A common misperception is that that agency owners reach a certain point in their career when they reach the decision to sell their agency and then hire Sukay & Associates. In the vast majority of situations, we establish a long-term relationship with the owner. They contact us and tell us that they are considering a sale in the future and have some questions. A good deal of those questions arise when a local agency and competitor sells their agency. The owners have questions about the market and some of the newer participants in the agency acquisition marketplace.
Agency owners know that eventually they will need to perpetuate the agency. Incredibly, many haven’t made that connection. At some point, all agency owners will sell their interest to a family member, other employee of the agency or to a third party buyer. The question is always, “When is the right time to sell.” There are many good reasons to sell to another agency. Those reasons include the ability to grow the business due to access to better markets, products and expertise. Just the simple name recognition of a larger agency will open many doors.
A common comment we hear is that the owner intends to retain the cash flow of the business for as long as possible and then sell the agency for the same price. In the end, they end up receiving more cash flow. In certain situations, we would agree with that statement. However, this strategy has some significant risk. What could possibly go wrong? We wanted to share a few examples. These are not made up. We have seen these situations and they have caused a dramatic decrease in the value of the agency. In certain cases, they have prevented the eventual sale of the agency.
Death of a Major Shareholder
Why not start with the worst possible situation? Unfortunately, most agency owners are in their late 50s or 60s. The median age of an agency owner is 59. At this age, bad stuff really does happen. The owner often views the sale of their agency as the funding vehicle for their retirement. How would their death affect the retirement of their family? If this isn’t a risk, why do so many buy life insurance?
We have seen every type of situation. We have seen the younger athlete die suddenly. We have seen others die after a long illness. If the agency owner is important to the generation of new business and servicing the existing clients, this event will have a dramatic negative impact on the valuation. The owner doesn’t necessarily have to be deceased. Often a major illness will impact the owner’s ability to devote their time to the company.
Loss of a Major Account
Many agencies have a very large account that generates a large percentage of the overall agency revenue. We would consider any account over 5% to be significant. The loss of any large account will have a material impact on the valuation. This type of loss can’t be recovered if sales multiples change. We are aware of an agency that lost two of its largest accounts. The owners went from having an agency that had significant value to undertaking actions that kept the agency from losing money. Unfortunately, they are at the age when a recovery of that revenue is highly unlikely.
Economy
The economy has been strong for quite some time. At times we forget that there are economic cycles and that they include a slowing of economic growth or even a recession. These events caused a decrease in agency revenues and often take years to offset.
Soft Market
Just like the economy, we forget that the markets soften. The same number of clients generate a lesser amount of revenue. When this happens, many of the costs of the agency do not decrease. As a result, the earnings go down and so will be value of the agency.
The Perfect Storm
The Perfect Storm can happen in other places other than on a fishing vessel off of New England. We have not listed all of the events that could go wrong. We have never witnessed the Perfect Storm but we have come close. An agency lost 75% of its value due to the loss of major accounts, an economic downturn that hit their client base particularly hard along with the soft market.
We also had a situation where the owner died at a young age with no plan in place. They were very important to the business and a sale could not take place.
Our purpose is not to scare anyone and have you sell your agency. It is all about your tolerance for risk. If you have saved enough money to fund your retirement then you really don’t incur much risk by holding on. If not, you have to make a serious assessment of your financial risk and gather all the facts in order to make an informed decision.
What is the Value of Your Insurance Agency?
As financial advisors who represent insurance brokers in business transactions, we are commonly asked one question “How much is my agency worth?” It is the one topic that each and every agency owner wants to discuss. It would be nice if we had one simple answer; unfortunately, there is no simple answer. Click below to download our comprehensive whitepaper which details “The 9 Factors That Indicate Value”.
