How are Brokerages being valued in 2021?

For an industry in tune with the future value of money, it’s a tricky question for many. Part of what we do in TAG is facilitate, value and future proof Brokerages for merge or sale.

In terms of an Irish market overview I estimate that there;

• 1,000 are core financial planning, pensions, life etc.
• 140 core General insurance Brokerages
• 50 composite Brokerages doing both Life & General as a dual focus
• 300 Mortgage Brokerages with only 150 doing Mortgages in a proactive fashion against incidental, overlapping the above figures

The General Insurance market is undergoing a “hot” period with the likes of Aston Lark and Arachas buying up circa 10 GI Brokers in the past 2 years, hiving off the financial planning side quite often.

The likes of O’Learys and others have attracted international buyers, a show of faith in the Irish economy. St James Place in the UK have also attempted to enter the Irish marketplace.

On the financial planning/Life side, there are circa 1,000 Brokerages, from the Corporates like Aon down to the 1 x person operator working from home successfully. The death of the one person Brokerage has been an agenda lead soundbite for the past 15 years, yet most of the new entrants I’ve seen or assisted in the past 3 years have been a maximum 2 x directors as they get authorised by the Central Bank of Ireland.

I expect there will be circa 800 Financial Brokerages in 5 years time, with consolidation the main driver as a demographic cycle of the industry, rather than any compliance or macro sledgehammer. I also expect a CPC-116 version 2.0 within 5 years which may impact on numbers.

So what are they going for in the open market?

Is it recurring income multiples, EBITDA, 1% of total AUM?....Can it be a mixture? I don’t believe so as you cannot have it each way.

For General Insurance, a common measurement is EBITDA, it is quite rare in the financial side, however I believe Financial Brokerages should start thinking of “the business” with this frame of mind for future proofing.

GI Multiples have traditionally veered between 1-2.5 times recurring income based on the commercial/personal splits, but this has evolved also away from the simple multiplier mode.

On the financial side, the valuations of Irish Brokerages have been underscored by the PIBA buyback since 1999 with the 1st agency agreement with Irish Life negotiated. These helped to establish a higher floor for exit/value, however they have also inhibited open market transfers in certain instances.

The model is a multiple of your recurring income based on your persistency + the balance of your 1st your income due. All 6 Life offices vary, however the metric model is consistent.

The Life Offices buy the client bank as an asset of their own books(which of course split multiple ways in reality), subject to criteria, with a strict 2 year non-compete clause. There are taxation issues plus staggered payments of several years to factor in based on persistency kpi’s. An open market makes more sense to me, giving fairer value plus better client service capacity than going back to the Life Offices. Most Life Offices don’t have re-distribution capacity post a buyback.

 Brokerages I regularly speak to do not want to walk off into the sunset, rather they are aiming for a 2-5 year plan to back themselves into a Brokerage that has a good cultural fit to them & their client service(at an attractive but fair price)

Multiples of recurring income are still key, I often hear simplistic/crude multiples as the total valuation model, which can do a dis-service to both the seller and buyer.

The 3 key valuation dials to combine for me are;

1.     The recurring income@ a multiple model

a.     The recurring income as a percentage of total turnover (40% plus is percentage I feel Financial Brokerages must strive for as a minimum)

2.     The AUM accumulated in itself, which has an attractiveness to buyers regardless of attached recurring income as the effort of building up@€40 million plus is appealing, and worth factoring in

3.     The 3rd & increasingly relevant metric is data and the demographics that can be understood from the data. Brokerage intelligence & CRM data are what you are selling@due diligence. It is something I am seeing far more priority on now in comparison to 5 years ago. What are your data quality and future earning potentials insights?

Percentages of AUM e.g 1% of total AUM for Financial Brokers are not something I’ve seen with retail Brokerages, it is something more appropriate for Goodbodys, Brewin Dolphins etc. It may end up as the same number but it is not a trend I expect to see.

There is little tangible value in Mortgage clients in themselves it must be noted.

Protection, since the introduction of bullet payments post 2011, have stealthily brought in a solid recurring income base for Brokerages that is often undervalued or ignored as a potential value building mechanism.

The distribution plays of product providers buying intermediaries is an interesting phenomenon. Banks/direct models are under pressure and the Brokerage market is increasingly become the focus for financial planning/products. I fully expect larger institutions to continue to buy up market distribution as protective & expansive strategies.

There is a significant omission here of Central Bank, taxation, compliance, PI, liability, payment schedules and further due diligence criteria here that require a workshop in themselves.

 The market is increasingly consolidating in a positive sense, as options are assessed from positions of strength, not weakness. There was no Covid-19 exodus, as there was in 2008 in a different variation of a crisis. A lack of recurring income built plus Mortgage market focus were the key drivers of consolidation at that time.

There are plenty of new Brokerages entering the market which is a positive sign. I would not be in a rush to sell either as the sustainable value in Brokerages is only strengthening. Don’t engage in a panic fire sale if you don’t need to, and give yourself time to plan out your exit strategy.