RECOGNIZE WHAT YOU WILL FACE IF YOU RETIRE AND SELL YOUR BUSINESS
–AND WHAT YOU’RE LIKELY TO FACE AS A BUYER
OR PERPETUATOR OF AN AGENCY
Working with buyers, sellers and internal perpetuators and successors we have the opportunity to see many transactions take place. One of the things that we recognize happens more frequently than not is the hesitation caused by a form of Seller’s Remorse before the conclusion of many transactions.
Seller’s Remorse takes place when a selling owner (usually someone transitioning into immediate or eventual retirement) realizes the loss of control that will occur simultaneously with the transaction. This loss of control could be triggered by financial loss – the realization that the funds generated by the sale are finite compared to the annual benefit of compensation, perks of ownership and agency profits. The loss of control could also be triggered by the realization that the owner, long used to full control of his surroundings, will now become- the “prior regime” and his position will be assumed by the new owners.
If the transaction uses Agency Consulting Group, Inc.’s valuation services, both buyer and seller now realize that the agency must be purchased with the cash flow that it generates over a specific period of time agreed upon by the buyer and seller. This means that, eventually, the seller will have received the agreed upon “value” of the agency from the buyer and the new owner will take all future financial benefits from the agency. The seller realizes that if he hadn’t sold and remained in place and healthy he would have always achieved more future value from the agency than the price that he received. Of course, no one lives forever, some are required to retire by physical or mental conditions and others understand that there is life after business and they desire to enjoy it while they still can. The smart business owner plans for ownership transition and seeks a fair value for his agency that is sufficient to allow him to live comfortably while enjoying life and family.
Those agents who try to ‘short-cut’ the valuation system will either underprice or overprice the agency based on some arbitrary multiple of something (commission, revenue, EBITDA, etc). Regular readers and clients of Agency Consulting Group, Inc. know the example, below, that destroys the concept that there are “common multiples” that work for every agency.
Two agencies, each generating $1 Million revenue 50% CL/50%PL with good loss ratios, are two blocks apart in a city. Agent A (on the left) was $3 Million five years ago. Its owners are in their late 60’s and 70’s as are their employees and most of their remaining clients. Their client base is eroding annually through death and retirement and they are not replacing their lost clients fast enough to grow the agency. Agent B (on the right) began from scratch five years ago with 35 year old owners and a young staff (all hungry) and are marketing and soliciting for new clients most of the time.
What will happen to Agency A’s long term large clients when the owners who have been their friends, retire? Will the employees who have worked for the owners all their careers, stay or retire simultaneously? Will Agency B’s owners stay with the agency to help build it?
Would you pay the same “multiple” (of anything) for both of these businesses?
Sometime after the seller has made the decision to sell he will realize that his value is finite and he will no longer be ‘top dog’ in his own company. This will cause some angst and he will wonder if he’s making the right decision – SELLER’S REMORSE.
In reality the only sellers who should carefully consider their decision are those in the prime of their lives who have made an emotional decision based on their conditions at the moment and had never considered retirement seriously before that time. We have seen the result of these sales as former agency owners become ‘Lost Souls’ trying to relive their strongest times by staying with the agency without a well-defined role or wandering through the next few years of their lives re-living the best of times in their careers. Some realize after the transaction that they were not really ready to retire and should not have made the decision regardless of the pressures on them.
However, most sellers we encounter have been thinking about retiring and their alternatives for many years before their decision. They will experience the same remorse as anyone who is making a radical change in their lives but, in retrospect, they know their decisions were due (or overdue) and that staying longer would be detrimental to their physical, emotional and financial condition.
Buyers can help the sellers by helping them define the reasons for ownership transition within the due diligence stage of the transaction. Do so in writing. Actually help the seller develop a T-List, listing on two sides of a page the reasons for or against the sale of the agency. That list will act as the reminder to the seller of why a transition of ownership is more helpful to his future course than detrimental and it will alleviate the Seller’s Remorse by acting as a reminder.