In some cases the best bet for agency perpetuation is to sell, and there’s a right way — and many wrong ways — to do it.

When it’s done correctly, a sale can be of great benefit to both buyer and seller, with long-held books of business transitioning almost seamlessly from one owner to the next. When it isn’t, the results can include a loss of long-standing clients for the new management, an unsatisfactory deal for either party and even possible costly litigation down the road.

Al Diamond, president of Agency Consulting Group Inc. in Cherry Hill, N.J., a consulting practice founded in 1980 and dedicated to the needs of independent agents throughout the U.S., has seen the mistakes made by many a producer who thought they were making the right moves after they decided to sell. And between six to 12 times a year, he gets the same phone call from agents’ widows telling him their late husband left her instructions to call him, should they die before being able to execute their agency’s transition.

“At that point,” he says, “It’s too late.”

Much of what goes into an agency sale seems like common sense, but there are many bases to cover — and multiple steps during which both buyer and seller must be mindful, says Diamond, who is working on a book on the subject.

For many producers who’ve spent decades building a solid book of business, their agency and its continued earnings potential are their greatest assets. When pondering a sale, it’s best to ask yourself first: What is my agency worth to me, and what would it be worth to someone else?

See also: ESOPs: The road to business succession

Click through for the top 10 most critcal things to consider when selling your agency.

How much money do you need?1. How much money do you need?

There are two key questions to ask when considering the sale of one’s agency, says Diamond: “How much is my agency worth, and how much do I need in order to retire?”

There are plenty of agents who have earned enough money and managed it well over the courses of their careers who, strictly speaking, don’t need the value of their agencies to sponsor their lifestyles for the next 20 to 30 years once their agencies are sold. The majority, however, either need to continue earning at least a reasonable percentage of their most recent income post-sale, or had better make sure they make enough money in a sale to live, once it belongs to someone else. As such, it’s important to know your minimum expectations when going to market.

“Agents keep asking what a ‘good’ down payment is,” says Diamond. It’s not supposed to be a punitive issue for the seller to give the buyer 50 percent or any large part of the price in cash, he explains, but the tax ramifications should be figured into that; the bigger piece of money you get up front, the more you’ll just be giving up in taxes. A total cash payment requires the buyer to finance it through a bank at as much as 9 percent interest—interest that accrues to the bank, not to you.

See also: 3 reasons you need a succession plan — now

An alternative strategy is for the seller to accept a payout over time at an appropriate interest rate (tagged to the prime rate at a minimum, or several points above) instead of a large down payment; many buyers like this option because they don’t have to come up with a substantial chunk of cash for a down payment. Protections should be put in place, however, to ensure knowledge that the new owners will continue to be able to pay for their investment (which we’ll discuss further in question No. 9).

Is your agency worth your projected asking price?2. Is your agency worth your projected asking price?

Will the agency provide at least enough earnings (profits less taxes) to warrant a buyer offering you at least what you need to sell the agency? Before even considering any offers, one must determine whether the agency will provide enough earnings to support your asking price. This can entail some house-cleaning.

Eliminate any bad debts from your books and get your financials straight. Prospective buyers, Diamond notes, “don’t look at your balance sheets from five years ago; they look at your balance sheets today. You have time to make sure it’s clean. Fix your numbers.”

Next, keep your working capital in the bank. The hard value of one’s agency includes its tangible net worth, its cash on hand. Many agents, says Diamond, make the mistake of emptying out their bank accounts at the point of sale. But that robs the agency of some of its value, and valuation is key in sweetening the pot for potential buyers.

See also: The issue of succession planning

Next, take an honest look at your staff and consider who might need to go. If you have more people than you need, it’s driving down your profitability—and the new owner will just end up eliminating them later. It lowers the value of your agency to show lower profits for staff that you know are not productive for you (or for the new owner). Other expenses must be considered. Will your accounting staff, for example, remain with the firm once it’s sold? Perhaps not; the new owner will likely use his own.

“If you eliminate the dead wood in your agency, then a buyer will see a more honest view of the potential profitability of your agency,” says Diamond, who states that a 10 percent to 15 percent profit margin or more, much easier reached once you streamline operations, exhibits more appealing earnings potential.

How will you manage your own ego while selling?3. How will you manage your own ego while selling?

This is one of the most important steps of all.

“The agency is not your child. It is not your heritage. It’s a business asset that you build, like a stock portfolio, that you expect earnings from,” says Diamond. “It’s the foolish child who thinks it’s too precious to sell.”

See also: How to prepare for the sale of your practice

A highly personal question for the seller to ask is, what are you going to do when you leave? Do you have other interests that can be pursued, Diamond asks, or is the agency your life?

“There are a lot of agents who tell me, and this is a red flag, that they have no other interests than the agencies,” he says. Once the agency is sold, those people “are going to be little lost puppies. If you don’t have something to do, you’re going to die.”

All too often, agency principals are used to a certain degree of reverence and ego stroking by colleagues and clients. “But the day you give the key to somebody else, that’s gone,” says Diamond. Even if you’ve enjoyed good relationships with clients, chances are that once you’re no longer part of the agency, communications from those folks won’t be as frequent.

“You have to have something else to do. If insurance is still a part of your life, you can do that, but it won’t be as important as it was yesterday.”

How do you want your employees treated in a sale?4. How do you want your employees treated in a sale?

When interviewing potential buyers, request time to speak with their staff to gauge their happiness within their organizations. Would you want to work for this person? Because your people soon would be.

“This is something that few principals do, but when the time comes that you’re serious, ask if you can meet with their employees,” says Diamond. “If they’re very guarded and don’t want to talk to you, it’s your red flag—there’s something wrong.”

Family members, long-term employees, and “sacred cows” in your agency to whom you might allow a certain degree of latitude in day-to-day operations probably won’t be granted the same consideration by new owners. The same applies to those whom Diamond calls “RIP” (Retired In Place) agency staffers, often semi-retired, older producers who don’t deliver as much as they used to but do enough business that they’re still part of the shop.

See also: The pros and cons of ESOPs

The goal is to make your agency as lean and mean as possible, and it’s best to identify those personnel and consider their fate under new ownership; in some cases, it’s a better move to bonus them out and have them retire along with you.

Exhibiting this level of empathy is only right in showing respect for those who have helped you grow your business. Otherwise, in the most extreme of cases, “sometimes an agency’s employees come in one day and the new owner just shows up. That happens.”

How do you want your clients treated in a sale?5. How do you want your clients treated in a sale?

“Every agent starts out by insuring his friends and then goes out and insures others, and sometimes they in turn become friends, too,” Diamond says. “Sometimes you have personal relationships with your clients where they trust only you. If they’re not treated the same after a change of ownership, they’ll leave.” Regardless of whether your deal includes a retention “kicker,” you may not be pleased to find your loyal customers jumping ship due to lack of proper treatment by the new owners.

See also: Buy-sell planning is the new estate planning

Indeed, your employees aren’t the only ones who’ve contributed to your agency’s growth; your clients should be shown the same degree of consideration when it comes time to sell. Introduce the new owner to the clients; that way, they’ll be made more comfortable by the move, which will help keep retention high.

Are your clients simply agency customers, or are they also “real” friends outside of the agency? If it’s the latter, care must be taken to maintain those relationships with your firm once you’ve moved on.

How can you entertain buyers without letting everyone know that you're selling?6. How can you entertain buyers without letting everyone know that you’re selling?

First off, embrace the use of binding confidentiality agreements. Deal only with those potential buyers who will agree to one.

See also: What is your most important asset?

Second, deal only with one potential buyer at a time—the best you can find—until and unless you know for certain the party you’re courting at the time can no longer accommodate your needs.

“Figure out who the best potential buyer is, and if it doesn’t work out, break it off and move to the No. 2 candidate,” says Diamond.

“I’m working with a client who has seven potential buyers,” he says—something Diamond does not recommend, and openly discourages.“I told him, ‘This is going to get out of hand.’”

The danger here is that your competitors will start spreading the word to your clients, sowing seeds of discontent in order to poach them. Avoid this by taking it one party at a time. After all, you’re only going to sell to one buyer, right?

The prospectus should contain all the information you could imagine you’d want if you were considering buying your office. That even includes details on office equipment, software and other management systems, all of which will be part of the sale. When in doubt, include information on it.

What's a prospectus, and how do I prepare one?7. What’s a prospectus, and how do I prepare one?

Preparing a prospectus (a printed statement that describes something such as a new business or an investment, sent to parties who may want to be involved or invest in it) allows potential buyers a full enough view that they can legitimately make an offer (without a preliminary offer “subject to due diligence”).

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“The more you give to a prospective buyer, the faster he can come up with a valid price offer (that you will compare against your valuation and statement of financial need) for your reasonability test,” says Diamond. “We have a guide that we use in our transactions that spell out chapter and verse of an agency. If you could determine a price for your agency from the information you put into your prospectus, then it should suffice for the buyers.”

How does one LOCATE potential buyers?8. How does one LOCATE potential buyers?

The first thing to remember here is that the seller should be in control—not the buyer.

Start with fellow agents whom you know and trust, and begin feeling them out as to whether they’d be interested or if they have any suggestions. Then do the same with contacts whom you trust at the carriers with which you do business. Sometimes, as Diamond points out, perpetuation or succession plans are required by some carriers—and they can assist you in providing some ideas for potential buyers.

“Tell everyone that you’re looking at a merger for strength, from which you will ‘someday’ retire. That way, none of your clients will know you’re looking to sell and you’ll gain insight into who to sell to,” Diamond suggests.

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

Attend association meetings of Professional Insurance Agents (PIA) and Independent Insurance Agents and Brokers of America (IIABA—the Big “I”), if you don’t already, and network. “Talk to people, tell them you’re looking to do a contingency buy-sell agreement,” Diamond suggests, in order to learn who might be interested in stepping in, should an emergency situation present itself. Your ulterior motive here is to find a buyer.

One strategy he discourages: “I would never use blind ads,” says Diamond. In those types of transactions, he explains, quite often “the broker cares far more about making the sale than about what the quality of the buyer is.”

Once a potential buyer is found and negotiations begin, he adds, always keep a cool head. There are several benefits to using an impartial facilitator/negotiator—not the least of which is, if the direct buyer and seller reach an impasse, more often than not the negotiation is over. A facilitator can back away and return after “consulting” with the owner.

Why is a balance sheet liquidity audit so important?9. Why is a balance sheet liquidity audit so important?

This should undoubtedly be part of the sale agreement. One of the biggest concerns among those selling their agency, especially those who opt for a long-term payout in lieu of a sizable chunk up front, is “what happens five years from now if they get a letter saying, ‘Sorry, Charlie, but I can’t afford to pay you anymore.’”

The balance sheet liquidity audit serves as a binding agreement among both parties that helps ensure the buyer retains the agency’s liquidity until they officially own it; it helps keep an eye on the buyer’s financials and liquidity ratios to maintain the agency’s health as years pass.

See also: ESOPs: a plan to help business owners avoid “taxmageddon”

A liquidity audit requirement within a sale agreement eliminates this potential problem because it adds monthly oversight with notification to both buyer and seller should liquidity diminish to a dangerous level.

If you sell, should you stay (and for how long), or leave?10. If you sell, should you stay (and for how long), or leave?

Continuing in the agency as a producer or manager is quite common, especially among smaller agencies where the price depends on retention or if the sale price doesn’t meet a buyer’s needs and they have to continue to work after selling the agency to someone else. Additionally, there are agents who want to cash out the asset of their business but are not yet ready to retire. These producers may opt to stay on for a few years post-sale to aid in the transition.

In addition to the management-transition points raised in Question 4, there’s your customer transition to consider as well. “You have only a certain amount of time to make your clients trust the new owner,” Diamond says.

See also: From business success to succession