pressures throughout the global economy. In our country, the Bank of Canada reacted by initiating a cycle of interest rate hikes since inflation was no longer considered “transient” and a prolonged period of interest rate hikes is likely to last. Consumers are feeling the pinch as their purchasing power erodes. Commission revenue growth and brokerage profitability are likely to have a negative impact for the first time in many years.
All of these factors create a dilemma for the brokerage owner. How can I continue to rely on my existing succession plan to maximize the value of my brokerage and effectively execute a sale? The key is “adaptability”! When considering the concept of “adaptability”¹ and the strengths that could impact your short-term succession plan, you need to ask yourself the following questions:
- Is the insurance brokerage market at its peak? With only a few large industrial consolidators backed by financial sponsors competing for brokerage targets, could the current instability ever drive down valuation levels? The answer is probably, but it is quite difficult to predict when, why and to what extent. As a brokerage owner, you should consider the possibility of some downward pressure on valuations. Your succession plan should take this risk into account.
- If growth through brokerage acquisition is at its peak, what will drive brokerage valuation levels forward? Multiple expansion over the past two years has been driven primarily by positive corporate sentiment and the convenient availability of cheap debt financing to fund acquisitions. With a mixed-at-best business climate and more expensive debt financing, brokerage’s growth trajectory is more of a major valuation driver than ever. Organic growth is a desired attribute for acquirers and often involves a higher multiple. Growth by acquisition is another essential measure of value. This does not always necessarily mean brokerage acquisitions. A comprehensive acquisition strategy should also be based on maximizing the brokerage’s ability to acquire agents, and their books of business, at reasonable multiples.
- What if the current geopolitical and macro-economic instability slows down in the coming months? Improving economic conditions and rising asset prices driven in part by inflation could increase aggregate demand for insurance coverage. Brokerage owners should assume that organic growth will remain a key driver in maintaining high valuation levels. The key to adapting your brokerage’s succession plan is to include assumptions for both upside and downside risks.
Your insurance brokerage firm has taken years to build and has withstood and thrived through multiple economic cycles. Therefore, any succession plan you create as a brokerage owner cannot exist in a vacuum. It cannot remain static! It should be adaptable and address both upside and downside risk to your brokerage’s valuation. While the likelihood of a significant compression in brokerage valuations remains low, reviewing your succession plan is a prudent step to take in today’s market.
¹ Key points on adaptability from “Has the Insurance Brokerage Market Peaked?” Rackes and Forgione, Houlihan Lokey, 2022
