By Rick Dennen, president and CEO of Oak Street Funding
So you’re ready to start thinking about retirement? Maybe, maybe not? If you’re an insurance agent reading this article, it’s likely you are in the beginning stages of either considering how to make an exit from your agency. The majority of agents are at least 55 years old. That could mean as few as five more years of work for some or up to 20 more for others, depending on your personal circumstances and goals. But even if you’re younger and at a different stage of life, you still need to think about the sale of your agency. There are factors that have to be carefully considered and financing options weighed (or evaluated) so that you can be prepared whenever the time comes. Now is the time to start painting a picture of how the sale of your agency might look.
As you think about selling your agency, the first thing you have to know is what you want and what you need. What will be the purpose for selling and what are your goals? Will you sell to retire in your 60s or to make a career change in your 50's? If you retire, to what degree are you counting on the proceeds from the sale to fund your retirement and how much will you need? Is leaving a legacy important or will the focus strictly be business and financial? And what about your level of involvement once the business is sold – will you mind being involved in a mentoring or other role for a season or do you want to be finished with any attachments to the business? Are you concerned about your employees remaining, or will they find other work? If you have business partners, these questions may be more difficult to answer as all parties may have differing opinions and needs that will have to be reconciled to make decisions and plans.
Once you’ve settled on the answers to these questions, you’ll have start outlining a high-level plan. Experienced brokers in the insurance industry typically say it takes two years of preparation to sale an agency. The questions outlined above are part of preliminary steps to developing and executing a solid sales plan so they need to be asked and answered even prior to two years out.
If the process can take two years of preparation and even more to actually finalize a transaction, it’s important to start with a patient and perseverant mindset. There is a lot of work involved in determining needs, the right sale structure, setting financial and management matters in order, finding the right professionals to assist with the process, ensuring the right agreements are in place employed producers and so much more. It can be very frustrating whether you’re prepared and have realistic expectations or not. So be ready to call on and exhibit the same endurance and vision you had to rely on in the early days to get your business established – you’re going to need those qualities once again!
Preparing a business for sale and actually getting it sold can be likened to selling a house: it often looks easier than it is. Just as people think you can easily do some cleaning and needed repairs, throw up a ‘For Sale by Owner’ sign and watch buyers rush in with offers, agency owners also mistakenly thinking they can tidy up their finances and post their business for sale on some listings. Like the homeowner who comes to realize their lack of knowledge and expertise is hindering the sale of their home, agents learn that selling a business usually commands professional help. It’s advisable to find good brokers, valuation experts, attorneys and accountants to not only simplify the process and help increase the likelihood of having your expectations met, but to also ensure the transaction is free of legal and tax issues that can derail or stall your plans.
While you’re going through this process, remember to work on making your agency business one that can function well without you and other owners if there are any. Manage your business like a parent raises a child — their goal is to train them to be well-equipped, self-sufficient adults who are liked and valued by people other than their parents. In the same manner, you want to demonstrate that your business is poised to continue thriving after there’s new ownership and leadership. Not only will this help ensure the continuation of the business, which is, hopefully, valued by employees, customers and the community, it will help attract more potential buyers who might not be up for tackling management challenges. Work also on building value. There are a number of strategies related to finances, profitability, operations, sales and more to do this. Conduct some research and seek advice to determine what’s best for your agency.
Know your financing options
Deciding to sell your agency business presents a dynamic that many owners aren’t ready to face. You have to think about the types of financing options you’ll consider because your choice will affect the amount and type of purchasers you attract. And while you may have professional help making this decision, you need to have a high-level understanding of your options so the picture of what the sale might look like will start to be more clear and conceivable.
The three most common financing options are seller financing, earnouts and third-party financing. With seller financing, the agency seller accepts a down payment for the business and then installment payments over a predetermined period of time. Because many people don’t have the financial resources to buy another business, this option can increase the number of prospective buyers. The seller maintains a stake in the business until the purchase price is paid off. That may or may not be desirable to the seller.
A seller also continues to have a stake in an agency when an earnout is chosen for financing. In this case, an agreement is struck in which the buyer pays the seller a portion of the sale price upfront, and the seller has the potential to earn more money over a specified period of time (usually up to five years) if certain goals (i.e., profit, revenue, cash flow) are met. Again, a seller is still tied to the company and may have a low to high level of engagement to see to it that goals are achieved so he or she can earn more money. This can result in conflicts depending on how the buyer operates the business. If the arrangement doesn’t go as expected, the seller’s income from the sale can be reduced by a significant amount. So while this can be a risky option, as with seller financing, the pool of buyers can be expanded.
Third-party financing is probably the most widely desired option of agency owners. First, the seller can get one lump sum which is often the goal when exiting the business. Second, the seller doesn’t have to deal with the complexities of providing funding for a buyer and filling the shoes of a lender. What’s more, they like having a financial institution involved because they believe they benefit from their acquisitions experience and underwriting requirements — lenders are not going to fund risky or shady deals. While the number of prospective buyers may not be as great as with other options, competitive rates and available funds may equate to a higher purchase price if buyers can borrow more money. Third-party financing is attractive to buyers too. But sellers should be careful about investing a lot of time in negotiations with potential buyers before they have great certainty of their ability to secure a loan. If you’re in that situation, you might want to make sure they are pre-qualified to save yourself time, energy and even money that can be wasted on someone that can’t buy.
There’s no reason to purport that selling your agency is a simple undertaking. But having being informed about what’s to come, having reasonable expectations and properly preparing can simplify the process and help ensure a successful outcome.