A View of the Pandemic’s Impact on Brokerage Valuation

With Colin Clahane, National Director, Insurance Initiatives Lead, BMO Bank of Montreal

The COVID crisis is impacting all aspects of business—financing, staffing, technology, customer interaction and engagement. You name it, there’s an impact.

M&A activity and succession planning are no different. But while some speculate that the crisis will lead to dramatic asset devaluation, others suggest the impact may be less extensive than anticipated. Colin Clahane, Insurance Initiatives Lead at BMO weighs in.

“From a deal flow perspective, we continue to see solid broker financing activity. This is largely the culmination of BMO’s reputable name in the space, having facilitated financing solutions for a very long time. We’ve demonstrated stability in times of uncertainty over the course of many decades. I think when things get rocky, brokers—like everyone else—tend to gravitate toward stability.”

According to Colin, succession planning deals that consider the introduction of key employees or peripheral family members remain active. There are often operating circumstances that trigger the need for a partner buyout regardless of any adverse externalities in the world around them. With the average age of Ontario brokers exceeding 57 years old, many are now asking themselves if they want to stomach future pandemic–style macro shocks. This, in turn, may spawn another round of heightened M&A activity as brokers begin their exit strategies.

“Deals that were already underway pre–pandemic are generally proceeding. Very few Principal Brokers have pulled the plug—most are looking to finish what they started. Deals that were in preliminary stages when the pandemic hit are tapering off a bit. In that scenario, Principals are assessing where the world is heading before making final  decisions, but seemingly not shutting the door on follow up discussions.”

With respect to valuation, Colin offers the following observations. “There may still be downward pressure exerted on sale multiples over the course of the next few months. The imminent future is difficult to predict with a slew of variables at play, including the possibility of a second COVID wave. For the most part, multiples are hovering at  comparable pre–pandemic levels. The typical broker holds the glut of their net worth in the corporate asset—the brokerage. Extracting value from the business—or monetizing—as brokers age seems like the logical next step, which may help to sustain broker valuations. COVID may also serve as the catalyst to get more brokers thinking about their ultimate exit strategy. It’s never too early to plan your succession.”

With prospects of the imminent future in the broker financing space so difficult to ascertain, where does that leave the common view of what the long term holds?

“It appears doubtful that we’ve seen the last of the US private equity wave sweeping our nation. The re–opening of the stateside economy will help propel additional interest in well–run Canadian brokerage operations—as was the case over the past few years.  Brokers provide a vital service for clients. Their ability to assess risk and match an appropriate product offering shouldn’t be lost in this global pandemic. Industry migration to a digitized platform over the past few years has served brokers well with respect to maintaining operations effectively on a remote basis. Brick & mortar shops who are well entrenched in their communities with strong retention  rates have been forced to think beyond the confines of their local community. This has helped keep brokers ahead of the planning curve when major shocks like a pandemic unexpectedly jolt our entire economy.”

We’re all in the midst of an unprecedented crisis. Macro shocks, however, tend to be finite. A prudent and pragmatic approach to planning is recommended by most industry practitioners. There is hope, however, that the underlying fundamentals remain palatable over the mid to long term.

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VOLUME 24 | ISSUE 1