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How To Sell An Insurance Agency
Keep an eye on the future!
Self Determination Is "The Name of the Game"
Every day we hear business gurus talking about "mission statements" and "business plans". They are espoused to help executives and business owners in outlining how their respective business are going to grow. In larger corporations, managers and executives rearrange their calendars to when the next planning meeting is scheduled. Forecasts and "planning" is all-consuming. Having said this, don't you think you should think years in advance on how and when you are going to sell your insurance agency?
In the real world there are two types of insurance agency owners:
- "Planners" - This group starts at least 5 years before they are ready to retire or exit the agency. They plan for the future.
- "Hope & Pray" - The "Hope & Pray" bunch really isn't ready for the future and they "hope & pray" a solution will present itself when they are ready to sell.
Let's take a more in-depth look at each group.
While the agency is still in its growth mode or even entering maturity, the "planning" owner is thinking about how she is going to transition the agency 5-10 years down the road. They may be thinking about bringing-in one of their kids to run the agency. Maybe a younger employee is being groomed for an eventual leadership position. The point here is they have the longer-term horizon on their minds.
As for the "Hope and Pray" crowd, they are enjoying the success of the agency but may not even have the perpetuation of the agency on their radars. 5-10 years is an eternity and why should they think about retirement as that is a subject for a later date. They are immersed in their entrepreneurialism and creativity. Furthermore, they have always handled their business and personal lives with quick decisions that may be made at the last minute. Success seems to grow year-after-year, so why should they change their "MO" at this point. Why plan for the future when they've succeeded with a "fly-by-the-seats-of-their-pants" attitude.
Life as well as business can be wildly unpredictable. That's why each and every agency owner needs to have safeguards in-place to protect their largest source of income and financial store of wealth. Don't put the security of you and your family at-risk just because you didn't plan for the future. Daily there are stories of owners who suddenly get sick and then a spouse or child comes in to run the agency without the skills to succeed. The family member has good intentions but they don't have the lifetime of business experience to make things work. Sales and profits begin to slide and now the family is contemplating a sale.
The problem here is many buyers are hesitant to acquire an agency that's on "skid row" (or heading towards it). Some of the worst examples known have seen a 70% drop in value of the agency over 4 years. In one particular case, it translated into a $600,000 loss at the time of sale. That's a lot of money for most Americans! Don't spend your golden years wishing you had planned for your future. You only have one chance to do it right.
Planning for the future should be a daily part of your agency. Always be thinking on how you are going to cash-in on your hard work. You can not start soon enough with the process.
"Planner" vs. "Hope & Pray"
Which do you see yourself as?
"Three Course Meal"
No, we are not talking about what is on the table for your Thanksgiving dinner. Rather agency owners need to think about who will buy the agency when they are ready to head out to their lake house at retirement. There are three possibilities:
- A close family member...son, daughter, brother etc.
- An existing employee at the agency.
- Other agency owners whether or not they are local or across the state or country.
Coming off of our discussion above, do you think all three are equally the "smart choice? There's no clear-cut winning or losing answer. Each category has its own pros and cons. Below are a few comments about each category:
- There is usually a high level of trust especially if it's a son or daughter.
- You have a good idea of their level of business experience or lack thereof.
- Selling to a family member gives you an emotional satisfaction of continuing the "family business".
- If the business begins to falter after a transition, those holiday dinners may be a little tense.
- The family member runs the agency for 2-3 years and suddenly has an epiphany to become a photographer. Now what do I do?
- The son or daughter winds up in a divorce and 50% of the agency is lost to your ex son or daughter-in-law. Make sure there is a "pre-nup".
- You don't have to look far to find a buyer.
- Their level of business acumen and insurance expertise is well-known.
- A transition will be short, as they know the agency very well.
- Your customers have a familiar face to contact after you are gone.
- Do they have the financial backing to close the sale?
- They've only worked for your firm, so will they be able to find new ways to grow the agency?
- There is a large universe of buyers to pick from (think high demand for your agency).
- Many will have the money to quickly close either from "cash-on-hand" or through pre-established bank financing.
- They may be able to bring-in new carriers to expand your agency.
- New management ideas may help with reinvigorating growth.
- Too many inquiries from a multitude of buyers may become tiresome.
- Once the "word hits the streets" that you are for sale, carriers and customers may become nervous about their business relationship with the agency.
- Employees loyal to the owner/founder may defect.
- The new owners layoff half of your employees and consolidate the operations an hour away.
As you can see, each group presents it's own positives and negatives. The point here is to get agency owners thinking about their alternatives 5+ years out from retirement. It's all part of the planning process.
Sifting Through The Clutter Will Bring Success!
So you've been planning for the future transition of your insurance agency. However, you've come to the conclusion that you don't have a close relative or employee to take over the reigns of the agency. How do you go about finding an "outside" buyer?
From years of experience, there are several sources as follows:
- Advertisements in trade journals.
- Referrals from within the industry.
- Business Brokers.
- M&A advisors.
Ads in trade journals do usually bring in a lot of interest. However, quite a few unqualified buyers will contact you. Furthermore, there will also be a cadre of "tire kickers" who think they would like to buy another agency but either don't have the financial resources to buy or they are only "window shopping". Likewise, as mentioned above, you may create some problems with your employees and carriers by openly telling them you are "For Sale". Just say "no" to ads!
Referrals from within the industry are a better option but not the best option. Oftentimes carrier reps. will ask if you think you are nearing retirement or thinking about selling. They have good intentions but it's a quick way to let the "street" know you are selling. Just as with an "open ad" via trade journals, there are possible negative outcomes.
Business brokers, in the general sense, help provide the confidentiality that carrier reps. and trade journal ads don't provide. Additionally, brokers will usually screen-out unqualified and semi-serious buyers ("tire kickers"). However, many brokers are generalists and work in selling businesses of all types. So while they are helping sell your insurance agency, they are also working on selling a restaurant or a car wash. Do you think they have the expertise to help with insurance agency professionals? It's like having your dentist perform a heart valve replacement. They have solid motivations but don't have the day-in and day-out experience of handling insurance agencies. Likewise, they may not have a large list of contacts of potential buyers needed to make things work. Finally, their scope of influence may only be local to your town or city when a better buyer may be across the state or country.
Your best source of help is going to come from a long-standing M&A firm who specifically works with insurance agencies. As a sub-set, if you sell P&C insurance or life insurance, try to find a M&A firm who predominantly works with P&C products or life insurance. They have a reservoir of knowledge that will help move the process along. Whether it's how to price your agency or helping review a Letter of Intent, these niche specialists are the way to go. Ron Christopher Co., Inc. (our firm) is one such specialist but not the only. It may take a little leg work to find the right M&A firm for your situation. Oftentimes, the decision from selecting one M&A firm over another, may come down to how the personalities mesh between the agency owner and the rep. at the M&A firm.
Selling Starts at the "Beginning"
Many younger agency owner entrepreneurs don't realize that "selling starts at the beginning". How they structure their agency when first entering the business will affect the value and marketability of the agency when it comes time to retire or otherwise cash-out. Items that will enhance the agency's worth to the marketplace include:
- Being an independent agency..."captives" and "franchise" agencies just are not that desirable.
- Possess highly desirable carriers like: Erie, Cincinnati, Westfield and the like.
- Stay away from clientele that have a lot of in-person cash transactions.
- Keep your employee count and costs in-line with the industry average. The latest number in the industry is $145,000 in commissions per employee. Some firms are up around $200,000 per employee.
- Keep the amount of health, life and "non-standard" P&C insurance to less than 10% of your agency.
- Have high personal and business ethics. The P&C market is very local and word travels fast. So if you do someone wrong, it will follow you for years and may affect the available pool of potential buyers.
- Stay away from one-sided contracts that can restrict your ability to sell (i.e. SIAA).
- Have a maximum of one family member working with you in the agency if any at all.
These are a few things that come from our real world work with buyers and sellers of independent P&C agencies. In every market and in every city, there will be agencies that sell very quickly and those that just take a long time. Many of the factors above will influence the selling price and the pace of the sale. Make sure your agency is one that is at the top of everyone's list!