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In the world of damage insurance, growth often involves acquiring strategic or complementary firms. Often costing millions of dollars, find out what the main strategies are for financing such acquisitions.

In a time when many insurance brokers are reaching the age of retirement, transfers of businesses to younger brokers are becoming quite common. At least that’s what Benoît Laroche, National Lead, Financial Program Insurance broker, at the National Bank, has observed.

In April 2016, National Bank launched a financial program for insurance brokers. Laroche spoke to us about the main financing methods available to damage insurance brokers seeking to acquire another firm.

Equity

The company’s equity is one main source of financing for brokers looking for growth through acquisition. “Consider a broker who’s had a client base for 12 to 15 years, who’s built up significant equity, and who has no debts. In this case, they’ll without a doubt be able to finance 100% of the transaction with their own equity,” explains Benoît Laroche.

However, brokers who are more active in the market – some of whom close one or two acquisitions per month, according to Benoît Laroche – will probably have to take out a loan to successfully complete the transaction they’re considering. Two avenues are open to them in this case: insurance companies and financial institutions.

Insurance Companies

Insurance companies were the first to provide funds to brokers in order to let them acquire a client portfolio.

For strategic reasons, insurers are eager to support higher levels of financing – an appealing prospect for a broker who has already committed the leverage that the value of their own client portfolio represents to another transaction, for example.

But, like the proverbial coin, this option has its downside. “Most of the time, the insurance company will take a stake in the firm. It will also expect the broker to steer their clients to them, which compromises their independence. Brokers want to assure their clients that they’ve found the best premium for their specific needs,” says Benoît Laroche.

In the face of regulatory changes, banks have the advantage of being more efficient when lending money. The result is an advantageous borrowing rate for the broker and lower interest rates.

Financial Institutions

The other way to finance the purchase of an insurance firm involves taking out a loan specially formulated for damage insurance brokers. In Canada, National Bank is one of the only financial institutions that recognizes the value of a client portfolio.

“Typically, banks finance 50 to 60% of the value of a client portfolio, sometimes more,” says Benoît Laroche.

The bank loan is then combined with a down payment from the broker or – for a hybrid solution – a loan offered by an insurance company.

It’s also possible for a broker who has taken out a loan from an insurance company to transfer their debt to a financial institution, often at a lower interest rate.

The Matter of the Personal Guarantee

The financing offered by a financial institution generally requires a smaller personal guarantee than an insurer.

“We don’t systematically ask for personal guarantees. The decision to do so is based on the quality of the borrower’s financial plan,” explains Benoît Laroche.

Ten Years… or a Little More

Whether they’re granted by an insurance company or a financial institution, loans that serve to finance the acquisition of an insurance firm generally have an amortization period of ten years. However, some financial institutions may agree to extend the amortization period by a few years, depending on the company’s financial position. So shopping around before taking out your loan is definitely worth the trouble…

Discover other strategies for achieving and sustaining business growth with National Bank’s advice. 

This article is offered by National Bank