Consolidation is the next logical phase for brokerages across the country, according to BXI’s Shay Keane. The time for independent brokers to act, he believes, is now.
Selling a business is never a straightforward process. Just putting it on the market can be tricky. After all, how do you alert potential buyers to the fact that your business is up for sale without giving customers and your competition the impression that you might be vulnerable?
“Since the beginning of time, we have had markets and exchanges to buy and sell particular types of goods,” says Shay Keane, Managing Partner of BXI, which specialises in introducing and matching buyers and sellers of businesses in the insurance and life broker market. “We have a stock exchange where people can buy and sell shares in companies, but up until now, there has been no place to go for small financial services businesses.”
BXI offers independent brokers who are considering selling their businesses a place where they can explore their options, test the market, and know that it is all done in the strictest confidence. “Buyers also need a place where they will find serious sellers,” says Keane. “And that’s what we provide.” That commitment to secrecy and privacy in discussions about buying or selling is one of BXI’s key attributes.
Demand for the BXI service is driven by consolidation in the sector. “Ireland has between 1,500 and 2,000 independent brokers,” Keane notes. “The reality is that there are far too many independent brokers. Having up to 2,000 brokers in a country of our size doesn’t make sense.”
The traditional business and remuneration model for brokers is creating pressure to consolidate. As Keane explains, the primary payment for a product sale comes in the first and earlier years with recurring income for renewals at a much lower rate. “The problem comes when there is no one left to sell to. Brokers are thus relying on annual remuneration from previous years’ sales. Any drop in new business will put a significant hole in the profit and loss account.”
That will be a challenge for life and pensions brokers in the current environment. “The people in the industry are talented entrepreneurs, but COVID-19 is a real problem,” says Keane. “Life and pension products have to be sold while home and motor insurance are bought because both are mandatory. How will COVID-19 affect the numbers of interested buyers of discretionary life products? If you think of COVID-19 as an electric shock to the system, it has left everyone a bit frazzled and dazed. People are asking what it means for their business, and the impacts will be quite serious.”
He points out that close to half a million people relied on State support when the wage subsidy is included. “If we have a lot of closures, and I hope we don’t, people will lose their jobs and they might decide to cancel discretionary spend on life and pensions policies. People will be very, very careful about how they spend their money. For a small independent broker who has been happy relying on sales every year, new customer opportunities will be very limited for the next few years, and it will become increasingly difficult to cover costs. That’s a huge issue for the broker community.”
Even in circumstances where the business manages to maintain income at pre-COVID-19 levels, that may not be enough. “The challenge comes when the cost base starts to move,” says Keane. “One cost-increasing area is regulation. The Central Bank has been increasing compliance requirements year-on-year for independent brokers since the financial crash of 2008. Pre-crash, we had what was known as a ‘light-touch’ regulatory framework. Post-crash has been a nightmare for a lot of small, independent brokers. To comply with new and changed regulations, they have to hire full-time compliance experts or retain external compliance expertise to look after it for them. This all adds to costs.”
Increased regulation has also changed business practice. “The nature of the sales pathway has changed,” Keane notes. “Regulation has made selling slower and more costly. It is all predicated on good intentions by the State, but it means there is a hell of a lot more work to do in the sales process. It slows down the ability to make money. It’s a bit like limiting the speed you can drive at on a motorway; the weight of regulation is placing a drag on business. Brokers need scale to drive at an optimal speed. In any sector where you get uber-regulation, the next stage in the process is consolidation.”
According to Keane, hassle and pain can be avoided by selling the business now.
The sector also includes a number of accountancy practices, Keane notes. “Many accountancy practices are also independent brokers,” he says. “They enjoyed a gentler form of regulation in their brokerage business for several years. This changed quite substantially last year and they now have to bear the full weight of compliance and regulation. They must ask themselves if the brokerage side of their accounting business is generating enough revenue to justify its continuance.”
Accountants will also be advising independent brokers on their next move. “People in financial services tend to be optimistic, resilient individuals. That is the nature of the industry, but they should seriously consider what their next move should be. They will be turning to their accountants and professional advisors for guidance. They need to be comfortable with the idea that selling is not a failure. It is a success and a reward for the hard work put into building the business.”
It is about picking the most suitable time to sell, Keane contends. “Globally, scale is key. The bigger players want scale and want it fast, and they are ready to buy. The reality is that there are plenty of people of scale who do not believe there is any organic growth left in the market. If you want to get bigger, you must acquire in today’s market. There are plenty of people with scale and money who will buy now.”
But that won’t always be the case. “In 12 months, when the real pain kicks in, the clamour to sell might drive prices down, and the opportunity to take advantage of the natural consolidation phenomenon might be less attractive.”
BXI allows brokers to avail of that opportunity. “In Ireland, there is a tendency on the part of people who are considering buying a business to tell everyone about it. The tendency for those selling is to tell nobody. If they are thinking of selling, the general sense is that there must be something wrong. Sellers always keep their mouths shut. We allow them to put their business on the market while retaining their privacy.”
BXI is more than an exchange; it also offers the full range of M&A expertise. “M&A is a very time-consuming process and can suck the energy out of a business,” says Keane. “The best thing to do is to get external advice and expertise to manage it. We have the knowledge and experience to do the valuations, chemistry tests, due diligence, and so on. We offer a steady, sure and safe pair of hands to deal with the process.
“People are battle-weary,” he continues. “Survival is the current key strategic target. People who came through the last crash have spent the past ten years recovering, battling back, and rebuilding their business. Do they want to spend the next ten years doing that again? The natural order of things is to move on. We have a combination of Irish and overseas buyers who are prepared to buy at fair value. Next year could well be a race to the bottom, so the time to act is now.”
For more information, visit www.bxi.ie.
(This article is sponsored by BXI.)
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