Take The Steps To Sell Your Practice For Maximum Value

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So many agents spend their time developing succession plans for their business owner clients. Yet, many of these same agents fail to spend time developing a succession plan for their own practice.

Ask any agent, “What is your most important asset?” Most will probably respond, “My business.”

If thats your response, then it would make sense to position that asset for maximum value upon your retirement or death. At the same time, you can put in place factors that will help assure that your clients are well served when youre no longer there.

Many producers would prefer to retire with cash, rather than residuals, but we wont be talking about the issue of whether you want cash or stock for your business. As technology helps “unbundled” agent functions, youll want to consider what combination of products and services will maximize the value of your business in the future. Sophisticated agents and agencies are actually becoming more valuable, as fewer new agents enter the system annually and our business becomes more complex amid constantly changing tax laws.

There are two stages of your business life cycle: wealth accumulation and wealth preservation–much like the financial stages your clients go through.

Some of the factors that will determine the valuation of your business include: premiums in-force, policy count, renewal commissions, persistency, goodwill, client relationships, any special intellectual property you have created, and your professional network of related advisors.

There are a number of different valuation techniques, and each one varies depending on the industry. But our goal here is not to arrive at an absolute number for your particular situation, its to help you understand the process and the factors involved.

Its far too simplistic to use a rule-of-thumb like five times net pre-tax income. Youll be better off working with a valuation company and business broker to sort all this out and arrive at maximum value.

There are numerous issues to consider before youre ready to sell. Some of these, for example, are:

Whom will you sell to? Another agent, a bank, a stock brokerage firm or a roll-up?

How much involvement will you have after the sale, and what level of post-sale control and freedom will you have?

Can the sale price be left flexible to allow you to share in any “excess” profits in the years after the sale?

Can the sale be structured to allow capital gains tax treatment?

Should you take all cash, cash and equity, or cash and a note with equity participation opportunities?

How restrictive a non-compete clause will the buyer require?

Some additional questions youll want to explore are:

What is the buyers primary motive?

What is their source of capital for the purchase?

Is this a marriage of equals?

What client control will you have immediately after the sale?

What will be your relative position as a creditor after the sale?

With that said, what can you do now to structure your business to maximize its value? Consider the following:

Avoid “concept-of-the month” sales. These build no loyalty or goodwill and will not likely stay on the books.

Take a multi-generation focus (i.e., family financial planning vs. client financial planning).

Be an asset-gatherer. If you control all or most of a clients assets through either money management or a living trust, youre less likely to lose control to the competition.

Promote your agency, not yourself. People will stay with the agency after you sell, which translates into more value to you as the seller.

Plan and organize yourself out of the picture. A money-making machine has intrinsic value.

Do joint work with your junior staff. This trains them to take over your functions.

Create or invest in effective systems to manage the work. It builds value that will survive your departure.

Develop diverse income sources. Diversification works in agency valuation, too.

Be sure to add value. Commodity sellers arent worth a premium.

Network with similar professionals. It builds the reputation of your firm, which adds to its value.

Develop a special skill, technique or approach. Different is good when its time to sell.

While there is no one “right answer” to the valuation issues discussed here, hopefully youre now aware of some additional ways to maximize the value of your most important asset.

Pat Lang, JD, CFP, CLU, ChFC, CFS, FLMI, is vice president, advanced sales-case design and support at Jefferson-Pilot Financial, Greensboro, N.C. He can be reached via e-mail at patrick.a.lang

@jpfinancial.com.


Reproduced from National Underwriter Life & Health/Financial Services Edition, November 11, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.