Unsolicited Offer for your Brokerage? How Should You Respond?

With the aggressive level of consolidation taking place in the insurance brokerage industry, many independent brokerage owners are being contacted monthly, if not weekly by several potential acquirers that are looking to build their pipeline of potential acquisitions. It is exciting and flattering to get the call, but how you handle the process can make a big difference in the outcome. A sale of your brokerage is a complex marathon, not an easy sprint, so do not feel rushed in making an important decision. This article discusses how to respond or move forward with an unsolicited offer for your brokerage.

While selling one’s brokerage in an auction process is a great strategy to get the highest price and best terms, if you feel you’ve found the perfect partner, there is a proven process to achieve similar results if you decide to move forward with a direct sale.

What to Consider Before Responding?

  • Is this the right time/are you ready to sell? If the unsolicited inquiry piques your interest, the first step is to stop and reflect on your goals. Is this the right time to sell your brokerage? What are the financial and non-financial objectives you want to achieve through the sale of your brokerage? Most brokerage owners have spent decades (and in some cases, generations) building their brokerage and it is part of their identity. Selling your brokerage is a psychological and emotional process that most brokerage owners need time to mentally prepare for.
  • Is this the right fit? The brokerage landscape has consolidated significantly over the past 10 years, with a handful of brokerages controlling more than $10 billion in premium alone. The majority of these are institutionally owned (e.g., owned by insurers, private equity backed, etc.), however there are several regional brokerages committed to remaining independent that are looking for merger opportunities. Each potential purchaser has a unique offering, business model, corporate culture and strategy that you should carefully study when assessing who you want taking control of your brokerage.
  • Negotiation experience? Regardless of who the purchaser is, you need to understand that they are likely very familiar with the M&A process which can lead to an advantage in negotiations and outcomes whether it’s price or terms. To level the playing field, it’s important to prepare yourself both mentally and organizationally in order to maximize value at the best terms.

Even if you decide that this isn’t the right time to sell, do not let the opportunity go to waste. Use this as the catalyst to start developing your long-term succession plan. Working on a succession plan a few years in advance will allow you to keep your options open and increase the likelihood of a successful retirement.

Evaluate Your Options and Take Control of the Process

If you decide the time is right to sell, the next step is to decide how to proceed. Do you explore the opportunity with the inquirer or do you cast a wider net? Our next article will discuss a process with multiple parties, while the balance of this article discusses striking a deal directly with a single purchaser.

If you decide to seriously engage in discussions and negotiations with an unsolicited offer, our core advice is to find a way to achieve some control over the process. That is, create a structure for the process. This will give you the best chance to get a fair price and good deal terms. While every situation is different, there are certain things that you should be aware of. Here are some points to consider:

  • Know your value. It is always a good idea to know the value of your brokerage. This will help you gauge whether the price you are offered is fair and gives you a basis to negotiate a higher price. It’s important to engage a professional that is regularly involved with the valuation of independent insurance brokerages, or those that represent independent brokerages in their succession plan. These professionals possess current knowledge on valuation considerations specific to Canadian brokerages and are able to articulate why some brokerages sell for 3.5x revenue vs. others at over 6x revenue.
  • Prepare like you are going to market. Prepare a confidential information memorandum. Ensure that all your assertions and financial results can be supported by data. This allows both parties to negotiate with a full understanding of business performance and in a timely manner. If you are prepared, it gives the perception to a buyer that you are prepared to walk away from the deal and can consider going to market later.
  • Don’t be afraid to consider your options. It’s in a purchaser’s best interest to have you sign a term sheet without speaking with other potential suitors, as there is no competing offer to worry about. Purchasers understand the emotional and financial significance of business owners selling their brokerage, and with it being a seller’s market, don’t be afraid that their offer will disappear if you don’t get back to them right away. To ensure you’re getting market terms, you need context either through obtaining multiple offers or working with a third party with market intel to ensure that the price and terms put forward are competitive.
  • Be realistic about what a good outcome might be. Be willing and able to walk away from the deal if the purchaser won’t or can’t meet your pricing expectations. This can be harder than you might think.
  • Terms and conditions of the sale are equally important as the price. Consider them seriously and take the good advice of your lawyer and M&A advisor. Nothing is worse than making a deal and later finding out you’re not getting all the money or, even worse, have to give some back.
  • Have an advisor be your point person. Having all communication and correspondence pass through an experienced advisor insulates you and the purchaser from negotiating directly with each other. You will ultimately control the process from behind the scenes, but it allows you the flexibility to decide when and how hard to push on deal considerations.

In summary, if the process looks and feels like an auction, the purchaser is more likely to treat it as if it is an auction.

Process Overview

  • Initial Contact. The obvious first step in the process is when the potential purchaser contacts you. If you’re interested in discussions, we suggest that both parties sign a non-disclosure agreement (NDA) to protect their interests. Depending on the purchaser, NDA negotiations can sometimes indicate how the parties will handle future negotiations. Once an NDA is signed, the next step would be to arrange a short meeting to talk about the opportunity and if possible, share general information regarding the business, including scale and profitability. The objective of this initial meeting is to assess fit. Based on this initial discussion, we would advise that you request that the purchaser provide a high-level price range that they are willing to pay. If their pricing is within range of your expectations, then it makes sense to continue discussions further.
  • Timeline and milestones. We recommend that both parties agree to a process including a timeline with milestones that will trigger continuation or termination of the process. This will keep everyone focused and on track.
  • Sharing of Information and Due Diligence. Once timelines and milestones have been established, the next step is to work towards an informed offer in the form of a letter of intent (LOI). The purchaser will generally provide a list of information they would like to see. It is important to assess what financial and operational information is appropriate to share at this early stage of the process, especially proprietary or customer information. With that said, you must provide enough information that a potential purchaser can provide a meaningful offer.
    • Your advisors can provide guidance on what is appropriate to share at this time. In our experience, providing a concise information package is effective in facilitating a purchaser’s due diligence. It is important to provide sufficient information such that the purchaser understands the aspects of the business that would impact their interest and pricing. This would also include several discussions with management.
  • Letter of Intent. After the purchaser has reviewed the information provided to date, the next step is to negotiate an LOI. While there are different approaches to this, we prefer that the LOI contains most if not all the provisions that will materially impact the deal including both business and legal terms. It can be helpful if the parties agree in advance what should be included in the document. While the LOI is not binding (i.e., legally enforceable) on the parties, it will serve as the basis for the actual sale agreement.
  • Confirmatory Due Diligence and Purchase and Sale Agreement. At this point there is still lots of work to do, but the price and business terms should effectively have been finalized. Next steps would include confirmatory due diligence where the purchaser validates the information provided thus far by reviewing supporting documentation, followed by corporate record and tax information review and the drafting of the purchase and sale agreement. We cannot stress enough the value of a good M&A lawyer. The drafting of the share purchase agreement is a time-consuming and critical part of the process. The involvement of your legal and advisory team is critical to getting the deal over the finish line.

With lots of interconnected steps, unsolicited offers can help you by-pass the process of finding a purchaser assuming there is a strong fit, but it still requires lots of work to achieve optimal Please keep in mind that this is a limited list of considerations when undertaking a sales process. There are a number of other factors such as tax, personnel and regulatory considerations which may also have to be dealt with.

Selling a brokerage is a complex process results. If you’re looking for advice for selling your insurance brokerage on your terms and timeline, please contact one of our brokerage M&A specialists.