10 Rules To Follow If You Are Thinking About Selling Your Agency
If youve ever thought about selling your agency, listen closely. Where there are rewards, there are also areas of caution. Before embarking on this journey, theres much to be considered. Here are 10 important rules business owners should follow as they venture down this road.
Selling a business is one of the greatest challenges and potentially, one of the greatest rewards any business owner will ever realize. Like marriage, career changes, and other major endeavors, it is not something that should be taken lightly. Serious contemplation of the risk vs. reward must be well thought out.
If there are business partners, their concurrence and support are, no doubt, essential. If you have family members directly involved in the business, their welfare and ongoing contributions must also be evaluated and taken into account. Selling your agency is a decision that requires careful deliberation and potentially, collaboration among close associates, family members, and partners.
One of the biggest questions you will face is whether the time to do so is right. Many dynamics dictate whether the timing is appropriate. Generally, the goal is to sell when the business is peaking on its trend of revenues and earnings. The old adage of selling high certainly applies here.
Another adage to remember is that pigs get fed and hogs get slaughtered. The trick, more often than not, is staying ahead of the market curve, timing everything just right so that you can sell out just at the peak of the trend.
Selling a business usually takes between four and 12 months, assuming everything falls into place. The risk to the agency owner, quite frankly, is that the acquiring entities are so tuned into industry trends that by the time the market begins signaling price compression, the acquirers are packing their bags, or at the very least, lowering their multiples. The valuation methodologies run concurrently with demand. If product demand or rate of return on revenue declines through market softening, the value of the distribution channel certainly will decline by relative proportions.
Sometimes the sale of a business is used as a succession-planning vehicle where the owner can easily liquidate his ownership interests in the business without disrupting the ongoing viability of the operations. This requires a careful fit between the buyer and the existing business. Most often, timing and market conditions are not as important; rather, it is up to the owners discretion as to whether it is right.
Often, agency owners face limited growth opportunities for their business due to the lack of capital. The desire to grow bigger is there but the capital is tied up in the business. By selling the agency interests to a larger, national company, this can release the liquidity from the company and allow the business owner to continue to manage it as a platform. Although being part of a larger organization brings new challenges, it also often represents a new opportunity for entrepreneurs to flourish.
All this being said, market conditions, as well as personal and financial objectives all have to be carefully evaluated prior to making the commitment to sell.
2. Consult with a business advisor and M&A lawyer.
This is an important, but often overlooked, consideration. Once you are determined to sell your business, it may be worthwhile to seek the guidance of a business advisor and an attorney who specializes in mergers and acquisitions.
Many times, business owners depend on their local CPA and corporate attorneys. While these people are important and may have created value for the organization in the past, it may be better to have experienced specialists who can navigate through the acquisition process.
The acquisition course has many components and requires the understanding of the sequential events that generally occur during the process. These events consist of the business valuation, assessment of sellers market opportunities, preparation of offering memorandums, review of the tax implications of a potentially complex transaction, and legal and financial due diligence.
Additionally, there is much drafting, review and negotiation required for the definitive, employment, and non-compete agreements, in addition to other representations and disclosures. Arming yourself with these professionals will most likely provide you greater consideration, which should outweigh their costs by a reasonable proportion.
3. Clearly recognize the value of your business.
A business advisor can guide you here. Although this is not rocket science, it is important to be well armed with a clear understanding of the value parameters of your business. Acquirers will sometimes reduce their valuations to an “art form” and will not specifically disclose how they appraise your business. Establish benchmarks for an acceptable selling price that you are willing to tolerate. It is not expensive to obtain a valuation, and well worth the investment when it comes to comparing it with a buyers offer.
4. Avoid reactive selling.
It is highly recommended that you take the initiative and go to market under your own volition. Typically, this will provide a much greater chance of optimizing your sales proceeds. Being reactive and allowing the buyer to initially approach often puts the seller on the defensive where you are subject to buyer timelines and pricing methodologies; in other words, they maintain control over the process.
Do not hesitate to take the offensive and find the buyers before they find you. There is an abundance of buyers in the marketplace; therefore, consider shopping among multiple suitors. A business advisor will prove to be helpful here. Depend on your advisor to maintain control of the selling process while vigorously representing your interests.
5. Present your company properly.
Typically, a business advisor will recommend putting an offering memorandum together after you conclude that selling your business is right for you. An offering memorandum includes historical financial performance, business and market trends, ownership interests and pertinent tax information, forward projections, a narrative overview and other historical information on the business.
Additionally, it includes certain metric information that is key to the business. The biggest mistake made by entrepreneurs is that they open their books and immediately provide an internally generated, cash basis, financial statement to a prospective buyer. The primary goal of any small to mid-sized business owner always should be to minimize their tax liability while maximizing their personal cash flow out of the business. Often, this skews the presentation of the business from a GAAP accounting basis, which really should be the means on which an agency is valued.
A business owner should carefully evaluate and quantify all personal expenses charged to the business and treat these as “add-backs,” which ultimately increases the book income of the agency. Add-backs are adjustments that a purchaser usually makes in “normalizing” the income of a business. More often than not, many add-backs are overlooked. If a buyer pays a multiple of earnings, the seller faces the prospect of leaving significant sales proceeds on the table.
Did you ever think about how other financial dynamics may misrepresent the performance of your agency? Remember taking Accounting 101 and learning about the matching principle? This states that in order to fairly present your financial statements, costs should be proportionately matched with revenue as it is earned. Insurance agencies are inherently put at odds with this principle when they present cash-basis financials.
Think in terms of where the preponderance of expense is generated in an agencycreating a sale or placing business. Yet, when an insured elects to defer payments to monthly, quarterly, or even semi-annual mode, the agency commission income will follow the same payment cycle. The agency has expended a large amount of resource placing the business, yet it may have received only as little as one-twelfth of the actual annual commission due.
In order to clearly “match” costs with revenues, numerous adjustments such as accounting for deferred commission revenues, or alternatively, deferred acquisition costs, need to be taken into account to properly present the true earnings of the business. Remember, every buyer will value your business based on earnings. It is extremely important that you include all details that will assist in optimizing your agencys earnings.
One final and equally critical component of the offering memorandum is its ability to accentuate value creation for the buyer. In other words, to bring to the surface certain intangibles or revenue components that can and may create exceptional value for a prospective buyer.