Ben Franklin said, upon signing the Declaration of Independence, “Our new Constitution is now established, and has an appearance that promises permanency; but in this world nothing can be said to be certain, except death and taxes.” While that is probably correct, we have now developed a way to better assure agents who sell agencies, books of business or who perpetuate agencies that the payments that support the acquisition will be forthcoming every month, without fail, or the agency will be forced to sell itself to satisfy the original seller.
Agency Consulting Group, Inc.’s Financial Audit Service helps assure that, once sold, the buyer will continue to be capable of paying the seller throughout the contracted payment period. The Audit Service is based on the liquidity ratios that are reflected through an insurance agency’s balance sheet each month. Those liquidity ratios prove the agency’s financial strength and ability to meet its immediate financial obligations (like payments to a seller).
Here’s WHY the audit works:
An agency’s balance sheet reflects the financial health of the agency. To the degree that the balance sheet is accurate, so is the determination of its financial health – including its ability to pay its short term and long term financial obligations (like the payments to a seller for an agency or a book of business). At least once each year an agency’s balance sheet is corrected for tax purposes. If the proper adjustments are made to correct the system, the balance sheet is then “in balance” and correct. There are several Liquidity Ratios that can be calculated from the data in the agency’s balance sheet. These liquidity ratios identify how well the agency is positioned to meet its current and long term obligations. The combination of Acid Test (Quick Ratio), Current Ratio and Trust Ratio is used to determine whether the agency’s current cash position remains stable enough to permit continued payment of its current obligations unhindered. These ratios can be tested every month to determine if they remain stable, are increasing (meaning greater cash position) or are decreasing (identifying potential cash weakness). If the liquidity ratios dip below specific levels (100% Current Ratio and Trust Ratio and 90% Acid Test or the levels of these ratios at the time of the sale of the agency or book of business) it indicates a potential weakness. If the levels remain deficient for a period of time, it may indicate that the agency no longer has the financial stability to maintain the payments to the seller without extraordinary efforts.
Here’s how the audit works.
On the closing date of a sale, Agency Consulting Group, Inc. pulls a balance sheet and calculates the agency’s liquidity ratios. These liquidity ratios act together to assess the financial health and stability of an agency at any point in time that a balance sheet is created. For a small fee paid by the agency, Agency Consulting Group, Inc. receives the agency’s balance sheet every month, calculates the liquidity ratios and validates the agency’s ability to meet the financial obligation to the seller.
If the Liquidity Ratios were at acceptable levels or were sufficient to support the payment obligations of the agency to the seller, Agency Consulting Group, Inc. creates a marker against which monthly balance sheet liquidity measurements are gauged to assure the seller of the buyer’s continued ability to meet the payment obligations. If the Liquidity Ratios were insufficient at the outset to properly support the payments, Agency Consulting Group, Inc. will inform the agency of the required balance sheet needs and how to achieve them. Then, on a monthly basis, the agency will send its balance sheet to Agency Consulting Group, Inc. for monitoring. Agency Consulting Group, Inc. will calculate the liquidity ratios and measure them against the marker or against the agreed-upon acceptable levels that would assure the seller of the buyer’s ability to continue payments.
If the Liquidity Ratios of the agency falls below minimum acceptable levels for two consecutive months, Agency Consulting Group, Inc. will inform the buyer and the seller of the deficiency and advise how the buyer can remedy the cash-flow shortfall. If the Liquidity Ratios remain below acceptable levels for three months in a row, Agency Consulting Group, Inc. will advise the buyer and the seller and suggest a consulting visit to remedy the cash problem to permit the buyer to continue payments to the seller unabated. Should the Liquidity Ratios not regain acceptable levels after four months; the agency will be required to either pay the seller the full amount remaining due or will be required to be re-sold to satisfy the seller.
Contact Agency Consulting Group, Inc. to find out how to trigger the Financial Services Audit (800-779-2430). It can be effected as a part of the sale transaction to assure the buyer that there will be no surprise call one day telling the seller that the agency cannot meet its financial obligation or it can be implemented at any time after the transaction with the permission of both the buyer and the seller.