Let me start by saying that some of the best managed and most profitable brokerages in Canada are employee-owned. We believe that every succession planning process should, at the very least, consider this option.
When talking about management buy-ins, a good place to start is to understand the reasons why we don’t see more of them. Keep in mind, some of these reasons are sometimes more perception than reality. Here are a few examples:
Of course, all these issues are real and, in many cases, good reasons for not under-taking a management buy-in. Having said that, I think management buy-ins make sense in certain situations and they are often overlooked because the brokerage owner either doesn’t know this might be a viable option or, they don’t know how to proceed.
Let’s look at some fundamentals of a good plan. First, there must be a process from which to evaluate what is best for you, your family, the organization and then the potential investors. While each situation is different, we typically suggest the following:
Proper planning and preparation are the key to success. There is little point in inviting employees or outside investors in the process unless they are going to add value. It is a far better approach to advertise for exactly who you’re looking for. There will be a lot of interest if they see a possible return.
The same goes for governance. You need to protect your investment and exercise ultimate control. At the same time, the investment must be meaningful to your new partners. A strong governance model supported by a well-crafted shareholder agreement is critical. The agreement needs to address those issues that require unanimous shareholder consent, under what conditions shareholders can obtain more or divest in shares and how they will be valued. There are a number of great lawyers who both understand the P&C sector and know how do craft effective agreements.
There are two issues that generally take some finesse. In the case of employee investors, it is getting them to commit some personal capital. For younger people, they generally don’t have any capital. But if they do, then it is paramount that they have at least something at risk. While you can work around this, I struggle to justify why a Brokerage Owner should commit to a plan to transfer ownership without some immediate commitment by the investor.
The second issue is financing the transaction. The financing approach depends on the circumstances. Banks, insurance companies and private investors each have unique advantages and potential challenges. Your chosen plan will play an important role in what type of financing you look for.
Management buy-ins should be part of an overall plan that leads to the eventual transition of ownership. Yes, there are complicated financial and emotional considerations. But, with a well-designed tax and financial strategy you can protect your family’s financial future, reduce the organizations dependence on you and ultimately increase the overall valuation of the business.
CPA, CA, CBV
Partner - Advisory Services
Mike has over 25 years of experience providing accounting and business advisory services, with a focus on the Canadian insurance industry.
CPA, CA, CBV
Alex Wong is a partner at Smythe Advisory and is focused on being a trusted business advisor to his clients.
CPA, CA, CBV
Director of Valuation Services
Paul Woodhouse focuses on providing financial advisory and litigation support services to clients.
CPA, CA, CBV
William Tam is a senior manager at Smythe Advisory, and is focused on providing valuation and financial advisory services to his clients.