By Stan Sauerwein
B.C.'s economy is on the upswing, even though the reasons for it are the subject of debate. The Liberal Party attributes this recent growth to policies introduced since it formed government in 2001, and optimism about the future thanks to initiatives like the 2010 Olympics to be hosted in Vancouver and Whistler. Others, such as the Canadian Centre for Policy Alternatives, maintain that external factors like low interest rates and U.S. demand are what continue to drive B.C.'s economic fortunes.
In any event, the signs are there. The construction industry - one of the sure-fire barometers of the economy - is showing record activity. According to Statistics Canada, Greater Vancouver cities issued more than $1.5 billion worth of building permits between January and April - a 34% increase over the same period last year. Throughout B.C., the total rose by 28% to more than $2.5 billion, with about $1.9 billion of that in residential permits and $600 million in non-residential permits. This is a four-fold increase over the national total, which rose by 7.8% to $17.5 billion in the same period.
Brokerage sales have been brisk as well. However, according to former IBABC president and broker Renate Mueller, the healthy price tags and fast sales of brokerages seen recently have more to do with the insurance market cycle than with multi-colored Olympic rings. It is simply a seller's market in this province at the moment, with demand far outstripping the supply of independents available for acquisition.
"It's very probably the highest price period the industry has ever seen," she says. Because of the prices, it would seem to be an ideal time for owners of small agencies to consider divesting the stake in their businesses, but not many are posting 'for sale' signs.
Mueller sold her own agency, M.B. MacGregor Insurance, in the summer of 2000. Since last April she has been sharing the helm of the only national firm specializing in business management consulting to insurance brokers that is headquartered in B.C. She, with her partner in AMAC Consultants Inc., John McArthur, have advised on scores of acquisitions, mergers and restructuring projects in the past year. AMAC has been involved in excess of 100 sales deals nationally since 1996.
"Market demand is definitely pumping the price right now," she says. "We had a very nice agency that came available recently and there were nine interested buyers. That just shows you the activity you can expect if the agency is well managed and has a good book of business."
"I don't for one minute relate to the claim that the 2010 Olympics in Whistler has impacted sales levels on brokerages. I can see large brokers gearing up for that because they have the capacity, but even then it will only be for a select group of brokers with specialty in commercial insurance," she believes.
Besides, she adds, there "is not much left after you consider the consolidators' activity of a few years ago."
She says the buyer today is more likely to be a broker with one or more locations who wants to add another inorder to take advantage of the economies of scale and she has noticed a few changes in the sales dynamics recently.
"It's not so unpalatable for someone not to sell 100%. The opportunity to buy in at less seems to be happening now. I'm seeing where there is some retention for future growth by the owner. The owner can bring in new infrastructure, capital and more insurers to work with," through a partial sale.
Mueller also sees more opportunities for ethnic agencies to be part of the selling process now. "I don't know if there is more demand for ethnic agencies but I'm seeing occasions where there is a fit as brokers consider how they can create more multi-cultural services."
"We also believe the insurance companies will demand more market share of the smaller brokerages, which means they will struggle to continue to grow and keep the insurance companies happy. That alone may lead more of them to decide to sell or become part of a bigger group in the future."
"The hard market has worn the brokers very thin and this could be the right time for them to take advantage of the high price period, rather than setting a date to retire five years from now, for example. If rates come down, premiums will go down and so will the values."
For brokers considering the potential of a sale or merger, she recommends coming to a valuation price based on normalized earnings before income tax, depreciation and amortization rather than a traditional multiple-time-commission measurement.
Back out all the perks and privileges of ownership on the balance sheet, she says, to arrive at a more realistic valuation. Mueller provides that service. As a chartered accountant, and having spent eight years in forensic accounting for the federal government, she is able to arrive at an efficiently determined valuation, she says.
"If a broker is giving it any serious thought, it's also a very good idea to take a succession planning seminar."
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