Do digitally efficient brokerages make better acquisition targets?

Brokerage owners shouldn’t just invest in digitization for its own sake, says one financial advisor. They should do it to make a purchase and integration easier for consolidators.

Consolidators don’t necessarily expect small brokerages to digitize before acquisition, said Alex Wong, partner at Smythe Advisory, because they’re not necessarily buying them for their technology.

“The value of investment in technology is what the brokerage can do with it,” he said.

When smaller brokerages digitize, the effort often leads to brokerage growth, which attracts consolidators. “If you can use that technology to grow faster, so that you are bigger at the time you are ready to sell, then it can be useful,” added Wong.

Technology can also make a brokerage better managed. “Better-managed brokerages are perceived to be lower risk, so the purchasers get a lot more comfortable making that acquisition,” he said.

A brokerage digitizing its book of business, accounting and documentation before an acquisition “would be a big part of being attractive in that [M&A] space,” said Jonathan Brown, general insurance broker at Peters Insurance Agencies.

And consolidators like smaller brokerages that understand the importance of a digital strategy.

“The most important thing to us is, even if you don’t have [a digital strategy], you understand that one is important,” said Melanie Muise, chief operations officer at Navacord. “That first question [we ask] is: ‘Do you understand the importance of digital strategy?’ Almost everybody says yes to that question; they just don’t know where to start.”

Small brokerages can take steps to improve their digital structures before a sale, including the introduction of electronic documents and other paperless solutions, cloud software and cybersecurity tools.

“[It’s more than] just a broker-management system. Do you have a whole ecosystem that supports your employees and your clients?” Muise asked. “Can employees [and clients] access their information online in a safe and secure way?”

Although consolidators may not necessarily pass on a brokerage because it’s not digitized, there are potential deal breakers that can lead a consolidator to think twice about a purchase.

For example, consolidators may pass on deals that require a lot of time or capacity.

“The reason a consolidator is looking to buy that brokerage usually is based on the quality of its book of business,” said Wong. “So, if they are looking at a few different acquisition opportunities, and if the [target brokerage’s] records are either messy or paper-based, or it just will take [the consolidator] a lot of time to get comfortable with that book, there’s a higher likelihood they’ll just pass on the opportunity because they can focus their attention elsewhere.”

A hard stop for an acquirer would be if a small brokerage is non-compliant with digital privacy regulations, accessibility or client data laws, Muise added. And, for some, digitization may be a tool for independence.

“I think we will see brokers continue to harness digital strategy in a more robust way to accelerate their goals,” she said. “We’ll still see consolidation, but there are going to be local brokers maintaining independence, knowing they can invest in technology.”

 

Feature image by iStock.com/fatido