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Getting the Deal Done: Insurance Distribution

April 15, 2024

The fragmented insurance distribution market in Canada continues to see significant levels of mergers and acquisitions (M&A) activity as established consolidators roll up smaller brokerages and managing general agents (MGAs), new players emerge, strategic buyers remain active, and more owners approach the age of retirement and seek third-party exits.

For the owners of a brokerage or MGA, the sale process can be fraught as day-to-day operations still need to be managed, diligence materials tracked down and advisors coordinated, all while attempting to keep the transaction “under the tent.” In many cases, this will be the only M&A deal the owners have ever participated in, placing them on unfamiliar ground. There are several key steps an owner can take to ensure a quick and efficient process that minimizes contingent liabilities, accelerates the payment of the sale proceeds and does not frustrate a potential buyer. Sellers who anticipate and mitigate transaction pain points will increase the odds of a successful and swift sale process. 

Preparation Is Everything

In our experience, the leading causes of deal friction and delays are lack of preparation and insufficient resources dedicated to getting organized for the sale transaction. Owners often underestimate the amount of work involved. Historical financial information, third-party contracts, minute book materials, insurance licences and other books and records must be located and organized for the buyer’s diligence process. While each potential buyer will have its own form of diligence checklist, there tends to be a standard set of requests that prepared owners can anticipate to more proactively manage what is invariably a time-consuming exercise (especially where limited operational staff will be aware of the sale process). Some of this preparatory work will involve coordinating outside advisors like the company’s legal counsel, accountants and tax advisors. 

In addition to assembling the materials, owners should make sure they understand the company’s contracts, licences and other key documents to minimize surprises during the deal process and to pre-empt potential concerns from escalating into deal issues or undermining the owner’s credibility with the buyer. Owners who know what consents may be required for the sale, and who have answers to potential or perceived issues before a sale process, are well-positioned to complete a sale successfully and quickly. For example, precious deal time can be taken up by details like missing share certificates, stale security registrations and routine pieces of litigation that were settled or dismissed but may still show up in a buyer’s public searches.

Understand Key Producer Arrangements

Insurance distribution is, at its heart, a people business. Producers and broker relationships are typically the most important asset of a brokerage and MGA. Accordingly, buyers will be laser-focused on understanding the dynamics and legal architecture around the producer team and their books of business, as well as how to incentivize and retain key producers post-closing. Areas of focus will include whether producers have any ownership rights or rights of first refusal in their book of business, as well as the scope of non-competition and non-solicitation covenants in favour of the brokerage or MGA. Owners who have a good understanding of the company’s legal and working relationships with its key producers will be better able to address a critical value driver for buyers during sale negotiations. 

Start Tax Planning Early

Buyers are often willing to accommodate standard tax planning by individual owners, and it is important that owners start this planning early so that the buyer has time to consider the planning with their own advisors. Even though buyers will typically be protected through a full indemnity in respect of any pre-closing planning transactions, they will still want to assess and understand what the planning involves and prevent unintended post-closing consequences. Certain tax planning steps can require lead time to implement and may also require regulatory notices or approvals. Buyers appreciate owners who anticipate these types of gating items and plan for them early, avoiding unnecessary delays at the eleventh hour. 

An owner’s pre-closing tax planning steps may also involve the extraction of assets unrelated to the core brokerage or MGA business, which could include everything from vehicles to assets tied to out-of-scope businesses of the owners. Where interdependencies exist between the target business and owners’ other businesses, owners should be prepared to work with buyers to develop appropriate transition and post-closing commercial arrangements once the businesses are separated.

The Canadian government recently amended the Income Tax Act (Canada) to include new and expanded mandatory reporting rules in a variety of situations. The new reportable transaction rules and notifiable transaction rules are already in force, but significant uncertainty remains as to the scope of their application. Owners (and buyers) will need to consider the possibility that tax planning steps may be specifically reportable under the new rules and may want to coordinate how those obligations are satisfied.

Consider Owners’ Future With the Business

Many private equity and strategic buyers are active in the insurance distribution market in Canada and, accordingly, we have seen a range of sale models utilized. Some buyers require or encourage owners to roll over a minority equity stake in the sold company. Other buyers have owners stay on as employees, or consultants for a transitional period. In both models, there may often also be an earnout or other type of deferred consideration element to the purchase price to bridge value expectations and incentivize continued growth following the closing of the sale. Owners should take advantage of opportunities to meet key buyer team members and begin building new working relationships, as adapting to the new structure and transitioning from independent owner to employee or minority partner can require a significant change in mindset.

Have Realistic Expectations

It is important that owners have realistic expectations about the sale process. Managing this process and responding to the buyer’s disclosure requests can be time-consuming activities that require the devotion of significant resources, both internally and from outside advisors. Owners unfamiliar with M&A should seek advice from sophisticated counsel on transaction mechanics and “market” sale terms. Buyers, particularly in distribution deals, often focus on post-closing value protections, including contingent price adjustments, indemnity protections and the use of holdbacks and escrows. A seller who is prepared and well-advised will be in the best position to limit tail risks and close a profitable and satisfactory sale.

One of the worst outcomes for an owner is to embark on a sale process and have the deal fall through. While there is no way for an owner to completely bulletproof a sale process, being prepared can mitigate deal risk, build credibility with buyers and make the sale process go much more smoothly. 

For more information, or if you have any questions, please contact:

or another member of our Financial Services M&A group.