Questions About Selling an Insurance Agency

My firm regularly assists agency owners with the planning and execution for the sale of their businesses. With the 2013 tax hikes, some key questions are being raised more often. I thought it would help to bring these issues to a wider audience through the dialogue that follows. Although the information is quite detailed, it is intended to allow for a deeper discussion on these important issues. This information will be useful for your business planning.

1 What is the current market price for agencies as a multiple revenue?

Although it may seem simple, a revenue-based value is not realistic. There are many brokerages and agencies that serve different markets and regions within the insurance distribution system. With an average guarantee price range of 1.4-1.8, we have seen agencies selling for anywhere from 1.0 up to 2.7 times annual compensations. Our experience shows that the value of an agency to a buyer is driven by its pro forma earnings, risk, and transaction terms. All three are equally important. Multiples of revenue are usually the result of the expected price and not the determining factor.

Pro forma earnings are a combination of a return on investment and cash flow that can be used to pay any debt service. The buyer’s risk assessment is subjective and reflects how confident they are that the investment will return the desired return. The terms also refer to the buyer’s ability to leverage their capital. This includes when there is substantial seller or third-party financing. They also help hedge any significant risks such as a portion being paid on an earn out contingent on maintaining revenues, earnings, etc.

A professional valuation is the only way to determine the true market value of your agency. It should be in line with the industry, financing availability and market demand. In addition to performing 3-6 valuations each month, our firm also completes a sale transaction once every 1-2 months.

2 What steps can an owner make to increase the agency’s value?

There are many ways to increase the agency’s value. However, they all relate to maximising profitability and minimising perceived risks to buyers. We will start with maintaining or growing revenue. As declining revenue generally leads to lower profitability, let’s talk about how we can do that first. We often recommend to our clients to set up methods to track revenue sources. You could track revenue from different sales or marketing programs to see how well your marketing dollars are spent. Tracking renewal and new revenue by producers is another option. This will allow you to understand who/what is working and what can be done to improve performance. Your commission rates and contingent earning agreements with carriers are the last things to examine under the category revenue. You might have the opportunity to negotiate your compensation with the carrier if the agency has low loss ratios and high production and retention. Asking questions and using leverage is a good idea. For example, if another carrier offers a better pay schedule, it might be worth considering.

Personnel costs are usually the biggest expense and can account for anywhere between 35-60% of an agency’s revenue. It is therefore important to monitor personnel and productivity waste. Technology is used by the most productive agencies to increase productivity and reduce labor costs. They also create performance-based compensation plans, and eliminate unproductive employees quickly. The best agencies keep personnel costs below 30%-40% of their revenue. If an agency is needed to restructure, restructure and pay staff, buyers will often discount its value.

A major problem with personnel is how to address any ownership or vesting interests of employees or producers. You can’t sell a business book if you don’t own it. If the producer is involved in the ownership, this can be a problem. It is possible to buy out the interest in advance or negotiate an equity swap so that the producer is paid.

You can also reduce minor expenses before you start the sale process. These include cancelling ineffective advertising, renegotiating leases and contracts and reducing discretionary spending like personal meals, travel, and entertainment.

You should also address revenue concentration issues that may arise with carriers, producers, product lines, or accounts. Are business and account relationships possible to transfer from producers to employees? Are there good processes in place to cross-sell and follow up with clients before renewing? Is there an area in which you are over-exposed that could be a problem? Most likely, the owner is aware of any internal problems. Your goal should be to build the business and minimize your risks. Buyers may also see you as having internal problems.

3 How can an agency owner get the best deal and terms for a sale?

By planning for and executing a controlled sales process, multiple qualified buyers are made aware of the opportunity and given the details necessary to make a decision. They also get encouraged to make offers within a limited time period. It is important to remember that if you only negotiate with one party, you can end up negotiating against yourself. It is important to give accurate and relevant information before you receive an offer. This will allow you to avoid the possibility of the other party renegotiating.

We conduct pre-due diligence on clients when representing them in the sale or purchase of their agency. This helps to identify any potential issues and ensure that all documentation is in order. We create a confidential, detailed summary of the agency to educate potential buyers about the operation. These steps are extremely valuable as they speed up the sale process and provide buyers with all the information they need in order to make a purchase.

4 How can you find a buyer and protect confidentiality?

There are two methods to reach buyers. The proactive and reactive methods. Reactive advertising is where you place discrete ads about the opportunity, and then wait for potential buyers to contact you. The proactive approach involves discreetly marketing to potential prospects and asking if they are interested. The proactive method is more effective than the reactive and should be handled by a third party. Our firm has access to a database that includes over 1,200 companies and individuals who have contacted us to inquire about insurance agencies.

It is important to protect confidentiality during the selling process. If your customers, employees, or carrier representatives learn you are trying sell, it can cause a lot of damage. Although there are many potential buyers for insurance agencies, only a few are qualified candidates. Any prospective buyer should be required to sign a legally binding confidentiality/non-disclosure agreement and required to submit a statement of their financial worth, including cash available for a transaction, before receiving information on the agency. It is difficult for an owner to manage the buyer screening and solicitation stages while still running a business.

5) How long is it to sell an agency?

It can take as little as three months or longer depending on many factors, including the asking price and terms, how buyers were solicited, how prepared the agency is for sale, and how well the process was managed. It is also important to consider the buyer’s needs. Many people are uninformed and make promises they can’t keep about how much they can borrow from third parties. Others lock the seller into a nonbinding purchase agreement in the hope of renegotiating the terms.

According to our experience, depending on the complexity of the transaction or the financing involved, the typical sale process takes between two and three months once a purchase agreement is signed. Depending on how complex your business is, the due diligence phase can take anywhere from two weeks to two years. The owner may also be required to remain with the buyer during the transition period. This can vary from a few months to several years. The average time it takes to execute an engagement with a client and close on the sale is five month. Our success rate is high due to our pre-due diligence regarding the potential buyer and agency.

Agency owners consider their agency business to be their most valuable asset. Many agency owners have never sold their agency before. They don’t know how to start a sale process, what the costs are, and what the possible issues can be. It is crucial to do this properly and select the right advisors to maximize your return. You only have one chance to sell the agency.