M&M Insurance Podcast #23 - Mergers & Acquisitions

(upbeat music) - And Milsie, good day, welcome, mate. - Good day, Mick. - How you doing? - I am very well, just got over Manflue. (laughs) As it hit you, yeah? - No, not yet. I've been very fortunate. I missed that fast, man COVID and flew so far, touched with, yeah, but get a fluke shot tomorrow. - Oh my God. - So, kind of looking forward to it, but kind of not. - So, you're good, I'm a tough guy, mate. - No, no, no, no, we've been very fortunate last few years with sickness. So, I continue that impossible, it's never hard. We're to this one of the things. So, I think it's important to probably get that vaccine. - Yeah, well, speaking of tough guys, that's a pretty good segue. (laughs) - Special guest tonight. - It's very, very special guest, yeah. We have Ellie Lightlow, CFO of Oshaw. - Hello, thanks for having me. - Oh, well. (laughs) - Great to see you, how are you? - Yeah, really good, really good. It's fast approaching 30 June and my favourite month, July and August, around the corner, so yeah. - Yeah, sorry, we're lucky to get this because you've got KPMG in. - Yeah, they've been in with us for the last three weeks, doing their planning and interim work. So, they're just checking in to see what's changed at Oshaw, doing what they call walkthroughs, so looking at our processes and doing some testing. Yeah, it's been so far so good. So, they'll go away for a couple of weeks and then come back in July for the May and year in order. - So, actually, are we lucky or are we looking forward to getting a bit of time away from audities? - No, and I think I was telling you like, this is sort of the calm before the storm, these next two weeks. So, it's just after the first initial planning work with KPMG and then just before year end. - Yeah, yeah, that's good. - So, mental note, if we need to walk over to Ellie's desk, early in the next two weeks. - Yeah, yeah, for sure. - So, I guess we've got you on 'cause you've got your finger on the pulse on a lot of things with Oshaw, but I guess one thing in our reps are pretty, pretty interested to hear about is, I guess, market trends in the merges of acquisition space? - Yeah, well, it's been a consolidating market, definitely in Australia for the last, what is it? Eight years. I don't think I know a brokerage out there that hasn't gone through some kind of merger or acquisition if they've been around in that time. And I'd say most people in the industry would have experienced a takeover of some sort. That doesn't look said to change at all. Even with a few rumbles of recession that no people are talking about now, I don't see that changing. Having said that, we're facing interest rate rises. People might be a little bit more nervous, a little bit more hesitant about borrowing money, but I still think steadfast will have an appetite and that will flow down a lot of subsidiaries as well. - Okay. - Okay. So when you say consolidation and it has been, can you give any insight to what? - Well, I think the main driver is profit to be honest with you. If you look at the average brokerage that has say $5 million in income, it's going to be able to achieve higher profit margins than the average $1 to $2 million brokerage. And so I think shareholders are looking for that return. That's my simple answer. - Yeah, probably we can flesh it out later, but in general, are you seeing all sellers and buyers? - Well, I think we are seeing quite a few sellers like certainly within our network. There's the group of people that have been in the industry for 30, 40 years. They're ready for retirement. A lot of the acquisitions that we've seen recently are definitely driven by succession planning. So people looking to sell out or wind down or pass on to the next sort of generation. So yeah, we're definitely seeing that. Yeah, okay, there. Mills, you see, I'll hear a lot from the reps. And you mentioned in the last podcast about fatigue. That got me thinking, so what's your gut feel? Question with that known as blah, blah, blah. On where fatigue sits, or even to get the change in landscape, it's probably a better way for this one, you turn for it. So there's more compliance. There's more change of processes. And that's linked from what you were saying was fatigue. Are you saying of feeling that there's brokers out there who may not have considered selling? - Yeah, definitely. I think for more conversations with inside our network, but also outside our network. Seasoned ARs have been around for a long, long time, ones who haven't been around for so long as well. I'm certainly hearing their sort of fatigue with the sort of challenges in the industry. So everything from insurers, from claims, obviously the Catavans, but that's a compound that we've been experiencing for the last couple of years. Underwriting, just lack of contact service, getting decisions, insurers, pulling away from certain industries. It's just a mighty challenge for everyone at the moment. And with all of regulatory changes last year, especially, which just seemed to be up on one, one, one, one. But certainly, ARs are just questioning, what do I do next, and look at it. It's a 21, sorry, 22, I felt there's such more challenging year already than 2021. So it's just sort of added on to those layers. But yeah, I don't think they've been talking about that so much about succession to me. But I guess there's a question of well worth that should be having a chat about it with someone. I mean, I'll show a hand office, I'll take it a bit further. So flip side, I certainly talked a lot of young brokers. Again, the inside of their work and outside of their work. And a lot of hungry and so passionate about what they can do next to the growth as well. Well, they want to do the next industry. Yeah, I think that's really important that the next generation coming through, it's exciting to see that. And it's good that people are hungry and not showing away from the risk because it is definitely a risk, an investment that they might have had to save up for. They might be for going deposit on a house to put the money into their business, for example. Are you seeing succession planning? What do you mean by that, sorry? Are you seeing brokers doing succession planning because you've been involved in quite a lot of revenues? Are you seeing succession planning as happening? Yeah, definitely. I think it's always on the back of their mind because the value is in the relationship with the clients. And that's obviously helped with people. And so if you don't have that succession planning, then your value is going to be reduced. Or there's going to be more risks over that when it comes to selling. So definitely something that every brokerage you need to think about. Do you, Ellie, do you want a difference between regional centers and metro centers and respect to officers who like their own family members may not want to stay in the industry or go into the industry plus staffing issues and regional centers as well? I'm sure there definitely are differences, but I don't, I couldn't really comment much on that. I thought with, you know, all the talk about people leaving Sydney Melbourne moving into regional areas that some of our regional brokerages wouldn't have the same staffing issues. But I'm assured by various reps that that's definitely not the case. They've got the same challenges as people in metro areas. I'm sure I can add to that. Like I probably never received so many phone calls from LARs and actually our site network as well in the last 12 months, we never said, do you know anyone? Yeah. And I've never had that in the might 17 years with or sure, I've never had that. So it's challenging. I think I've been, you know, every brokerage I speak to has that problem. And I'm told, that's just such a common issue. There was the biggest issue that all professional services are facing. And I hear from our reps that that's the same thing a lot of their clients are facing like hospitality, the hospitality industry, getting workers. It's just really difficult. Construction, yeah. Yeah. I was in Swan Hill without him Sloan last week. And just driving around town, I stopped counting the number of we are hiring someone. Oh, wow, yeah. And Swan Hill is really prosperous at the moment. They're doing really well. And then it's got back in the weekend, drove around to Brisbane in just one area. and again, I lost count. I just look past how many shops are saying, we're hiring no experience training on the side. Yeah. Yeah. Yeah. Yeah. Yeah. I mean, there's articles in the news all the time about things employees can do to make their workplace more attractive. And I know we've discussed that internally as well. But yeah, there's lots of opportunities for employees out there at the moment. It's definitely a difficult market for employers and we need to be thinking about what we can be doing for our staff to help with retention and to help them want to stay, give them opportunities for career progression and so on. So what are your thoughts on the retention side with, yeah, on the retention side? Because there's no one, I don't think there's one civil bullet. Yeah. No, there isn't. Well, you know, funny. We had a bit of a brainstorming session yesterday, Milsie and I and a couple of others and we sort of came up with a few points. One was career progression, one was sort of flexibility, the work and home data. We had sort of communication connection with management, accountability, collaboration. Those were the sort of things that we discussed. And the thing that I think we've most thought about was career progression, which I think is a real positive story within insurance because there should be good training pathways for our brokers and opportunities to learn opportunities to learn from each other. So I think there's definitely things out there that we can be doing and doing better at. It isn't just about the work from home thing, it's definitely about the relationships in the office and the culture and that sort of thing. But probably not, no overnight fixes, I don't think it's something that we've got to be working on for the medium long term. Yeah, because there's financial potential financial changes, but there's things that don't cost. Yeah. That don't sit on the P&L, but change culture. Yeah. Yeah. So, sorry, sorry. Because I think throwing it out there just outside the training that in the P&L, so I may be able to do for that stuff and use stuff and then you've got the product training and start training that insurers might do. Do you think that principles have to think a little bit outside the square a little bit? There may be training? Does that make it positive? I would have said yes before. Pre-COVID, I would have said yes. I think training has always been something that's a larger and talked-to-red issue in industry. Yeah, for sure. Yeah, what are your thoughts? Yeah, it's a good question. I think thinking about my team and some of the non-broken areas, I think it is important to give training to add some sort of variety. But I do think it needs to come partly from the individual and whether they're driven or whether they're interested in learning something new and I think different people will have different priorities and what they're wanting to do and that's absolutely fine. But I've always been someone that enjoys learning something new, quite happy to try and experiment and teach myself something. So yeah, I like the idea of investing in stuff with training differently. Let's create a factor in HR. Yeah, do we need to go back to the M and Ingrid? Well, here's a terrible question, hopefully it's not, but so multiples, like when we're having years with reps, multiple seems to be, so what are we seeing and it's like how long is peace of string? Yeah, small book, large book, yeah, good quality book, maybe a hundred before the book. Yeah, yeah. That's interesting because obviously Steph Vast has got their sort of top dollar 10 times profit multiple and that's really on the basis that they're doing a significant acquisition. So they're doing, you know, they're acquiring a very large business that is profitable. They're looking, they're looking more for the high profit margin businesses rather than like, you know, a low profit margin business that they want to improve on. They're looking for really strong compliance and a strong, strong management team. And with that acquisition, when I say significant, I mean, dollar value, but also taking a majority ownership. So that's my understanding of what they're looking at. It's interesting because most of what offshore does, you know, we're much smaller end of the scale within the ARs and we're generally not looking to take a majority ownership in an AR's business. We found that we get more success when we're partnering with, partnering with someone. So taking a minority stake and the local partners, the one responsible for the majority of the operations, certainly the day-to-day and probably only consult with us for key big business decisions, but otherwise they're sort of free to run the business as they see fit. That's where we've had the most success. So it's sort of the opposite to the big end that steadfast is looking for. And to be honest, like we're not, we're still not really dealing in the sort of 10 times profit area, our sweet spot, still really looking more at the revenue multiples. And you know, we've had this week deals closing for the fairly standard two times revenue multiple. So that's still certainly the offshore space. And you know, talking about that youth succession, I do worry that the 10 times even of multiple prices, a lot of younger people out of the opportunity of acquiring a business. You know, you're going to end up with such a small percentage if you're having to pay 10 times profit. And I've seen, you know, really good brokers kind of walk away from that and set up on their own because that is pricing them out. So I'm not sure how far into the future steadfast is thought about that. But that would be my personal opinion on, you know, I don't necessarily think 10 times is good for good for the industry. And that 10 times seems to be a fairly large business in its own right. Getting acquired. Yeah, yeah, it would be, you know, three, four, five million profit type of business. Yeah. So you've got that scale. Yeah. So I guess, what would you so I said again, the average EBITR or ex-neximate expected profit from say 10,000 shareholder is 33%. Yeah, about that. Yeah. So I remember we went through this project several years ago just trying to get understand where reps were at in terms of their own percentages. And it was quite varied somewhere over 40 and somewhere about 40. Yeah. Yeah. So that's one of the first indicators where you're going to sit in terms of a multiple as well. That's right. And it's not always easy to say just generally because every broker's P&L the way they're running their business is going to be different. There could be costs in there that aren't directly related to the business. And typically we would look at adjusting for those sort of non business related expenses. There might be some one off things that occurred in the year. So about so the last year and the year before there was all the government incentives with job, job keeper and the other COVID related incentives that, you know, that's just a one off thing. So those would get adjusted out. So what we're trying to look for is what they call like the ongoing or the maintainable earnings of the business. And that's what we would apply the multiplier on. So whilst you might be less than 20% one year, you know, after adjustments that might look different. Yeah. I was going to ask quite from an odd show point of view. How's it? How's work? Is someone wanted to potentially sell a portfolio? Would we normally just look at in-house first? Does that house otherwise? Yeah, we definitely try and keep things in-house. Like I think the advantages of that is you're going to know the other party better. So from a buyer and a seller perspective. And so I think that is really reassuring. And offshore being involved as well. Like we all know they're about the history of the book and the people and the staff and that sort of thing. So I think it works well from a negotiation perspective. It's a friendly, typically a really friendly sale. And only occasionally would we get external lawyers involved to drive the contracts which is I think a time and cost saving. So yeah, I definitely, we definitely like to look at to help, you know, offshore refs find other offshore refs to buy and sell to. Yeah, we had a meeting yesterday, and I think you and Troy were talking about, you know, offshore's DNA with M and A's. So that's. I want to be listened to wrong. What was it like over 50 or. Oh, so yeah, how many of we don't, how many acquisitions have we done in the last. 10 years. Yeah, it could, it could well be that if you count all the small portfolio acquisitions we've done to us, I haven't counted. I reckon I can say at least 20 of that I've been involved in, but then there would be others within the network. Yeah. If you were talking your sleep. Yeah, I mean, I think Troy was talking about like his background and my background, so I, that I start working most in acquisitions would have been 2006 back in Japan. I was working for EYPWC then, and then when I moved to Australia, I started with the steadfast M and A team when they were getting ready for their IPO. So, like, I don't want to call myself an expert because I was just saying a journal. Well, I've done all the, well, I've advised on a lot of M and A projects. I've never actually been involved in one from the other side. Whereas I think there's many people out there in our industry that have been part of an M and A and know what it's like, no one's like to be fed the communication from higher up to be told what's going on. And so I don't want to say I'm an expert at that point of view because I've never actually been on the other side. Well, I had the risk of not having a phone blow up from reps. I would say that you are the person that week that our reps need to have an informal chat to a formal chat to help from budgeting to contracts. Yeah, absolutely. Yeah, yeah. So, from the transaction point of view, definitely, where to get started, what, how to start planning because, you know, it makes sense to start looking at your business structure. I've wanted to use out from when you're thinking of selling because you want to tidy up what's in the company. You want to get rid of the personal things that might be going on in there. You want to put in place proper employment contracts. If you haven't got those with your staff, because as we were saying before, it's the relationships that are really important and really the only thing that you are protected by when it comes to your employees and their relationships are the restraints and employment agreements in a way. Quality restraint. Yeah. Yeah. So, I suppose it's never too soon to start thinking about that and planning for it. And then when it comes to doing the actual sale, you'll be in a better position and be in a better position to negotiate more favorable terms. Yeah. Yeah. I still covered off succession planning, but I still think it's one of the best defenses that business can have as well as identify a key staff. Yeah. One on two and bring them along on the journey as well. And the convener's small increments can be funded however is suitable for both parties. Yeah, of course, you're included, because we're in long Chavis, but yeah, restraints are super important. Quality restraint. And I used to think there are restraints restraint, but instead we're not. But then also help your business is only as good as the check that you're going to get paid for it. Yeah. In terms of, you know, cash and you know, it's just makes sense to have some key people in the business when you're in that retirement succession. Yeah. Yeah. Yeah. Yeah. And looking after those, the key people as well. I've got a cover off all the points that I've got, but have you got you got your laptop here, you know, the first one is very nice. No, I don't want to talk about debtors or anything like that. Well, you know, it's fun to mention that because I like to think of debtors as an operating, like an operational issue, like I know finance, we like to collect money. And that means we get to pay everybody. But it really is a day-to-day operational matter from my point of view. And I think, I think we've done really well as a group to improve on that. KPMG were a bit of an initiator in us going, okay, we really got to address this. And that was partly because they were looking at our processes and they didn't fit the very rigid regulations. Which don't, this is really no room to make, to make any kind of adjustments to the process. And I'm hopeful that this year we've, we've ticked the boxes for them. And that's, that's actually not anything that my team have done. It's really Craig and Allison and our compliance team. Yeah, so yeah, so if people are interested, the next thing I'm looking at is from from that kind of more compliance point of view would be unallocated cash, because that's got a very similar corporations act regulation, which has the same sort of seven day window that was supposed to act on. And I know, I know it's really challenging and sometimes our clients want us to do something different, but it doesn't actually matter and KPMG won't care if it's the more practical approach. Simply, I'll be following the rules as silly as they might seem to us. And that's what we get judged on. So what's this space? Yeah, well, I guess the good thing with tightening a few of those things up is that we're protecting our license. Absolutely. And in terms of capacity, like even just getting PI, you know, we're so much more, so much more work now than there was before. We just got to add more strings to our vote to protect our license and be there in the long run. Yeah, and we've already seen some flash in the pan. Small networks, who would come or starting on the decline. Yeah, I think this is Dennis has been really compliance and accounts. I would say you guys do really well. And if we shore up a sustainability, that's, yeah, to everyone's benefit. Yeah. You always want to use it, you weren't having a sustainability. I was going to say, shore up. Was you doing a plug for PD days coming up in July in August, maybe just to get people to register? Yeah, yes, yeah, most definitely get this podcast at ASAP, but we're going to have all the good looking NK people talking about some stuff. Yeah, they'll come to you. And one last thing we'll give a plug to our offshore camping as well, because I think a lot of that we've spoken about will happen. We've definitely happened last year of the camping. It'll happen again. We're not talking about insurance and PDSs and we're talking about relationships and what you thought happens. So seeing a new, your son of the business and. I think the ball that we can get around each other with. Well, they're. And we'll have the grotesque and just share what's going on in our world. Reps do the same as it's good, but I'm just registered today. I'm already registered first time camp at this year. Thanks a lot. Sure, it'll be good. Ellie, I know you said the busy side. Thank you. Thanks, Ellie. My pleasure. Really fun. Thanks a lot. Thank you. [Music]