- Business and Employment
Sell My Insurance Agency
Don't Wait Too Long!
Many P&C insurance agency owners wait too long to sell when they have the "itch" to sell. Oftentimes, sales and profits decline as their "hearts" aren't into it anymore, and as a result, they receive a lower sales price than they would have when sales and profits were better.
Many times an owner has much success and then growth slows over a period of years. Don't let this happen to you! In several examples over the years, many agencies are losing 15%+ of their revenue per year. This is very significant. At minimum, your revenues should be flat if not increasing marginally.
On the other side of the equation are expenses. The largest single expense in any agency is salary and wages for employees. Many well-established agencies have long-term employees that have been with the agency owner for years or even decades. There is nothing wrong with mutual loyalty. The problem here is that if revenues are falling and there are too many employees, then the revenue/expenses equation is out-of-whack. You'll need to trim the number of employees before marketing your agency for sure.
All in all, prospective buyers will be focusing on three things: 1.) top line revenue, 2.) expenses (particularly those relating to employees) and 3.) your net profit.
"Selling Too Late" Poll
Do you know a business colleague who sold too late and later regretted the mistake?
How Much Is My Agency Worth?
The short answer is:
The highest price someone is willing to pay!
Over time there have been two general "rules of thumb" that people have used. The older but still most commonly used method is a multiple of annual commissions. Inside of the P&C industry, "standard" or "preferred" insurance can go for 1.4X to 2.0X annual commissions. So based on each $100,000 in annual commissions, this means a sales' price of $140,000 to $200,000. Carriers such as Erie Insurance or Cincinnati Insurance can garner 2.5X annual commissions, however, the process of selling such an agency can be more tedious due to carrier regulations.
The "newer" method of valuing an agency revolves around a multiple of earnings or profit. In the Accounting world, "EBITDA" is the most relevant term. For those without a financial or accounting background, the term can be foreign. Specifically the term means:
Earnings Before Interest Taxes Depreciation Amortization
The long and short of it is your profit before fancy accounting "adjustments" are factored in. Does the interest from your local bank really represent your long-term health (or lack thereof) of your agency? Probably not.
From a pure philosophical perspective, the EBITDA approach is very appealing and has cache in the M&An industry recently. For smaller agencies (let's say less than $1 million in annual revenue) it can be useful within a certain context. The amount the owner takes out of the agency via salary, distributions, car allowance, gas, health insurance, lunches, rounds of golf with "customers", car insurance, office supplies used at home, vacations categorized as "trade shows" etc. will not always be apparent at first. The point is that "earnings" may be lower than what the actual number is as the owner may be taking advantage of legal ways to reduce his tax bill.
You'll need to comb-through these details in order to come to a true earnings number. Many analysts suggest substituting the owner's "take" with a figure that would need to be paid for a professional to run the agency.
At the end of the day, a multiple of 4X to 6X EBITDA is what is suggested. Both multiple methods (Commissons and EBITDA) are used and neither one is right.
Outside of multiples and theory, "real world" factors will also be considered by potential buyers. A short list includes:
- Location of the agency
- History of revenues over the past 3 years
- Payment terms for the agency (payments over a number of years will get you a higher price vs. 100% cash at closing)
- Number of employees as a proportion of revenues
- "Transferability" of clients
- Is the sale of the business contingent upon the sale of the office building?
- Reputation of the agency within the local area
In summary, it all goes back to what a potential buyer is willing to offer for the agency. It's no different than buying a car or that new house you are eyeing.
Partners In Ownership
If you are starting to think about selling your insurance agency and you have a partner in the business, make sure they are "on the same page" as you are. Nothing can be more frustrating than having an equity owner that's been by your side for many years and is now holding up the sale of the business. You may be ready to head to the "links" to swing clubs or spend more time with your grandchildren, but, you partner does not have the same goals in mind.
Most prospective insurance agency buyers will want to buy the "whole pie" and not just part of it unless you are a publicly traded company. Thus, whether the split is 50/50 or 80/20 it's imperative that both owners are in sync. There are many instances where negotiations are going smoothly with a suitor and then things come to a halt due to the other shareholder.
There are strategies and ways around the situation if the other owner doesn't want to sell their shares of the business. However, the number of buyers that will be interested will be more limited. Our suggestion is to have on-going discussions five years or more from when you plan to exit about an eventual sale of the business. In this way, when the day comes to sell, there are no surprises and the process will move more smoothly.
Real Estate May Be Tricky!
If you own the office that your agency operates from you are a wise person. A significant amount of wealth held in America is via real estate. Looking at the Forbes 500 you'll see newbies like Mark Zuckerberg but a good amount of the list include real estate developers.
When it comes time to sell your insurance agency, you'll need to think about what will happen with your office when ownership changes. Many buyers will want to stay in the same office, however, quite a few will want to move to a new office in-town or even move to a neighboring area. If you currently lease your office space, there's not a whole lot to discuss other than any remaining obligation you may have on your lease.
The big problem comes with sellers who 1.) own their own building and 2.) want to sell the building along with the agency itself. If the seller intertwines the business and building in one set of transactions, the road will be more difficult. If you find a buyer that does want the building and the business you are lucky. There are many reasons why buyers may not want to buy your building including:
- They don't want to own and maintain an office building.
- They want to move to a new location in-town in an effort to establish a new "identity" for the agency from the previous ownership.
- Aesthetically, the buyer has different tastes and preferences.
- The seller is asking too much of a selling price for the building.
- The building is in a declining area of town.
- Outdated architecture, office décor, landscaping etc.
- An interior that has an obvious cigarette smoke smell.
Many sellers may not want to hurt the feelings of the current owner by telling them their office is not of interest to them. Thus, it may not be obvious what the buyer may not want to say. It's nothing personal and is not an indictment of the current owner and his selection of where the agency operates. Whether it's buying a car or the selection of the furniture in our homes, we all have different tastes and preferences.
In a perfect world sellers would only talk with buyers that send out perfect offers. If a buyer accomodates most of the terms you ask for in the sale of the agency, strongly consider consummating the transaction. Many buyers will decline valid offers that can benefit them and their families due to the fact of one missing piece out of many.
Our recommendation is to sell your business separately from that of the agency. Involve a top-notch real estate agent that knows the local commercial market. More than likely, they'll have the experience and knowledge to market your building to interested parties who are willing to pay the money for your building. If you are seeking long-term residual income from the property, a commercial leasing agent may be in order. These are real estate experts that know the ins and outs of the local market.
In short, we never know what the future may or may not bring. Look at all of the experts that try to predict the stock market year-after-year. There may or may not be that ideal buyer around the corner who would be interested in your business and building. Don't risk losing a financial payday on the sale of your agency. Start interviewing real estate professionals today.
Divorce and Selling Your Insurance Agency
Going through divorce can be extremely demanding on top of running your insurance agency. Oftentimes, the owner will get caught-up in the divorce and business may falter. Your soon-to-be ex-spouse will be eyeing the equity in the agency. If you have been thinking about selling your insurance agency for some time, it's best to sell it now before the divorce drags on. Both sides in the divorce will be better off and receive more money.
Sunk Cost Theory!
We have all over-paid for things in life whether it's a purchase at the department store or the business we own. When selling your insurance agency, don't stick with a sales price that the market can't bear just because of the money you need out of the agency to justify what you paid for it 5, 10 or 20 years ago. It's called the theory of "sunk costs". By waiting for that perfect sales price, you may pass up a valid offer. Furthermore, the money from the sale of the agency could be invested in other instruments or could be used for personal plans for your family.
The most classic example of "sunk cost" is the grocery store check-out scenario. You approach three lanes and choose one that turns out to be very slow. You stay in that lane even though it's apparent the other two are moving forward. It's your mental "commitment" to that lane which keeps you from revising your original decision. This same situation can negatively affect you when selling your agency. Don't let it happen.
Don't Over Negotiate
When you receive a bone fide offer, it might be unwise to "over negotiate". Whether you are buying a house, a new car or selling your insurance agency, there's a point where trying to get that last little concession might blow up in your face. It's a natural emotional feeling to make sure you get what you deserve for the agency that you've built over a number of years or decades. We don't promote anyone leaving money "on the table" but if you are within a few percentage points on the sales' price that you want, does it really make sense to walk away?
You may think that there's another offer just around the corner that you can take if the first offer is not in your favor. That may or may not be true. Think about the time and effort you've put into working with the buyer that's already at your door with an offer in-hand? Are you ready to start the process from the beginning again without a guarantee of the results?
Many factors can change in the time it takes to start up with a new buyer. Your agency may lose a large account that could affect the value of the agency. Your partner in the agency may decide he doesn't want to sell and now you are stuck. Capital gains' laws change and now you have to pay a higher tax amount when you sell. There are a myriad of possibilities out there that could negatively affect your decision to negotiate for a very small amount. Don't make a mistake you'll regret later.
"Over Negotiated" Poll
Have you ever taken the negotiations too far and lost?
Clean Up The Office...Clean Up The Files
It may seem an obvious point, however, when prospective buyers are coming to meet you at your office, it's suggested to clean up the office. We've all seen people who have offices in complete disorder. Paperwork is stacked a mile high, trash is left on the floor and there are stains in the carpeting. Irrespective of the performance of the agency, buyers will form a mental image of your agency,either good or bad, as soon as they walk in the front door.
Some things to consider several months before the interviewing process include:
- Paint the office.
- Clean or replace the carpeting.
- Trim any bushes on the outside of the office (if you own the building).
- Eliminate any cigarette smoke odors.
- Archive, store or throw away any files that are 7-10 years old or older.
- Buy new furniture and décor. You don't need to spend a lot of money here, however, it's advised to keep your office semi-modern.
On a different note, let's talk about your filing systems. Many smaller offices may not have highly evolved agency management systems or accounting records. That's okay! Prospective buyers will be interested in various key metrics that can come from your accountant, major carriers, agency files and bank records. Metrics and documents that are important include:
- Revenue and expense history over the last three years.
- YTD financial statements (if you are selling mid-year, it's good to provide your most recent quarterly or monthly statements)
- Policy count for the agency.
- Breakdown of commissions by: 1.) carrier, 2.) "standard" vs. "non-standard" clients, 3.) "personal" vs. "commercial" customers and 4.) significant niche markets.
- Average age of "personal" accounts.
- Loss ratios by carrier.
- Records that relate to employees: salaries, duties, non-piracy agreements and commissions contracts.
If you haven't kept good records over the years, it may take some time to gather these details. Start today with the collection process as prospective buyers will want documentation as to what they are buying.
The Tax Man Cometh...Make Him Wait!
A tax attornery or CPA are the ultimate authorities on the subject, however, take a look at spreading payments for the sale of your agency over a number of years. As an example, let's say your total profit from the sale is $500,000. If you take the payment for the agency at once, the rate today will be 20% or $100,000 in taxes. On the other hand, let's assume payments over 5 years or $100,000 per year in taxable profit. Depending on your personal income and tax situation, the tax rate may be 15% or $15,000 of capital gains taxes per year ($75,000 total).
In addition to legally "sticking it" to Uncle Sam, by taking payments over a number of years you may be able to garner additional "perks" and negotiated concessions when selling your business. Certainly it will widen the available pool of potential buyers.
Have said this, many sellers are wary about leaving the agency and then taking deferred payments. They worry that the new owners may not take care of the business properly and then default on the loan. This is a real concern. By building-in contractural "safeguards" and working with a buyer that has proven deep pockets, these concerns can be overcome.
"Buy/Sell" & "Perpetuation" Agreements
Many successful agency owners desire to keep on working for a number of years even if they are in the "retirement zone". A good number of owners will be in their late 50s and early 60s and will not have a successor when they eventually retire. The lack of a trusted family member or a defined outside buyer to take over the agency, creates long-term stress for the agency principal. The owner knows she has to take eventual action but they keep putting things off in hopes a solution comes to their front door. Do you want to risk what an uncertain future may bring? It's better to find a solution today!
Oftentimes an owner may not want to transfer the ownership of the agency immediately and keep on working. They fear that the new owners will cramp their working style. Visions of corporate rules being pushed onto the founder creep up. Worries arise that the owner now has to attend corporate meetings and change his style of daily work. No longer are they allowed to take vacations at the last minute but rather have to submit the request to "management". Old customers are divided-up and given to a "young gun" who came with the new owners. Office politics may arise. Gas cards may be revoked.
In these cases, a "Buy/Sell" or "Perpetuation" agreement may be in order. The nuts and bolts of the agreements can vary, however, the common thread is a locked-in contract for the purchase of the agency. A good attorney can help with the nuances, however, items of consideration both for seller and buyer are:
- Length of agreement. Typically this is the time period the seller has the option or right to sell the agency.
- Formula for determining a sales price upon the execution of the option.
- Penalty to either the buyer or seller for not sticking to the covenants of the agreement.
- Payment terms at the time of the sale.
- Asset vs. stock sale.
- Possible implementation of life insurance policies for the existing owner.
- If there is more than one current owner in the agency, one owner may want to sell her portion of the agency before the other owner.
Attorneys will tell you that any provision can be put into a contract or agreement. The possibilities and mutations can be infinite. The goal between the seller and buyer should be to fully understand what the other is seeking to obtain with an agreement. Once that mental picture is solidified, then sit down with the attorneys to hash-out the language.
Non-Competes Are Key!
If you are selling your agency but are not of "retirement" age (60+), many buyers will insist the seller approve a 3-5 year non-compete agreement as part of the sale. They don't want to hand over a large amount of money at closing only to have a new competitor a year or two down the road. Non-competes are also quite important to buyers for key employees inside of the agency being purchased. So producers and long-serving "back office" personnel will be on the seller's radar for non-competes.
It's best to have agreements in-place with your staff months or years before a sale occurs. Don't let the sale of your agency be nixed at the last minute while you try to get employees to sign on the dotted line. You'll regret it.
Advertising Your Agency For Sale Is A Big Mistake!
Many agency owners think of selling their agency as if they are getting an old car ready to sell in their local newspaper. Cars are straightforward. Selling a business is not!
Putting an ad on a web-board or industry newsletter will invite unintended consequences. Some negatives include:
-"Tire Kickers" who dream about buying an agency but really don't have the interest and don't have the money. Why take up your mental time with them?
-Your direct competitors may get wind you are for sale and it could give them an opening to woo away your major commercial accounts. Less policies = Lower selling price for the agency.
-Oftentimes small to mid-size buyers will seek to buy in your local area. That's fine but how are they going to manage your operation after you leave in a few months or a few years from across the country?
-Would you rather deal with a buyer who has experience buying other agencies or with one who is a virgin at the process?
These are just a few things that are big negatives with and "open advertisement" to the industry. For the most part, fees for business brokers in the independent P&C agency market are paid by the buyer at closing. So there is no real reason for a seller to take on all of the negatives of advertising his agency and not really gaining anything in return.
Great Expectations!...Or Lack Thereof!
Buying or selling an agency is like dating and marriage. In the beginning both parties have great expectations and they are elated about the future. Life is great and the future is picture perfect.
Then comes the engagement period. This is where you find out more about each other. You meet each others family. You find out that your future spouse doesn't have the best credit history or they may have a criminal record. You meet your future brother-in-law who lives in the basement of the parents house. Many days are good but "real life" comes around a bit. The general mood sinks just a little but your are still looking forward to the wedding day.
The same is true when you are buying or selling an agency. In the beginning both the seller and buyer are elated about getting the transaction done. The seller is looking forward to handing the daily responsibilities over to the new guy. He may be even thinking about how he'll spend his extra time with his family or traveling. The buyer is excited as this might be his first independent P&C agency or he's adding another one to his small but growing empire.
The easiest part of the process is when the buyer and seller have a "meeting of the minds". After the buyer and seller agree upon the basics of the selling price, payment terms and generalities of how to run the agency post-sale, the real work occurs.
Many of the items that come at this point include:
- Collection of Due Diligence
- Submitting applications for financing
- Bank appraisals of the business
- Real estate appraisals (if applicable)
- Bank underwriting concerns or requests
- Legal paperwork (i.e. Purchase Agreements, Letters of Intent etc.)
- Employee and Consulting Agreements
All in all, the bureaucracy of buying or selling an agency comes into play at this stage. This is where expectations can tumble and frustrations mount. The average time from when a buyer/seller meet until the transaction closes is anywhere between 4-6 months. So, don't get in a down mood just because banks, lawyers, underwriters, CPA's and the like get in the way. It's just part of the process.
As a side note, there have been agencies that went "A-Z" in the buying/selling process in one week or have taken as long as 9 months, but, those are outliers. Be patient and focus on what the end result of your hard work will look like!
Lawyers are very useful and needed in reviewing agreements whether your are buying or selling an agency. However, they can delay or even "deep six" a transaction for one of two reasons:
Timing - Since most lawyers work in smaller firms (less than 10 lawyers), if a large "whale-of-a-case" comes their way, your requests may get pushed aside. The lawyer is more interested in the hourly fees coming from a case that may be worth a month or more work vs. a few hours on your needs. Other times, if the lawyer gets sick or takes an extended vacation, your work may get delayed as well. The old saying: "Time kills deals" is important today as it has been over the years. Don't let time kill your deal.
Before you start negotiations with a buyer or seller, make sure that your lawyer has time to work with you. If they don't, dump them right away!
"Language Wars" - Oftentimes you'll run across a lawyer that goes to the "nth degree" with their legalese. In other words, they become "lawyer snobs" and believe that their way of writing the contract is better than the lawyer for the other party. Oftentimes, neither lawyer is right or wrong. It's like the experiment where 10 CPA's will provide you with 10 different tax returns based on the same data.
If you find that either your lawyer or the lawyer for the other party is engaging in "Language Wars", put a stop to it.