Joe was in the agency business for 25 years. His neighbor, John, was Joe’s father’s contemporary and had been in the business for 40 years. They knew each other since Joe was a boy and liked and respected each other. They were competitors, but the friendliest of competitors.
John, at over 70 years old, lost his wife and found little reason to continue his business. He figured his business was worth $2 Million, twice the annual revenue he generated from commissions. That amount, along with his investments, would allow him to move nearer his children and grandchildren and live comfortably.
He spoke to Joe and they agreed to simply sell John’s agency to Joe for $2 Million payable over five years at a reasonable interest rate.
Three years later a retired and reticent John calls us with a problem. Joe wasn’t paying him any more and when he contacted Joe, he found out that most of his clients were no longer insured and that Joe’s agency staff hadn’t retained much of what Joe bought from John.
NOW, as Paul Harvey used to say, “Here’s the rest of the story…”
Joe was a maintenance agent. He never grew his father’s book of business and was pretty much a hands off agent, choosing to “manage” the book of business instead of selling and retaining client relationships. John was ‘hands-on,’ friends with every client until the day he retired.
John’s business was tied to John as the key agent. His clients were his contemporaries, not Joe’s and, while friends with John, didn’t really like Joe, the ‘know-it-all whipersnapper’ as he was referred to around the town. What Joe never realized was that John’s business was in decline with his clients dying and retiring. The younger generation sought other representation than John’s. John and all of his staff were in their 70’s when he retired.
This situation was one fraught with danger, but not apparent to two friendly insurance agents who just wanted to perpetuate one agency into another.
The reason you might want to use a professional consultant instead of buying, selling or merging your own business is because the due diligence, valuation and negotiations of Win/Win scenarios in agency perpetuation is the profession of the consultant while the professional insurance agent is supposed to be expert in the derivation of risk management products for his clients.
No one would ever consider selling an office building worth millions of dollars without the guidance of professionals. No one would consider trying to cure one’s own physical illness without professional guidance. But too many small business owners define the word, “small” as “simple”. Insurance businesses are not “simple”. You might face single product or niche market situations that defy the norms of revenue projection. You might face agencies similar to yours or similar to those with which you are familiar, but have financial anomalies or internal and client issues similar to John’s above. You might be looking at mergers with banks or with organizations larger than your own. While you can hope for the best, Due Diligence is a better solution.
There are products like the Agency Valuer, that will help you step through the process of agency valuation. We freely provide our Due Diligence Questionnaire to any client who desires it because the questions are rock-solid methods of analyzing an agency, yours or someone else’s.
But, just as you can get a book about building a house, few of us would have the temerity to build one without professional help. Similarly, we encourage every agent to know how to value and how to conduct Due Diligence, but it makes sense to use someone with decades of experience doing so because he has the experience to understand any anomaly and has the unemotional detachment to cut a transaction loose if it proves to be less than valuable to one party or the other.
Finally, the use of a professional consultant is important in the negotiation process. If two decision-makers face off in negotiations over a deal and they disagree, there is an impasse that cannot be overcome. However, if a consultant is involved, he can, understanding the disputes, go back to his client with the problems and a number of alternatives. The deal may not happen, but only if no further give-and-take is available to either party.
Are deals made without consultants? Yes, every day. How do we know? We know because relatively high percentage have problems that will eventually require a court case to resolve during which both attorneys and consultants are kept quite busy untying the knots that the buyer and seller negotiated themselves into in their informal structures.
Call us at (800) 779-2430 if you are considering buying, selling, merging or doing any type of organizational evolutions (cluster, Virtual Insurance Agency, JV with a bank) and we can talk you through it, offering our assistance if you need it.