Perpetuation planning is not just a process that will lead to the eventual sale of the company. In older blogs, we have discussed the concept of running your agency like you would if you were planning to sell. In these situations owners focus on proper staffing levels and the correct level of expenses needed to support the revenue of the company.
Insurance agencies should be run like any other company. The President of the agency should run the company in a way that creates long-term value for the shareholders. In many cases, the President and the shareholder are the same individual. Why would you run the company any other way? If you did, Perpetuation Planning would be very easy since the company would be ready to pass along at any time. Many people fail to realize that Perpetuation is inevitable. Very few people die at their desk. Unfortunately, many that do are young and their companies are unprepared for this event. The value that is generated for their heirs becomes a fraction of the possible value if the perpetuation event was better planned. Immediate implementation of the plan does not necessarily have to take place, but a commitment to the plan is crucial to ensure success. With this in mind, let’s review the ways in which the ownership of a business can be transferred:
- Internal Sale – This type of sale involves selling the company to internal employees or to family members. This form of ownership transfer is very similar to a sale to a third party. Owners feel better that they know the new owners and that their business remains intact.
- Third Party Sale – This involves selling the company to an outside firm. This is now the standard in which most agencies are perpetuated due to higher multiples and higher proceeds paid at Closing.
- Merger – A merger is a sale that often involves an issuance or exchange of stock. We don’t see many of these as they are most often done in smaller agencies or agencies in a less than attractive market area.
- Inheritance – Once again, very rare. Most agencies that need to be sold as a result of an owner’s death are sold to a third party at a significant discount.
To set yourself up for a successful transition, here are four tips every agency owner, no matter where you are in the planning process, can use.
Successor(s) Should Share Values
In order for all employees to benefit from the perpetuation of a company, you must make sure the successor shares your values and priorities. Remember, even if the sale is to a third party, the company’s success will remain very important to you. Did you want to work all of those years to see your company struggle? Its’ the successor’s role to not only allow the company to survive, but to thrive. This role needs to be carried out by having harmonious attitudes in regards to client service, similar office management and a demeanor that is similar to your values. There are many active insurance agency buyers that see success as more than a high profit margin.
Your Financials Need to be Strengthened
The first thing we do when working with a new client looking to sell their insurance agency is to perform a complete operational and financial review. An efficient operation is normally a financially successful agency.
Agency owners usually want to know the value of their agency at the beginning of any perpetuation process. The question always focuses on multiples. Multiples are important, but the earnings of the company are far more important. That is why we start by focusing on the financial results. We look for ways to enhance the agency’s profitability. A valuation is not about determining a multiple. We perform Valuations on prospective clients on a routine basis and offer that service for selected clients on a complimentary basis.
The valuation structure is then in place and gets updated at the client’s request. Often this occurs after a year in which the client has generated a significant amount of new business or when they have lost a major account. We have written and published our nine factors that influence value. This paper was published over 9 years ago. Since that time, we haven’t added or deleted a factor. However, some factors become more or less important. The evaluation of these factors is part of every valuation process.
Identify Potential Successors
The identification of a potential successor in your agency isn’t difficult. In the vast majority of cases, it is either a legacy or the major producer. Just because they are related or a major producer doesn’t make them an ideal owner. There are many examples of owners who have taken over from a parent and grown and managed a successful business. Today’s environment requires a different skill set and a legacy sale isn’t as inevitable as it used to be. It’s hard to walk away from a big upfront check from a third party buyer. There are also many examples of legacies that have failed when they became the new owner.
Identifying the right third party buyer is just as important. New buyers arrive every month. Most new buyers are backed by private equity funds that intend to sell their interest in a short period of time. Take your time to get to know these buyers. Chemistry and character are revealed in these meetings. Choose wisely.
Seek an Unbroken Chain of Talent
Wouldn’t it be wonderful if every agency could build an unbroken chain of talent? Ideally, this means that for every senior member of your staff there is at least one younger member that becomes the next generation of producers and leadership. This mindset of continual talent building needs to be instilled at every level of the agency. There are practical limitations to your ability to execute this plan. Younger talent and producers aren’t easy to find. However, in order to effectively transition your business, talented staff will be critical.
Perpetuation Planning 101 is an easy course to pass. It’s also an easy course to fail. Unlike school, you can’t change your major if you fail. Recently, Sukay & Associates celebrated its 13th year of helping agency owners perpetuate their business. We are proud of our success and we look forward to helping agency owners achieve their doctorate in Perpetuation Planning.
The Value of Your Agency
As a firm, we believe an accurate valuation is part of our responsibility and the foundation of a great working relationship – even if that is further in the future. Because of this we, unlike most firms, offer free insurance agency valuations for those who qualify. Click below to apply!
