This article is by Simon Palmer is Director of Smart Funding Solutions, a whole-of-market commercial finance broker based in Chester.
Consolidation has been the story of UK broking for years, and it isn’t only the large groups doing the buying. Plenty of independent brokers and MGAs are looking at a retiring neighbour’s book, or a rival with no obvious successor, and wondering whether they can fund it without draining the firm.
Most can, if they understand how a lender sees the deal before they agree a price. As a commercial finance broker I see the same handful of issues decide whether insurance broker acquisition finance gets agreed, and most of them are settled long before anyone fills in an application.
The asset is intangible, so retention is everything
When you buy a book you’re paying for renewal rights and relationships. The question every credit team asks is simple. How much of this income will still be there in two years?
Expect to be asked for retention history by year, the split by class of business and insurer, the concentration of the largest clients, and how much of the income is commission rather than fees. A book where a handful of commercial accounts carry the revenue looks very different from a broad spread of household and SME policies.
That’s why deferred consideration tied to retention is so common in broker deals. Part of the price is paid at completion and the rest later, adjusted for what actually renews. It protects the buyer, and it helps the lender too, because the borrowing is sized against income you’re reasonably confident of keeping. Acquisition finance then funds the completion payment. Most lenders will want anything still owed to the seller to rank behind their loan, usually under a deed of priority, so agree that principle with the seller early.
Book or shares
Buying the book alone leaves the seller’s company and its history behind. You need your own insurer agencies in place to receive the renewals, and clients have to be told and then kept through their first renewal with you.
Buying the shares brings everything across, including permissions, complaints history and any past liabilities. It also brings a regulatory step that catches people out. Under the FCA’s change in control regime, approval has to be obtained before you take control of an authorised firm. The FCA says it has up to 60 working days to assess a notification once it’s complete, and it is clear that completing without approval is a criminal offence. The loan offer has to fit around that timetable.
The regulatory capital trap
Insurance intermediaries must hold minimum capital resources under MIPRU in the FCA Handbook. The FCA’s help text for the RMA-D1 regulatory capital return sets the requirement as the higher of a base figure (£5,000 for firms without client money permission, £10,000 for those with it) and a share of annual income from insurance and home finance mediation (2.5% for firms that don’t hold client money, 5% for those that do). The same guidance tells firms to deduct intangible assets in full.
After a purchase, the goodwill you’ve just bought doesn’t count towards your capital, while the loan used to pay for it sits on the other side of the balance sheet. Your income goes up, so the income based requirement rises too. A firm with comfortable headroom on Friday can be close to the line on Monday.
Before you sign, have your accountant or compliance adviser model the position on completion day and at the first quarter end. If the numbers are tight, the answer may be a different structure, with more of the price deferred or more equity from the directors, rather than a bigger loan.
Shape the facility to the income
Income from an acquired book is steady but takes a renewal cycle to settle. A loan repaying capital from month one isn’t always the best fit. Some lenders will split a facility, with part repaid over the term and part interest only for a period, so repayments match how the firm’s income actually arrives. Not every lender will do that, but the shape of a facility often matters as much as the amount.
Security and guarantees
Because the main asset is intangible, most lenders will want a debenture over the company and personal guarantees from the directors. Client money held under the CASS rules belongs to clients and insurers, so it can never be offered as security or treated as the firm’s own cash, and lenders will look at the client money position closely.
Don’t forget the knock on costs
A bigger book usually means a bigger professional indemnity premium and new systems or data migration. Build these into the cash flow forecast the lender sees. Spreading the PI premium over the year rather than paying it in one lump is one way to protect working capital while the acquired income beds in.
Management buyouts follow the same logic
Where the buyer is the existing management team, the same questions apply, with one more. The lender will want to know the team can run the business without the vendor, and that any ongoing role for the vendor is clearly defined and time limited.
Get the funding conversation in early
If you’re weighing up a purchase, pull together three years of accounts for both firms, retention data by year, an income split by insurer and class, the heads of terms and your capital model. With those in hand, conversations with lenders move far faster.
The deals that struggle are rarely the ones with weak numbers. They’re the ones where the price, the deferred terms and the capital position were all agreed first and the funding was left until last. Start the funding conversation at heads of terms stage and you’ll have far more room to shape the deal.
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