BY THE FINCH GROUP

VINCENT GARDNER MANAGING DIRECTOR

A GUIDE TO SELLING YOUR INSURANCE BROKERAGE

MARCH 2014

INTRODUCTION BACKGROUND TO FINCH GROUP

FCIB was established as P.G.Finch & Company in 1971. It was set up by, now retired, founder Peter Finch, primarily as an Independent Financial Advisor, writing some general business for connected clients.

As the business grew Peter employed his son’s Paul and Matthew until he retired in 1998 and his shares were purchased by Vincent Gardner on the general insurance side and Nigel Bull on the Financial Services side of the business. Both had previously worked for major insurers for many years.

Finch Group is now made up of the two associated companies, Finch Commercial Insurance Brokers Limited (FCIB) and Finch Financial Services LLP (FFS). We trade from Woodley, (nr Reading in Berkshire) as well as a small FCIB sales office based in Basingstoke (Hampshire).

FCIB currently employ 34 members of staff, including the two working Directors, Matthew Finch (Finance Director) and Vincent Gardner (Managing Director). Paul Finch also sits on the Board as a Non-Executive Director but concentrates his Executive time on running FFS with Nigel Bull.

80% of the business now placed is commercial with the remaining 20% being private clients with a strong “high net worth” book. The total GWP of the business is approximately £14M with annual income at approximately £3M. FCIB has a growth plan to achieve £5M brokerage by 2017.

FCIB is made up of a corporate broking team, a small commercial business unit catering for clients with premiums under £5,000, a commercial business development team, a private clients team, a claims department and a finance department.

Neither of the Executive Directors is directly involved in broking, although both are involved as “Account Directors” on a handful of large commercial clients.

As our Directors are in their late 40’s, we are in the fortunate position to have no immediate concerns about succession planning.

Both businesses are regulated and authorised by the FSA.

FCIB’s been working to become a much larger broker - a journey we’ve been on since 1971, when Finch was established.

Many people set up a business with the ultimate goal of selling it and moving to pastures new.

You’ve probably already got a time in mind for a sale, but timing is generally dictated by market conditions. The best indicators of when to sell are the financial climate, potential buyer profiles and market trends. Early planning will ensure that you have the right structures and processes in place to maximise success when conditions are right.

Since establishment in 1996, Finch Commercial Insurance Brokers (FCIB) has grown by both organic means and by way of five acquisitions of insurance brokers, namely:

• Fairman Insurance Services (Crowthorne)

• Maurice Keating – Commercial Book only (Camberley)

• Richmond Insurance Brokers (Eton)

• Ashcombe Border Insurance Services (Liphook)

• Kennet Insurance Brokers (Thatcham)

SELLING YOUR BROKERAGE

With every acquisition of an insurance broker, we have different cultural and logistical issues to resolve, but on each occasion the vendors chose Finch because it represented a safe home for its staff and clients alike. Selling an insurance broker is like selling your life’s work‚ it is essential to have some comfort that the qualities and values that you have developed will be respected.

OUR ACQUISITION STRATEGY

If you are considering selling your insurance broking business why not contact us for a confidential meeting?

You will not want to sell your insurance business to a buyer that you do not connect with, so there is no time like the present to start to consider who is the best‚ fit and who is able to offer you the right deal.

To do that, you are going to need a buyer that ticks all of the boxes‚ which must include:-

• Financial backing and security

• Above market value price

• Geographicalfit

• Similar business mix

• Service and people culture

• Totally independent

If you are interested in selling your insurance broker business, contact why not get in touch to arrange an exploratory meeting or to move quickly to sale?

VALUATION AND PAYMENT SCHEDULE

* Example 1 - a broker worth £1,500,000 based on 1.5 times retained income;

Consideration structure Payment schedule

Turnover £1,000,000 Deposit £750,000 (50%)

FCIB pay 0.75 times commission retained in year 1 £750,000 15 month deferred payment (25%) £375,000

FCIB pay 0.75 times commission retained in year 2 £750,000 27 month deferredpayment (25%)

£375,000

Total consideration £1,500,000

* Example 2 - a broker worth £1,000,000 based on 2 times retained income;

Consideration structure Payment schedule

Turnover £500,000 Deposit £500,000 (50%)

FCIB pay 1 times commission retained in year 1 £500,000 15 month deferred payment (25%) £250,000

FCIB pay 1 times commission retained in year 2 £500,000 27 month deferredpayment (25%)

£250,000

Total consideration £1,000,000

* Example 3 - a broker worth £500,000 based on 1.67 times retained income;

Consideration structure Payment schedule

Turnover £300,000 Deposit £250,000 (50%)

FCIB pay 1.67 times commission retained in year 1 £500,000 15 monthdeferredpayment (50%)

£250,000

Total consideration £500,000

These can vary from deal to deal but typically there is a deposit payment agreed at a certain percentage of the overall sale value, followed by monthly payments and/or a final payment based upon the actual client retention levels achieved.

* Please note that these are purely examples and that deals can be tailored in a number of different ways and over a number of different timescales.

PAYMENT SCHEDULE

If you are interested in selling your insurance brokerbusiness, contact why not get in touch to arrange anexploratory meeting or to move quickly to sale?

FCIB has a growth plan to achieve £5M brokerage by 2017. To achieve that goal, there will inevitably have to be very selective acquisitions. We must stress that we are not a “consolidator” in the sense that this is our only growth model.

YOUR MAJOR CONSIDERATIONS

TAXATION

This key area is often overlooked – you’ll need to take some serious advice regarding the tax implications of selling your business.

Capital Gains tax can vary depending on what you are selling and shares of assets/goodwill.

From our perspective there are issues of continuing liability that need to be catered for in the deal, and the deal structure needs to take into account your tax planning as well as our need to measure and minimise our liabilities going forward.

FCIB can assist you, without causing conflicts of interest, as we have learnt many important features of sale and acquisition ourselves over the last 10 years. We have actually sold two elements of our business as well as making six acquisitions, so we understand both sides.

“EARN OUT”

Some vendors will want a quick release from their business whilst helping to maintain stability during this time of change. The “earn out” period will usually be a minimum of 12 months, although the involvement during that period can vary.

It’s certainly advantageous for the vendor to assist in the transition, but it can be tailored on a reducing scale from say five days a week at the start, down to a case by case basis towards the end of the “earn out”.

CLIENT RETENTION

Our renewal retention rate is consistently 95% for commercial and household business. Private car retention rates can vary, but average at 85%.

With an anticipated retention of 95%, we budget for 90% on an acquisition. This reflects upon the possible loss of clients that are reluctant to move along with you, despite our mutual efforts to persuade them otherwise.

This 90% figure still out-performs larger brokers who are happy to retain as little as 80% in the acquisition budgets.

Our style of relationship management and attention to client service will inevitably lead to an improved final sale settlement.

YOUR STAFF

It’s our intention to retain quality members of staff that have a positive impact on the business. Good, honest hard working ethics are valued at FCIB, along with technical knowledge and experience.

Clearly certain staff may wish to exit with you, and this can be accommodated, although it’s important that they work on the agreed “earn out” period to maximise our client retention.

If relocation is agreeable this will be considered, but it’s unlikely that it will be required. The option of working from home has proved a worthwhile consideration for remote individuals.

Your staff joining FCIB would transfer their employment rights to FCIB including their period of service. The law surrounding TUPE protects your staff and FCIB will do all it can to accommodate their needs in line with that legislation.

OUR MAJOR CONSIDERATIONS

YOUR EXIT TIMESCALE

Although exit timescales can vary, the majority of sale/acquisitions are based around the need for the shareholders to retire. Therefore after a reasonable “earn out” period, the exit from the business can be agreed at the outset of a deal.

However from time to time there are shareholders with differing exit timescales. These deals need to be considered carefully for cultural and financial reasons.

At FCIB we don’t believe in mergers, rarely any have been successful. A complete sale is our expectation. Therefore there will need to be a clear understanding of your requirements from an early stage.

FCIB will consider a staggered shareholder exit, if your business has sufficient synergy and the shareholders wish to release some equity.

BUSINESS MIX

The split between commercial, household and private car business is an important factor.

Our bias is towards commercial business, however certain location dependent brokers will still have a thriving Personal lines book of business.

The geographical spread and trade mix is also important as some brokers will have a strong affinity to certain areas and/or trade sectors.

Household business is usually location driven, and more wealthy catchment areas will usually have a mixture of larger household policy holders. This will of course suit our “high net worth” client bank.

INSURER AGENCIES

Quite simply, who are your major insurer accounts and approximately what sizes are they? Is there any form of contingent commission deal in place?

It’s also important to know that we have the agencies to place your account. Where we don’t we will also benefit from inheriting your terms.

IT

From our own experience this is a key factor in acquiring a business as it involves transferring data and training staff.

FCIB’s platform is Open GI (previously known as Misys), which is one of the the most common trading platform for provincial general business brokers. Open GI can facilitate data transfers from all of the major IT providers as well as their own users. The cost is higher to us if we are acquiring a non Open GI user and of course there is more re-training time for us to consider.

LOCATION

FCIB can accommodate business acquisitions with sufficient synergy from anywhere in the South of England and London, but our preferred target would be within a 50 mile radius of Reading which would encompass the areas of; London, Swindon, Salisbury, Oxford, Twickenham, Newbury, Andover, Reading, Basingstoke, Bracknell, Winchester, Alton, Farnham, Southampton, Aldershot, Farnborough, Woking, Staines, Slough, Maidenhead and High Wycombe.

The list is not exhaustive but there are clear advantages in being closer to our HQ in Woodley, nr Reading.

PREMISES LEASE/FREEHOLD

We would prefer to ‘bolt on’ a business to our existing premises as we could accommodate staff within our existing office space.

FACT FINDING

The planning and consultation period involves FCIB carrying out a fact-find and agreeing a deal with you. Timescales will then need to be agreed and professional advisors appointed.

The whole consultation period can take 3 or 4 months before due diligence can proceed.

HEADS OF AGREEMENT

Heads of agreement and exclusivity rights to both parties can then be signed to safeguard confidentiality. The last thing either party needs is a member of staff being informed at this stage as it can cause unsettlement in your business.

It’s also important to know that the heads of agreement are strictly subject to satisfactory due diligence.

COMMERCIAL DUE DILIGENCE

FCIB will carry out the due diligence. We’ve used independent advisors to assess the quality of previous purchases, but we have ended up finding ourselves being more thorough and able to look for the most important issues ourselves. This can be done outside of working hours at weekends if required.

We will be looking to investigate:

• New business performance

• Lapse rates

• Insurer account size

• Credit control performance

• Business mix (trade and location)

• Compliant procedures

• Use of IT and web-platform

• Paperfileorder

• Competency

• Financial performance

THE SALE PROCESS

LEGAL DUE DILIGENCE

Our solicitors will request a legal due diligences questionnaire.

FINANCIAL AND COMPLIANCE DUE DILIGENCE

Our accountant and compliance consultant will also need to request a questionnaire.

SALE AND PURCHASE AGREEMENT

The legal contract will be drafted by our solicitor. You will need a solicitor to respond.

COMPLETION

Upon successful due diligence, dates will be agreed for contracts to be signed and our deposit to be sent to your bankers.

Then the hard work begins for us and you can start planning your free time.

Upon successful due diligence, dates will be agreed forcontracts to be signed and our deposit to be sent toyour bankers.

Then the hard work begins for us and youcan start planning your free time.

NEXT STEPS

Finch Insurance Brokers Ltd | 53a Crockhamwell Road, Woodley, Berkshire RG5 3JP

T. 0118 9215070 | E. vincentgardner@finchgroup.net | W. www.finchgroup.net

FINCH INSURANCE BROKERS LTD is registered in England and Wales Company Registration No 4251300. Authorised and regulated by the Financial Conduct Authority. Finch is a trading style of FINCH INSURANCE BROKERS LTD.

IF YOU WISH TO DISCUSS YOUR INTEREST PLEASE E-MAIL OR CALL VINCENT GARDNER IN CONFIDENCE

E. vincentgardner@finchgroup.net | T. 0118 9215070

If you would like Finch to place an indication of value upon your business or simply wish to discuss the ways that you would like to try to tailor your exit strategy, then please contact, Managing Director, Vincent Gardner.