Rapid Growth Risks: Warning Signs for Insurance Brokers and Financial Partners

You've seen what happened with Austria's Signa Holding—the spectacular collapse of a rapidly expanding conglomerate that ensnared investors from Saudi sovereign wealth funds to prominent German insurers and even the founder of Fressnapf. But why do investors and cooperation partners repeatedly fall for risks that were visible for extended periods? Dr. Peter Schmidt, a consultant specializing in insurance and financial brokerage, examines this phenomenon with specific reference to our industry. Understanding business risk assessment, due diligence processes, and partnership evaluation could prevent similar disasters for insurance brokers and financial professionals.

The Signa Case: A Cautionary Tale

The events surrounding former financial mogul Benko's enterprises reached bizarre proportions in recent weeks. Beyond the collapse of his corporate conglomerate and the revelation of large and small investors in Benko's plans, a battle now rages among his numerous investors to recover at least part of their capital from the insolvency estate. Total liabilities are estimated at over €14 billion, including debts of Signa Retail GmbH amounting to €1.3 billion and more than €800 million in debts of the Benko private foundation, as reported by derStandard.de. Nearly 100 creditors—including Signal Iduna Group with claims exceeding €912 million—must now hope to salvage at least part of their investment from the insolvency mass.

Dr. Peter Schmidt is an expert in personal insurance and a business consultant in the insurance, distribution, and brokerage sectors with many years of experience as a manager and board member at German insurers and tweets as @VersMakler.

Why Investors Fall for Problematic Business Models

The fundamental objectives of investors—to invest their own or others' capital and generate attractive returns—are completely legitimate. As the saying goes: money must work. Nevertheless, the question arises why investors repeatedly fall for dubious business models or engage in risks of speculative ventures. There are known indicators visible in every insolvency comparable to Signa, both large and small.

One indicator is excessively rapid growth in companies where too much happens too quickly. Such strong growth often brings ad-hoc decisions that aren't sufficiently thought through, aren't optimally communicated within and outside the company, and quickly lead to conflicts. Additionally, the necessary expansion of personnel leads to hasty hiring of underqualified employees or managers at excessive compensation.

With rapidly growing revenue, new corporate structures, new division of labor, and new decision-making processes become necessary, often overwhelming owners. Particularly investor requirements bring new demands for business cases and other business management topics that require corresponding know-how. Defining clear roles within management down to all employees requires competence and transparency. And if you don't have these, you should acquire them or bring in external expertise.

Growth Management: Essential Systems and Processes

Rapid growth requires continuous adaptation of business processes, generally referred to as evaluating the business model. This includes a clear management philosophy, a solid reporting system, and permanent controlling—for instance through regular management meetings. Equally important are a systematic project culture and active conflict management. Growth and changes almost always bring conflicts at various levels, which is completely normal. However, constructive handling of these conflicts—clearly distinct from patriarchal corporate leadership—is crucial.

Specific Risks for Insurance and Financial Brokers

Let's move from general topics and problems of rapidly growing companies and address some indicators of maldevelopments with reference to the insurance and financial brokerage industry. There are now sufficient examples in this sector where owners or management haven't mastered the accompanying processes of rapid growth described earlier and then—due to lack of change competence—the sale of the firm or even insolvency-prone approaches became evident.

If a cooperation partner or broker wanting to sell their portfolio or firm or transition into retirement considers engaging with such a rapidly growing counterpart, there are several easily researchable indicators that can aid in a well-founded and future-proof decision. This is especially true if purchase contracts against installment payments or a broker pension are under discussion. I'll select three indicators here and explain them:

a. Business Reports and Balance Sheets

Business reports and balance sheets can provide insight into the solidity of a company's business model and establish a business basis for the necessary trust relationship for a sale or cooperation. Particularly a multi-year review and analysis provides information about this company's viability and the necessary creditworthiness when considering a sale or retirement transition.

Further details from business reports and balance sheets can include information about existing obligations, loans, provisions, and other tax matters important for a new contractual relationship. If such a firm is already more heavily burdened with loans, one would likely insist on a lump-sum payment rather than agreeing to installment payments or an earn-out model. A multi-year review also shows whether it's a continuously growing company or whether balance sheets were embellished through special effects.

Tip for a: A short balance sheet filed in the German Federal Gazette (Bundesanzeiger) is rather not meaningful. Nevertheless, a look at the Federal Gazette can provide hints about whether balance sheets are prepared promptly or whether balance sheets show risky outstanding items over several years.

b. Business Information Reports

My recommendation is to review various business information reports before engaging in transactions with rapidly growing companies and possibly invest a few euros for this purpose. These include creditworthiness reports, a look at the commercial register, and also information about ownership structure, for example. If one examines the history of the Signa Group mentioned initially—the various company locations, development of balance sheet and revenue totals, movements among managing directors, and the network of participations—one is prompted toward more intensive scrutiny.

This applies equally to cases where a broker wants to sell broker portfolios or firms or, even more riskily, against a long-term broker pension. Even if data in these business information reports with corresponding entries in the commercial register aren't always completely current, information about participation networks, profit transfer agreements filed in the commercial register, or declining revenues/balance sheet totals can be warning signs for the company's future security.

Tip for b: Business information reports can provide more security and guarantee for a functioning business model. At minimum, necessary questions can be asked and information requested, which can then also be included as buyer-side guarantees in corresponding sections of letters of intent (LoI) or in the purchase contract.

c. Information About Involved Investors or Shareholders

Information about involved investors or shareholders is often advisable, even if these aren't immediately apparent through conventional means. Nevertheless, information about control and profit transfer agreements and corresponding shareholder resolutions is researchable.

In concrete cases, also pay attention to broker media and ask recognizable broker colleagues about their experiences with the buyer. With common sense, reports like "Investors want to pump fresh capital into startup XY" or "XY receives rescue financing" as well as "Investor writes down participations in XY" should be warning signs. Not to mention openly conducted disputes in social media between board members, supervisory boards, and investors.

Tip for c: Pay close attention to media coverage about potential cooperation partners or buyers and use corresponding internet search portals to look for experiences and feedback.

Conclusion: Proactive Risk Management

Rapid and strong growth can lead companies to exhaust their resources—both personnel and financial—too quickly and become unable to meet obligations. Therefore, small and medium-sized enterprises should ensure their own corporate growth doesn't become a permanent challenge. With appropriate reporting and subsequent controlling with suitable measures, these situations can not only be managed but shaped.

For cooperation partners or potential sellers, not only negotiations about purchase price but also future-proof safeguarding of the purchase model—particularly with installment purchase payments or promised broker pensions—must become essential. Because information about problems in rapidly growing companies is accumulating; one just needs to be willing to see and hear it.

Insurers and brokers struggle in claims management with high backlogs, increasing claim frequencies, skilled labor shortages, and growing customer expectations. Manual processes are expensive and slow.