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How to prepare for the sale of your practice

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In response to today’s market dynamics, there is substantial consolidation in the benefits brokerage community.

An increasing number of owners are considering selling their firms — or the employee benefits portion of their business — to an outside company. Their goals: to monetize their asset, ensure long-term survival, and gain the stability and resources needed to better serve their clients’ evolving needs. This leads to the burning question: what will life be like after the close?

See also: Are brokers really leaving the industry in droves?

In my current position, I work closely with industry leaders who sell their businesses to Digital Insurance. Yet prior to joining the firm, I lived on both sides of acquisitions and integrations — having been a partner in a privately held company that was subsequently acquired several times, as well as guiding the transition process for buyers and serving as a consultant. These experiences provide compelling insights into what sellers can expect — and how to prepare for an optimal outcome.

Show me the money

Differences between expectations and realities may lead to the biggest source of sellers’ regret. Presumably, many sellers have an earn-out component, dependent on continuing to grow the business post-acquisition. A typical purchase agreement will have an upfront, guaranteed component and also may have material additional monies payable based on achieving certain growth objectives. The initial influx of cash to partners is welcomed and often eases post-transaction jitters.

For example, as a partner in a firm sold years ago to a publicly traded company, my shares of stock became liquid assets. Other shareholders and I could cash in if we chose to — an option we were very limited to exercise before. Naturally, we were delighted with this development.

Perhaps more significant, however, was the expectation that our producers would be introduced to contacts and relationships made possible by the bank that purchased our firm. These cross-selling opportunities were essential for continued growth.

For sellers whose earn-out is tied to meeting future sales objectives, this portion of the equation may be critical. In our case, initially, this concept worked fairly well — until the regional bank that acquired us was later purchased by a national bank. After this occurred, priorities changed, and the level of commitment and sales incentives we had agreed upon were not embraced by the new owner. Since we were no longer a key cross-selling channel for the commercial bankers, we never truly attained the promised traction from cross-selling.

Lessons to learn from this experience:

  • When considering prospective buyers, be mindful of the strategic business focus of the company acquiring your firm.
  • If cross-selling opportunities are being touted by the buyer, ask for specific details about this process, incentives and past two-year results to gauge the level of success from other firms that were previously acquired. The devil is in the details.
  • What cross-selling incentives are in place? Are they clear and meaningful to both parties? 
  • Is the long-term success of your business and cross-selling opportunities important to the CEO of the acquiring firm — or is it just a local or regional priority?
  • What happens to your agreements if the buyer is acquired by another organization and it changes commitments?

Protecting clients means locking in key employees

Our business — particularly in middle and small markets — is about the individual the client interacts with on a regular basis. If the people working with customers are happy and staying put, it will enhance your degree of success. If you lose a key person, that book of business is often put at risk. Even if you have non-solicitation contracts with producers, your clients are more likely to entertain discussions with other firms if their primary link to your firm disappears.

As part of your negotiations with the buyer, indicate which people you want to protect and explain why they are crucial to your mutual success. As soon as feasible, approach each person, explain their importance to the new organization and offer them a new contract. Sometimes, in large acquisitions, one way to ensure allegiance is to consider payments of cash or stock to secure producers commensurate with their value. These payments can be divided into two parts — one issued at contract signing and a second to be made at a set time down the road.

Another reason to lock in key employees is to ward off lures from competitors. When the acquisition is announced, internal reaction within a firm could lean toward the negative because people tend to be wary of the unknown. Recruiters appear like vultures, encouraging employees to look for other jobs. While you may have non-solicitation contracts in place, some of your producers might be angry, thinking they should have received a share of the sale. Irritated personnel don’t make great ambassadors for a new brand. Know your people and their concerns, and determine how they can successfully make their way to the other side of the acquisition.

Culture: The secret ingredient to long-term satisfaction

Beyond the financial benefits, happiness with life after the sale is largely dependent on the culture of the new organization.

For the principals involved, there will be a big adjustment; it is never easy to release control. Those who once operated with complete autonomy and were in charge of making decisions now may have to ask, “Can I do this, spend that, buy this, and hire or fire this person?”

The bigger the organization that acquires you — particularly if it is publicly traded — the more processes and degrees of protocol you will encounter. In my experience, the smaller the firm that’s selling, the more issues they encounter after the sale, particularly if the owner never before had to work with a board of directors.

Culture is very important to your long-term satisfaction. Do not convince yourself that it is all about the money. In fact, unless the owner is considering retirement, I find most sellers are quite interested in how they and their staff will be treated by the acquiring organization. Part of this decision is instinctive — trust your gut. But don’t rely on it completely. Consider:

  • With whom will you routinely interact after the acquisition? Make sure you meet and are comfortable with these relationships. Some of the people at the negotiating table are likely to disappear after the sale.
  • By the same token, ensure you trust and have confidence in the acquiring organization’s leadership — not just locally, but up the ladder to the CEO. Determine how important your piece of business will be to theirs. Will your efforts contribute to meeting their strategic goals?
  • What commitments does the new company offer to help your portion of business continue to grow?
  • Talk to principals from other firms that were previously acquired by the buyer — not just the ones they offer as references. Ask around in the marketplace about the reputation of your suitor and whether promises made during the pitch match reality.
  • What are you seeking in the next 5 to 10 years? Prioritize what matters most to you and your staff beyond the financial transaction. Use this to create an integration checklist. Ask what recourse you have if the items on this list — particularly those at the end — never materialize or change.

Selling your firm is a very challenging decision. But if you find the right buyer, it might open the door to successes rarely achievable on your own, given the changes unfolding in today’s marketplace. I hope these insights help guide you to an arrangement that ensures an optimal outcome for you, your employees and your business.

For more, see:

Exit planning: All questions answered

End scene: Succession planning for our clients and ourselves

Why it’s never too early to build a succession plan