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.
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.
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).
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.
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.”
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.”
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.”