How do I sell an insurance brokerage in Ontario?

An insurance brokerage in Ontario is regulated by the Registered Insurance Brokers of Ontario (RIBO) under the Registered Insurance Brokers Act. That makes the sale a regulated event as well as a commercial one. Under RIBO’s By-Law No. 3, a Principal Broker shall notify RIBO’s CEO within ten calendar days if the firm’s ownership has materially changed, and RIBO’s guidance on selling a brokerage names two key regulatory provisions when a brokerage changes ownership: the trust account and the firm’s equity capitalization. This page covers Ontario and RIBO-licensed firms only. For the wider picture of how a brokerage sale is shaped, see selling an insurance brokerage in Canada; this page stays with what Ontario’s regulator and statute add.

The ten-day ownership notice

RIBO By-Law No. 3, section 2.7(b), requires a Principal Broker to notify the CEO within ten calendar days if the firm’s ownership has materially changed. Item (viii) names the transactions it has in mind: share purchase, asset purchase and amalgamation. The same list reaches other changes a sale can bring with it. It covers the appointment of a new Principal Broker where a former Principal Broker’s authorization to represent the firm is withdrawn, a change in the firm’s Errors and Omissions or Fidelity coverage, and material changes in its brokerage contracts with insurers. If the buyer is changing the insurance or the person in the Principal Broker role at closing, put those notices on the closing checklist next to the ownership notice rather than treating them as separate matters.

The trust account has to stay positive

RIBO’s page on the sale of a brokerage says members may sell their brokerage at any time and to anyone. It then sets a condition: the brokerage must be trust positive before and after the sale. The same page says the vendor cannot remove commissions from the trust account and take them into income if that removal is non-compliant or could result in a trust deficiency. RIBO adds that the transition of commissions should be agreed in the purchase and sale agreement. Section 32(1) of the Registered Insurance Brokers Act deems all funds received or receivable by a member in the course of business on behalf of insurers from members of the public, or on behalf of members of the public from insurers, to be trust funds. Section 32(2) adds that no member shall assign, pledge, hypothecate or mortgage, or in any way charge, those funds. So the agreement should say who holds the trust money at closing and how commissions are handled.

What the firm must still meet once ownership changes

By-Law No. 3, section 4.2(b), sets conditions on an Active Firm Licensee. Among them, the firm must designate a Level 3 licensee qualified under section 6.1 as its Principal Broker, obtain and maintain the letters of intent or brokerage contracts with insurance companies licensed in Ontario that section 4.2(b)(v) requires, and maintain an equity capitalization at all times. The by-law fixes how that capitalization is measured; read section 4.2(b)(vii) for the formula rather than relying on a summary. RIBO’s sale page says it often sees new owners of a sold brokerage out of compliance with this capitalization rule because the vendor or new purchaser removed too much trust money. A seller should ask whether the sale leaves the firm without a qualified Principal Broker, or short of its insurer contracts, even for a short period. A buyer who plans to move the book into its own licensed firm should check the same list against that firm.

Ownership limits sit in regulations

Section 35 of the Registered Insurance Brokers Act lets the Lieutenant Governor in Council make regulations. Clause (s) covers establishing and respecting restrictions and limitations on the sale and ownership of insurance brokers and the businesses of insurance brokers. RIBO’s legislation page states that licensees must comply with the Act, Ontario Regulations 989, 990 and 991, and By-law No. 3. This page does not summarize the regulations’ ownership rules. Before agreeing on a structure, read the current regulations and ask RIBO or a lawyer who practises in this area whether the proposed buyer, and the way the shares or assets are being transferred, fits within them.

Sharing client information with a buyer

A buyer may ask to see clients, policies and renewals before closing. Section 7.2(1) of the federal Personal Information Protection and Electronic Documents Act (PIPEDA) allows parties to a prospective business transaction to use and disclose personal information without the individual’s knowledge or consent if the Act’s conditions are met. Those include an agreement requiring the organization that receives the information to use and disclose it solely for purposes related to the transaction, to protect it with security safeguards appropriate to its sensitivity, and, if the transaction does not proceed, to return or destroy it within a reasonable time. The information must also be necessary to determine whether to proceed and, if the parties proceed, to complete the transaction. Section 7.2 applies in addition to the circumstances in subsections 7(2) and (3), and section 7.2(4) excludes a transaction whose primary purpose or result is the purchase, sale or other acquisition or disposition, or lease, of personal information, so read it in full before opening the book to a buyer.

A working order for an Ontario sale

• Before marketing the firm, check its trust position with the person who keeps its accounts, since RIBO requires it to be trust positive before and after the sale
• Put a confidentiality agreement in place that meets the PIPEDA section 7.2 conditions before any client data leaves the office
• Write commission transition and trust handling into the purchase and sale agreement, as RIBO’s guidance says it should be
• List the notices to RIBO that closing will trigger: ownership change, any new Principal Broker, and any change in Errors and Omissions or Fidelity coverage
• Confirm with RIBO how the buyer’s licensing fits the Act’s regulations on ownership of broker businesses before signing
• Make your lawyer and accountant aware of RIBO’s minimum trust and equity requirements, as RIBO strongly advises