Selling an insurance agency is a different skill than building one. While many agency principals and executives have achieved terrific success building agencies, recruiting and mentoring agents and cementing relationships with clients, actually selling an agency is a time-consuming and detailed process with a required skill set all its own. There are issues that come up during the negotiation and execution of a transfer of ownership that are quite different from the issues that confront agency principals during the normal course of business. And the rolodex of contacts you need to contact potential buyers for your agency is a lot different than the rolodex of contacts you’ve been building to help you run and grow your business.
That’s where an experienced agency broker can come in. When it’s time to cash out, a business broker who specializes in the insurance business can help you prep your agency for sale – so you can get the maximum price out of it. This is your nest egg we’re talking about here. This is everything you built when you weren’t contributing to your own 401(k) or pension plan, and for most agency principals, it’s your most valuable asset – if you can sell it.
And there’s where a lot of agency principals run into trouble: They haven’t gone through enough business acquisitions themselves to fully grasp the complicated courtships and rituals that occur between buyers and sellers of businesses, and too often leave themselves at a disadvantage.
One thing an established broker can do that few agencies can do for themselves is line up buyers ahead of an “open house.” Michael Mensch of Agency Brokerage Consultants, a business intermediary/broker with experience with assisting over 100 different insurance agencies in valuing and selling, states that one of the things his firm can do to add value is bring in up to 50 potential buyers, in some cases – in the space of a few days. “We try to compress the timeline,” he says. “Because when you do that, you have buyers bidding against each other to buy the business. You create competition! Without that compression, the seller has fewer offers to choose from.” Mensch calls that compression process “creating a controlled auction.”
Mensch added “Aside from marketing to bring in competing, strategic buyers simultaneously, the agency has to be prepared for sale by way of organizing for the due diligence phase in advance, pre-qualifying the business for third party financing and creating a confidential selling memorandum on the agency that will educate potential buyers on the history, operations, book of business and financials. If you don’t have all of these pieces together, then the auction fails to yield the best result for the seller. Additionally, buyers appreciate having all of the relevant facts up front.”
Bringing in possible buyers is just the beginning. Just like any good agent doesn’t waste time pitching to unqualified prospects, the broker also doesn’t want to waste time – or the agency seller’s time – dealing with people who can’t pay the asking price, and who can’t qualify for the financing.
“We know who the key players are in this market,” explains Jon Persky of Optimum Performance Solutions, another insurance agency broker out of Tampa, Florida.” “We know what they’re qualified for, and we also know how they structure their deals.”
Dan Menzer, of Optis Partners, another intermediary who specializes in brokering the sale of insurance agencies, echoes the importance of specializing in the industry. “We already know who buys the kind of agency that’s up for sale,” he says. “And we can also help the seller plan for a scenario that’s realistic.”
With dozens of potential buyers, an agency owner acting alone would be hard-pressed to conduct due diligence on every buyer. Mensch recommends getting a broker to do it on your behalf, on the front end. This saves a ton of time for the seller, says Mensch, and for the buyer, too: A buyer looking at acquiring multiple agencies need only go through the vetting procedure once. Moreover, often times a potential buyer blanches on releasing a great deal of information directly to an agency seller before he even knows he’s interested in buying. A broker, however, is able to establish due diligence on buyers as an industry norm, says Mensch. “They’ll say, ‘oh, ok, so this is the way it’s done.”
Qualifying Buyers and Managing Confidentiality
Sellers don’t want to waste time dealing with unqualified buyers. And neither do brokers. Most experienced brokers have a system for committing the buyer to a confidentiality agreement, while at the same time ensuring that the buyer is financially capable of consummating an eventual deal.
Confidentiality is the most important item of concern when selling or buying a business,” according to Mike Maiman, principal of MKL Acquisitions in Ventura, California. “Sellers don’t want to alert their employees, customers, suppliers or competitors that their business is for sale and want to be insulated from potential buyers until those buyers are proven to be “real.”
Prospective buyers have to fill out a confidentiality agreement right from the get go, on his website. They also must provide information on their assets available and how they plan to finance an agency purchase, before the deal goes forward. The result: A lot of time saved for the seller, who doesn’t have to deal with unserious buyers, or buyers who are a mismatch for the agency.
Tensions can get high during the negotiation over the sale of a business. Both sides can be prone to brinkmanship in negotiations. By acting in the role of intermediary, a broker can take the edge off of some heated moments and communications between buyer and seller. This alone can prevent a lot of deals from collapsing in the heat of a misunderstanding – and of course, save both the buyer and seller from having to start the process from scratch with another counterparty.
A good broker can also diplomatically move the deal forward. “Time can be a deal killer,” says Mensch. A big part of the value a good intermediary can add is in nudging both sides to move the football toward the end zone – before something happens to derail the deal. If the deal is good, all sides benefit from it happening quickly.
Persky elaborates: “A general practitioner who doesn’t do agencies all the time might take a deal and shotgun it to 20 people. But then the seller has to talk to 20 different people, fielding questions because the broker doesn’t understand the industry. Plus, word gets out. You can get a nondisclosure agreement, but that doesn’t protect you people start talking, and when word gets out that an agency’s for sale, people can start leaving… We might shop a deal to, say, five people – not twenty – who we really know are qualified and serious.”
Importance of Specialization
Selling an insurance business is a lot different from selling a restaurant or tire shop. Many general business brokers get lost when they try to broker insurance agencies, says Mensch. First of all, they have a narrower pool of potential buyers to choose from, compared to an insurance industry specialist that has been in business, talking specifically to insurance agencies and the people who acquire them, for years. That Rolodex of contacts has value to the seller.
Second, there are issues with regulation, agent retention, production contracts, goodwill, residuals and cash flows that are very difficult for people who don’t have a background specific to insurance to understand. An insurance industry specialist can work with the seller to establish a reasonable asking price, taking into account all these factors that someone who sold a golf pro shop last week and a liquor store the week before would likely miss. “We know what’s realistic,” asserts Persky.
A Detailed Understanding of Agency Earnings and Revenue Streams Aids Valuation
Dan Menzer relates a story from his own practice that underscores the importance of using an intermediary with a deep understanding of the insurance business. One of many possible sales structures is to assign a value to the business equal to a multiple of annual revenue – at least as a starting point for valuation purposes. One of Dan’s buyers – a frequent purchaser of insurance agencies – would routinely structure the deal as a multiple of revenue, payable in stages over two or three years after the sale, based on the revenue that actually came into the agency.
The hitch came when it became clear that a one-time hit due to a contingent commission that didn’t come to pass was going to result in an exceptionally low-revenue year for the agency. Because the risk that caused the agency to lose the contingent commission prior to the sale was a very unusual occurrence, Menzer was able to negotiate a variation to the contract with the buyer: “Give us an additional six months,” Menzer said, to allow the anomaly to fall off the books and for the firm’s revenues to revert to the mean. The buyer was an experienced agency buyer understood immediately, and the seller received a much better price as a result, which more fully reflected the true value of the business.
“General practitioners miss that,” Menzer says. “We see experienced lawyers miss things like that all the time.” Menzer, a CPA by training, asserts that this kind of detailed understanding of agency earnings and revenue streams helps him and other agency brokerage specialists “routinely” add much more value than broker commissions reflect.
Persky also goes an extra mile with potential clients: Suppose a seller is looking for a $1.5 million sale price to retire on. But after speaking with Persky, he finds that perhaps only a $1 million asking price is realistic. “We’ll leave him with a game plan – with specific recommendations – on what he can do to get the value of his agency up to the level he needs it to be.“