18:31
hanif
My firm works regularly with agency owners in the planning and execution of the sale of their business. Some key questions have been raised more frequently with the pending tax increases set for 2013, so I thought it would be helpful to address these to a broader audience in the dialogue that follows. The level of detail is significant but the intent is to provide a more complete discussion of such important questions. I hope you find this information useful in your business planning.
1) What are agencies currently selling for as a multiple of revenue?
While simplistic in nature, setting a value based on revenue is not realistic. The insurance distribution system contains a wide array of agencies and brokerages serving different market regions and segments. We have seen agencies sell for anywhere from 1.0 to 2.7 times annual commissions with an average guaranteed price range of 1.4 to 1.8. In our experience though, the value to a buyer is generally driven by pro forma earnings, risk and transaction terms, and all three are equally important. Multiples of revenue are generally the product of the expected price, and not the determining factor.
The pro forma earnings provide a buyer with a return on their investment and cash flow to cover any debt service. The risk assessment is a subjective measure of how well the buyer believes the investment will yield their desired return. And finally, the terms relate to how well the buyer can leverage their capital, such as when there is significant seller and/or third party financing, and also hedge any significant risks, such as with a portion of the purchase being paid on an earn-out contingent on maintaining revenue, earnings, accounts, etc.
The only way to ascertain a realistic market value of your agency is to have a professional valuation performed that is in-tune with your industry, the availability of financing and the market demand. Our firm averages 3-6 valuations per month in addition to completing a sale transaction every 1-2 months.
2) What steps can an owner take to enhance the value of their agency?
There are many steps that can be taken to enhance the value of your agency but they generally relate to maximizing the profitability and minimizing perceived risks to a buyer. Let's discuss maintaining or growing revenue first, as declining revenue generally erodes profitability. One suggestion that we often give to clients is to put in place methods to track sources of revenue. It could be tracking revenue created from different marketing or sales programs so you understand how effective your marketing dollars are being spent. Another is tracking new and renewal revenue by producers and product lines so you understand who/what is and isn't working for the agency, and perhaps what might be done to improve performance. The last thing to review under the category of revenue is your commission rates and contingent earning contracts with carriers. If the agency maintains low loss ratios, and high production and retention, there might be an opportunity to renegotiate your compensation with the carrier. It never hurts to ask and use a little leverage such as the hint that another carrier might be wooing your business with a better pay schedule.
On the expense side, personnel costs generally are the largest item and typically run an agency anywhere from 35-60% of revenue; therefore, it is important to keep a close eye on personnel and productivity waste. The most productive agencies leverage technology to improve workflow and minimize labor costs. They also develop performance-based compensation plans and weed out unproductive employees in a timely manner. The most profitable agencies maintain personnel costs at 30-40% of revenue. Buyers will typically discount the value of an agency if they need to come in and completely restructure the operation, staff and compensation.
Another major issue with personnel is addressing any ownership or vesting interest of employees or producers. If you don't own a book of business, then you can't sell it to an outside party. This can become a major problem if ownership with a producer needs to be settled during the sale process. The best solution is to either buy-out the interest before the sale process is initiated, or negotiate an equity swop in advance so that the producer will be paid on the sale.
There are many other minor expense items that can be shored up prior to executing a sale process. Such things might include renegotiating leases or contracts, canceling ineffective advertising and reducing any owner's discretionary spending such as personal meals, travel and entertainment.
On the risk side of the coin, you should address any specific revenue concentration issues with producers, carriers, product lines or accounts. Can business and account relationships be transferred from producers to staff members? Do you have good procedures in place for cross-selling and following up with clients before renewals? Are you over-exposed in any particular area that might be cause for a concern? Most likely any internal problems are known to the owner. The goal should be to round out the business and reduce your own risks, as well as that which might be perceived as one by a buyer.
3) How does an agency owner go about getting the best price and terms on a sale?
In short, by planning for the sale and executing a controlled sale process where multiple, qualified buyers are disclosed on the opportunity, provided with relevant details on which they can make a decision and encouraged to make offers in a short period of time. One thing to note is that when you lock into a negotiation with only one party, you end up negotiating against yourself. This is why it is best to provide accurate, relevant details in advance of receiving an offer so you can avoid an opportunity for the other party to renegotiate.
When representing a client in the sale of their agency, we conduct a pre-due diligence to flush out any issues and make sure the documentation is ready in advance. We also create a very detailed confidential summary of the agency that educates potential buyers about the operation and opportunity. Both of these steps add a great deal of value by speeding up the overall sale process and providing buyers with the information they need to feel comfortable in consummating a deal.
4) How do you find a buyer while protecting confidentiality?
There are two ways to solicit buyers: the reactive method and the proactive method. The reactive method involves placing discrete ads about the opportunity and waiting for prospects to inquire. The proactive method involves discretely marketing directly to potential prospects and asking them if they are interested. Obviously the former is much more effective than the latter and its best handled by a third party. When it comes time to solicit buyers, our firm has a database of over 1,200 pre-screened individuals and companies that have contacted us looking to acquire insurance agencies that we can contact directly.
Protecting confidentiality should be a top priority during the sale process as a great deal of damage can be incurred should your employees, customers or carrier reps learn that you are trying to sell. There are many would-be-buyers for insurance agencies, but only a small percentage are serious candidates for any given agency. 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. From an owner's perspective, it is very difficult to manage the buyer solicitation and screening stage while also running a business.
5) How long does it take to complete the sale of an agency?
The truth is that it can be as short as a few months to never depending on a number of factors including the agency, the asking price and terms, how buyers are solicited, how well the agency is prepared for sale and how well the process is managed. The buyer also makes a big difference. Some are inexperienced and unknowingly make promises that they can't keep in regards to how much they can borrow from a third party, while others intentionally lock the seller into a non-binding purchase agreement with the intention of renegotiating after due diligence is completed.
In our experience, after a purchase agreement has been signed by the parties, the sale process typical takes two to three months depending on the sophistication of the transaction and financing involved. The due diligence phase alone can take two weeks to two months, depending on the complexity of your business. In many cases, the owner will also need to stay on with the buyer for a transition period which can range from a few weeks to a few years. Our average time from executing an engagement with a client to closing on the sale is five months, and our success rate is very high because of our pre-due diligence on the agency and potential buyer.
For most agency owners, the agency business is their most valuable asset. Having not sold an agency previously, many owners are unaware of the value of their agency, how to initiate a sale process, the amount of time, energy and emotion that goes into it, and the potential issues that can arise. To yield the best return on your investment, it is critically important to the perform this process properly and choose the right advisors because you only get one chance to get the sale right.
Our firm has helped dozens of clients reach their goal of exiting their agency. Should you have any questions regarding this subject matter, please don't hesitate to contact me. Thank you for your time and best wishes for a prosperous new year.
For more details on selling your insurance agency, click here for my webinar "The Exit Strategy: Selling Your Insurance Agency or Brokerage" .
Michael Mensch
Agency Brokerage Consultants
Agency Valuations, Sales, Mergers & Acquisitions
Main Office:
http://agencybrokerageconsultants.com
Agency Brokerage Consultants
Agency Valuations, Sales, Mergers & Acquisitions
Main Office:
http://agencybrokerageconsultants.com
Article Source: http://EzineArticles.com/?expert=Michael_Mensch
Article Source: http://EzineArticles.com/6799292
