10 Rules To Follow When You Are Selling Your Agency

1. Selling your business can be a difficult decision but it can also bring you the greatest rewards. It is not something to be taken lightly, just like marriage and career changes. It is important to carefully consider the risks and rewards.

Their support and cooperation are essential if there are business partners. It is important to consider the welfare and contributions of family members who are directly involved in the business. It is a difficult decision to make.

The biggest question you’ll face is when is the right time. There are many factors that will determine the timing of your sale. The goal is to sell the business when it is at the peak of its earnings and revenues. Selling high is a good idea. Remember that pigs are fed and hogs are slaughtered. It is important to stay ahead of the market curve and timing everything so you can sell at peak times. If everything goes according to plan, selling a business can take between four and twelve month. Agent owners are at risk because acquirers are so well-informed about industry trends, they are ready to pack their bags or reduce their multiples by the time price compression signals start. Demand is reflected in the valuation methods. The distribution channel’s value will be affected by market softening if product demand and rate of return on revenues decrease.

Sometimes, the sale of a business can be used to plan for succession. This allows the owner to easily sell his ownership interest in the business and not disrupt the operation’s ongoing viability. This requires careful matching between the buyer’s business and the seller. Timing and market conditions are often not as important as they seem. Instead, the owner decides if it is right.

Agency owners often face limited growth opportunities because they lack capital. Although the desire to grow larger is present, the capital in the business is not available. The agency interests can be sold to a national company to release liquidity and allow the owner to continue managing the company as a platform. This can often be a chance for entrepreneurs to succeed. Entrepreneurs who join a larger company face new challenges. They may have to change their business objectives. However, they can also receive handsome rewards if they make a significant change in the company.

Before making a commitment to sell, it is important to carefully evaluate the market, financial, and personal conditions.

2. Talk to a M & A lawyer and a business advisor.
This is an important and often overlooked consideration. If you’re determined to sell your company, it might be worth consulting a business advisor or an attorney who specializes in mergers & acquisitions. Business owners often rely on the local CPA or corporate attorney. These people are important and can have been a source of value to the company in the past. However, it is better to have experts who can help you navigate the acquisition process. Understanding the sequence of events that occur throughout the acquisition process is important because it involves many parts. These include the business valuation, evaluation of the seller’s market potential, preparation of offer memorandums and review of tax implications. Legal and financial due diligence is also required. There is also much review, drafting and negotiation involved in the final, employment, noncompete, and option agreements. These professionals can provide greater consideration and will be worth the reasonable costs.

3. Recognize the importance of your business.
This is where a business advisor can help you. This is not rocket science but it is crucial to have a good understanding of the business’s value parameters. Sometimes, acquirers will reduce the value of your business to an “art form”, but they won’t disclose the exact method used to appraise it. You should establish acceptable selling prices that you can live with. A valuation isn’t expensive and it is well worth the effort to compare it to a buyer’s offer.

4. Reactive selling is not recommended.
It is strongly recommended that you take initiative and market yourself. This will increase your chances of optimizing your sales proceeds. Reactiveness and allowing buyers to approach you first often places the buyer on the defensive and makes it difficult to negotiate with them. You are also subject to their pricing and timelines. They know exactly where you want to be; they have control of the process and you are in their pipeline. Don’t be afraid to get aggressive and find buyers before they find them. There are many buyers on the market. Therefore, it is a good idea to shop among several suitors. This is where a business advisor can be of great assistance. Your advisor will help you to manage the selling process and represent your interests with diligence and vigor.

5. Present your company properly.
A business advisor will usually recommend that you create an offering memo after you have decided that selling your business is the best option. An offering memo includes information such as historical financial performance, market trends, ownership interests, tax information, forward projections, a narrative overview, and other historical information about the business. It also contains key metrics information that is important to the business. Entrepreneurs make the biggest mistake when they open up their books and provide a cash-basis, internal financial statement to potential buyers. Owners of small- to medium-sized businesses should always strive to minimize their tax liabilities and maximize their cash flow. This can lead to a distorted presentation of the business based on a GAAP accounting model, which is what an agency should be valued on. The business owner should evaluate all personal expenses and calculate them. This will increase the agency’s book income. A purchaser makes adjustments to “normalize” the business’ income. Many add backs are often overlooked. Sellers who pay multiples of earnings risk losing significant sales proceeds.

Have you ever thought about how financial factors could misrepresent your agency’s performance? Did you take Accounting 101? Have you ever heard of the matching principle? This principle states that to present financial statements accurately, revenue should be matched by costs. This principle is inherently challenged by insurance agencies when they present cash-basis financials. When an agency presents cash-basis financials, it is important to consider where the majority of expenses are generated. The same commission cycle will apply to an insured who chooses to delay payments. Although the agency has spent a lot of resources in establishing the business, they might have only received 1/12th the annual commission due. To accurately present the true earnings, it is necessary to make adjustments, such as deferred commission revenue accounting or deferred acquisition cost accounting. Every buyer will evaluate your business on the basis of earnings. It is vital that you include all information that will help optimize your agency’s earnings. The ability to create value for the buyer is another critical aspect of an offering memo. To put forward certain revenue or intangibles that could create extraordinary value for potential buyers. All buyers love recurring revenue. This is an example of creating economic value if the agency has a solid book of business. This could help the buyer to increase their profit margins. Intangibles such as the industry knowledge or professional credentials of agency owners can create value. A buyer may be looking to establish a platform, or have their business play a central role in their operation scheme. The intangible value that a well-respected management team can bring is worth more consideration.

6. Analyse all aspects of the offer.
If you decide to subscribe to these recommendations, the next step will be to send the offering memo to potential buyers. Buyers will generally need to do preliminary due diligence before formally making an offer. This will take place after the offer memorandum has been received. Offers are usually presented in a nonbinding letter or intent (LOI). They are time-sensitive and require the acknowledgment and acceptance by the agency owner in writing. This stage can be compared to being engaged. The intention exists for both businesses to proceed formally, but each party has the right to terminate it at any point prior to closing. The buyer must complete all legal and financial due diligence before a LOI can be issued. Is the LOI negotiable Absolutely. This is where a business advisor’s value can be tremendous. They are able to draw on their experience and suggest items that should be negotiated. A LOI can include many components that are more than the amount you offer for your agency. Each of these elements is critical and should be evaluated carefully. The long-term value and tax treatment of the transaction include the stock options, non-compete covenants and deferred buy consideration. To make offers of stock options, incentives, or employment agreements, you should examine the depth that the acquiring entity has gone into your business. These matters should be carefully evaluated. Keep in mind the importance of key employees and their ongoing contributions to the success of the business.

A business advisor will be able to guide you through all technical aspects of your proposed offer. The reputation of an organization on the market is often a major factor in deciding whether to sell to that buyer. You should not only consider the economic aspects of the offer, but also the reputation of your buyer.

7. Negotiate!
Once you have made your decision, and are ready to sign the LOI without making any concessions, A professional advisor can help you negotiate higher considerations such as splitting synergy. This is the revenue and expense benefit that the buyer gains from the combination of two businesses. Don’t be afraid to offer counter-proposals. It is important to clear any potential obstacles before you begin financial and legal due diligence. Do not hesitate to raise any concerns that you are uncomfortable with. This will save you both time and money over the long-term. These issues, whether they concern your compensation, consideration or transaction structure, must be addressed in a revised Letter of Intent. Do not be afraid that the buyer will close the deal. A buyer will rarely walk away if they are within a 10% tolerance for the price of your offer. They are not willing to lose the deal because of their opportunity cost.

8. Make your home orderly
Expect a convergence in your internal business operations. Although the transaction is usually relatively straightforward and painless, the next steps require the most effort. After you have signed the LOI, the buyer will arrange a formal financial and legal due diligence visit to your company. The buyer’s primary goal is to verify everything you have said about your company. The buyer’s team will need to visit your company for a review of systems, contracts and accounting records. They will not only validate financial statements, but they will also conduct risk assessments, such as production concentration, production levels, pending litigation, and so forth. A comprehensive assessment of the personnel and their skills sets is another drill that buyers will do. Although this is not directly related to the management of the company, it is an important part of the review. The buyers’ team should have a positive view of the management’s knowledge, experience, technical skills, work ethic, stability, commitment and depth of knowledge. Due diligence review lists can be quite extensive and may require you to prepare information on as little as 40 or as many as 150 categories. It is best to ask for due diligence checklists a few weeks before the visit. Your staff will have sufficient time to gather all the necessary materials. After you have signed the LOI, you should first contact the senior financial representative or legal counsel of the acquiring entity and ask them for the list. They will likely call you to arrange the due diligence visit if you don’t phone them. It is important to give yourself enough time to gather all necessary materials; to communicate with key staff members about impending events in order to help them get ready; and to coordinate due diligence activities with your accountant, business advisor, and lawyer. Although they may not need to be present for the whole visit, it is important that they are available in case they are required. The formal financial and legal site visits generally last between two to three days. It is important to have all permanent files information available and prepared. If you feel uncomfortable announcing your visit to employees, most buyers will conduct the majority of the activities in a neutral place.

9. Do your research on the entity you are considering purchasing.
This is essential if you plan to directly participate in the acquisition entity’s post-transaction activities. You should reciprocate while they are trying to kick your tires. Don’t let the transaction process go without confirming that the buyer’s operating system is compatible with your business culture. Visit the buyer’s headquarters and meet key personnel to learn more about their integration plans. Ask about any employee losses that could be caused by integration activities. Also, make sure the buyer has a proven track record of dealing with these situations with dignity and class. (Ensure that the grand fathering of tenure is in place for severance purposes.) Also, review their benefit plans, evaluate communication methods, and examine their entire operating cycle. Talk to former business owners who have been acquired. Before you contact the buyer, it is a good idea to ask permission. Talk to at least two ex-business owners one-on-one and you’ll learn more about the culture of your potential employer than any brochure can.

10. Take it slow.
This is the only and best way to conduct serious transactions. Haste has never been a benefit to anyone. You should carefully evaluate each aspect of the deal. Companies that acquire frequently will typically put out the offer for a few days or weeks. If they don’t make a decision quickly, they may threaten to walk. This means they want you to make the largest commitment of your life within a matter of days. This tactic is used to maintain momentum in the deal, so that sellers don’t remorse. They have the momentum. You, the seller, should keep the pace and not be dragged along without understanding the next step in the sequence. This leaves sellers at a disadvantage. Another reason that things are rushed is the fear of competing offers. This could increase the stakes. You can take it slow and rely on trusted advisors to help you evaluate each aspect of the transaction at your own pace.

Selling an agency can be very rewarding. Trust your gut instincts and hold firm to your convictions. This can be a major life-altering decision and should not be taken lightly. Do not hesitate to seek professional guidance if you are unsure of the best direction.