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The Keys to a Successful Insurance Brokerage Management Buyout

PCF Insurance's Buyout Supported Ongoing Growth While Delivering Additional Benefits

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February 24-25, 2021

By Felix Morgan, chief financial officer, chief operating officer and board member of PCF Insurance Services

There are several reasons management buyouts are uncommon in the brokerage industry. They can be complex, involve a lengthy vetting process, and they take time to execute. When done correctly, however, the benefits can be substantial.

A successful management buyout requires established relationships with financial institutions. Potential debt holders must have confidence in the buyout group's ability to continue to deliver results. It's also necessary to bring numerous different parties into complete alignment for the transaction to work.

A management buyout isn't the easiest path. Still, for the right broker in the right circumstances, a management buyout can be the right course to pursue, allowing the firm an opportunity to grow while pursuing its own vision. We had great financial partners, including our private equity firm, but we had outpaced their five-year plan in a single year. Having exceeded our financial partner's expectations, we knew we were going to have to find a way to recapitalize. Ultimately, that was the motive for our choosing the management buyout path at PCF Insurance in November 2021 and, a year on, that path is delivering on our expectations.

PCF Insurance's Experience

When I joined the company nearly two years ago, PCF Insurance was looking to expand our mergers and acquisitions (M&A) focus to also include a significant investment strategy in infrastructure and technology. Our fast growth made it clear that we were going to have to recapitalize to maintain the pace.

When faced with a situation like this, companies have various options to consider, including moving to a different private equity firm. As we considered what options made sense for us, we were aware that anyone who would acquire PCF Insurance would borrow money to do so. Since we had existing relationships with lenders, we recognized that we could have our own discussions with those lenders and avoid having to look for a new financial sponsor every few years as we have continued to grow.

Beyond financing continued growth, we also wanted to control PCF Insurance's vision and culture going forward. For us, a management buyout proved the right way to do so.

Why Choose a Management Buyout? 

An organization opting to pursue a management buyout is making it clear that it's ready to stand on its own feet, without a private equity firm or other sponsor providing day-to-day management support. A firm choosing a buyout must be sure it has the maturity to make that jump. At PCF Insurance, we felt we were in a good position to do so, especially after having an incredibly supportive financial sponsor that helped us achieve the success we'd experienced thus far.

The ability to pursue growth, as well as our own vision in allocating capital, are among the greatest benefits of a management buyout.

Importance of Lender Relationships

Most lenders are used to dealing with institutional investors or private equity firms, rather than directly with companies. That's another factor that makes management buyouts in this space uncommon. Continuously developing and maintaining trusted relationships with financial institutions and investors is critical. A broker considering a management buyout must find a lender with whom it has alignment and that's willing to be involved in such a transaction.

We were fortunate that we had an existing lender relationship that was already creating the capital cash flow necessary for us to continue on our acquisition pace. The buyout changed the relationship to a more direct one with that lender.

Maximizing the Chances of Success

A focus on building the necessary infrastructure is essential if a management buyout is to succeed. In our case, that meant building our financial infrastructure of enterprise-level financial systems and reporting systems, making sure we had good controls and staff in place, and that this technology and infrastructure could scale with us. Then, we implemented business intelligence that would allow us to better understand the operations of our business. Those elements are table stakes in executing management buyout.

On the growth side of our business, we had to make sure we had the right people on board in key marketing and operations positions to drive that growth. We had to demonstrate that we had all the organizational components necessary to meet our future growth goals, and that we were making the right decisions to build business maturity for the long term. That's essential in dealing with lenders that are used to engaging with sophisticated institutional investors who possess that financial infrastructure and key staff to enable future growth — you've got to prove that you have the same capabilities as well.

Addressing the Challenges

Brokers considering a management buyout must be prepared to engage in major legal discussions. You'll be dealing with lenders or investors and top-tier legal firms. There will be lengthy discussions about deal structure — the details surrounding how the deal agreements and go-forward provisions are going to work.

Those legal discussions are not something to be taken lightly. You have to come to the deal prepared and with all of the advisors — financial advisors, legal teams, etc. — on board and aligned. While we had legal relationships in place, we also brought in a partner specifically for this transaction. My advice would be to have that legal relationship in place before beginning the buyout discussion so that your legal partner is familiar with your organization.

All the details in those agreements matter, and if your miss any point, it's very easy to structure a management buyout that ultimately doesn't provide the flexibility and control you thought you were going to achieve. It can be very easy to make a mistake.

We would advise any firm considering a management buyout to agree to the basic terms of the deal with all parties upfront. We agreed to basic terms with all parties involved from the start, but even with those terms in place, putting the deal together was a lengthy process — probably four or five months in our case.

Of course, a successful buyout also requires the right leadership and the proper alignment among the members of that group. Our leadership group was completely aligned on the details of the transaction, and we communicated with one another frequently.

Valuing Communication

One of the lessons we learned in our buyout was the importance of consistently communicating with all of our employees and partners. In the midst of the transaction, it can be easy to get caught up in the details of the deal and overlook the importance of communicating what's happening with various stakeholders.

We took several steps to communicate with our various stakeholders.
  • A company-wide intranet with a directory of partners and resource pages for each of our functional areas, fostering collaboration and outreach and serving as a vehicle for questions and help requests.
  • Monthly forums with leadership, typically the CEO and the senior vice president of growth, to share company updates including equity news, new partnerships, growth initiatives, career opportunities and more. These events also provide opportunities for the entire network (partners, employees, those working from home offices) to engage directly with questions or points of interest.
  • Regular email communications on a variety of company and partner topics.
  • Regional and national in-person events that encourage networking, collaboration and interaction with leadership.
Many of these channels and opportunities encourage two-way dialogue, not just top-down communication, which is another long-term benefit we've realized from our buyout. We've all become more cognizant of the need to stay in touch with employees and partners, as well as our broader community. We're always trying to make sure everyone knows what we're about.

The Benefits of the Buyout

A year in, our management buyout has accomplished what we'd hoped, allowing us to grow at a lightning pace.

The maturity that we've achieved in the course of the buyout in terms of investments in technology and building out our management team has positioned us to always be ready to take on that next level of growth. We've proven that we can grow quickly — both organically and through M&A; the challenge is making sure we're always ready for the next 100 partners that we bring on. The management buyout certainly helped us address that challenge.

The keys to the success of our management buyout are ones that should benefit any organization entering such a transaction.
  • We had a strong relationship with our lender.
  • We developed the necessary maturity in terms of our financial infrastructure, our business intelligence, and having the key people in place to guide our future growth.
  • We had the right legal team in place and focused closely on the details of the buyout agreement.
  • We had absolute alignment around the transaction among our leaders.
  • We improved and emphasized communications with our employees, partners and other stakeholders.
While complex, time-consuming and occasionally challenging, PCF Insurance's experience showed the potential benefits of a management buyout in the insurance brokerage space.

 Felix Morgan Headshot.jpg 

Felix Morgan is the Chief Financial Officer, Chief Operating Officer and board member of PCF Insurance Services, a top 20 brokerage firm, headquartered in Lehi, Utah. Felix is a prominent industry transactional CFO and COO with several noteworthy mergers and acquisitions over a 20+ year career. In 2021, during his first year at PCF Insurance, Felix led a $2.2 billion management buyout (MBO). The MBO gave the brokerage the ability to pursue its own strategic vision and provide more opportunities to facilitate growth. Known for leading collaborative, high-performance teams that drive organic growth, Felix oversees PCF Insurance's Shared Services, which includes Business Intelligence, Finance, Growth and Operations, Human Resources, Legal and Compliance, Marketing and Communications, and Technology, in support of PCF Insurance's Agency Partners.

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