The sale of an insurance agency is not the most difficult task. We think we have a process that makes things as easy as possible. Our goal is to transfer the difficult tasks away from the agency owner and to assume those responsibilities. We always start the process trying to communicate two concepts to our clients.
- The process is a lot more time consuming than you think it is going to be. If it doesn’t seem like a lot of work, you have taken shortcuts that will end up being to your detriment.
- Finding a Buyer is the easy part
Every deal has its unique challenges. However, here are the five greatest challenges that we encounter in just about every sale.
Identification and Achievement of Goals
This step sounds easy. Once an owner of an agency has decided to sell, you would think that they have clearly thought out and established their goals. We have found out some interesting facts: If the owner says that they are interested in the best cultural fit, this means that they are looking for the highest possible transaction value. If they say that they want the highest possible value, this means that they have unrealistic financial goals.
Cultural fit is extremely important in an agency sale. The problem is that most Buyers do a terrible job differentiating themselves from their competition. If you heard all of their stories, you would swear that there is only one agency. They tell you that they are different, but they all say the same things that make them different. As a result, most decisions are based on price.
Financials
Deal values are based on the earnings of the agency. The days of revenue based deals are long gone. Unfortunately, some agency owners still base the value of their agency on old revenue multiples. In most cases, these are agencies that have low profit margins. All deals include a very thorough analysis of the financial statements. We then look at all aspects of the company and suggest areas where the owner could enhance the profit margin. Normally we start with owner compensation. We evaluate the owner’s role in the agency. Do they produce business or do they handle only administrative matters? Each role has a value and the market places a value on those services.
There is not a single line item in the financial statements that can’t be improved with some thought and the execution of a plan.
Staffing
This challenge is the most difficult. All owners have a great deal of loyalty to their employees. Fortunately, we play a valuable role in that we do not have an emotional attachment to every employee. Ask yourself some questions. If an employee left the agency voluntarily and you could increase the transaction value by seven times their compensation, would you replace them? How many employees ever work overtime?
Producers
Producers are some of the most valuable employees in an agency. They are also the most difficult to deal with. In spite of the fact that most are bound by non-solicitation and non-compete agreements, most view themselves as free agents that are willing and able to get a “better deal” with another agency.
Although they are valuable, don’t forget that they have not assumed the risk of owning an agency. They don’t have to meet payroll, invest in technology and deal with many carriers and employees. Don’t forget that the agency owner controls their book of business. If we could offer any advice, we would tell everyone to review their producer agreements and tighten up any language that does not restrict the activities of the producers.
Employment Terms
After a sale, is the owner a salaried or commissioned based employee of the Buyer? How long is the employment agreement? How long is the non-compete? Does it have a geographic limitation? Does it include an expense allowance? How about your club memberships? All of these become very personal and often more important than the Purchase Price.
We love to talk to clients after the closing. We asked them whether the sale process was as difficult as they expected. Most clients enjoy the sales process. They get to meet a lot of competitors. They also get to view their agency through the eyes of others and they are often proud of what they have achieved. Enjoy the process, but don’t think that the challenges will be limited to the five we discussed. There are many more, but that doesn’t mean that it isn’t rewarding.
Download our FREE whitepaper to find out other challenges which may be encountered during the Lifecycle of an Insurance Agency and how to deal with these challenges.
