5 common deal breakers for insurance brokers

February 24, 2020 Bobby Tong

Selling your insurance brokerage is a process that can often take up to a year to complete. Once the sales process is underway, there still may be obstacles ahead.

You should know what potential stumbling blocks that can occur if you’re considering selling your brokerage or are in the process of a sale. Here are five potential deal breakers:

1. High valuation expectations

A number of owners have high expectations when it comes to valuing their business. While you may believe it’s worth a certain amount, the valuation will be based on the types of insurance you sell and your customer volume. Your expectations of the brokerage’s value should be realistic and based on an advisor’s valuation.

2. Working capital

This is a commonly misunderstood metric in M&A transactions. The buyer must have enough working capital in the business once the transaction is complete. You should be aware of the company’s working capital requirements and have the financial information to support the calculation.

3. Decline in business performance

It’s possible that the business underperforms during the sales process due to a drop in revenue or unexpected costs. It’s advisable to share any business issues you may anticipate with potential buyers. This means providing realistic and accurate forecasts, which should include how the brokerage could be affected by external factors.

4. Misalignment with shareholders

Partners or minority shareholders can potentially hinder a deal. If their interests aren’t aligned with yours, it could lead to a lawsuit and a disruption of the sale. Before deciding to sell, it’s best to make sure everyone’s interests are aligned and that you have a written shareholder agreement in place.

5. Time

Time isn’t always on your side. In fact, deals can fall apart the longer it takes for a transaction to close. During the sales process, losing key people and clients is a possibility. An economic downturn is also possible, which could affect the price you expect. It’s recommended that you plan ahead for any potential setbacks ahead of a sale.

How we can help

Our Transaction Advisory Services and Tax teams give insurance brokers guidance when they decide to sell. We provide strategic advice before, during, and after the transaction process. Think of us as a one-stop shop. Contact us to find out how we can help your business.

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