One of the sure signs of Fall is the increase in frequency of agents calling us asking how best to set their agencies up for sale. As the weather changes (especially in the Northern climates) agency owners who have been considering monetizing the value of their agencies, either through their internal successors or to outside buyers, are deciding what and when they want to trigger a change.
Here are the steps you need to consider before making your decision:
- Neither retirement nor agency ownership succession is a spur-of-the-moment decision. I know that you’ve been thinking about it – possibly for years – but you should NEVER make this kind of decision at the spur of the moment or without consulting your accountant, attorney or consultant FIRST. There are too many considerations that need to be decided before the decision is made or the trigger pulled among which are (but are certainly not limited to):
- Health insurance for you and your family after the sale
- Tax considerations depending on your financial condition and the method of transfer of the agency (asset sale vs. stock sale)
- The creation of a Gap Analysis – how much will you need monthly after the transaction and how much will you have from the sale and/or your other cash assets.
- Your financial condition – debt load, other assets available, etc.
- Do you have or can you evolve an internal successor at your agency? Whether relatives or employees, an internal successor will buy your agency with its own cashflow. In other words, enough after-tax cash must generate from the agency to pay you and/or a bank both principal and interest. If the annual obligation (to you or to a creditor) is $100,000 (principal and interest) and the agency only generates $50,000 net income after taxes, where is the money coming from to buy the agency? It makes little sense for a buyer to purchase an agency that drains his other assets for five to ten years before turning a profit. And expecting a buyer to perform better than the seller on that book of business is an invitation to failure.
- If not, do you already know your buyer? While an internal successor could likely buy your agency’s stock, an outside buyer will likely purchase your assets only, permitting him to amortize the purchase price over 15 years. This places an additional burden on the seller from a tax standpoint but may generate a higher price if there are economies of scale that can profit a buyer when an internal successor is likely going to have the same level of expense and cashflow as the seller. Is PRICE more important to you than changes that may take place for employees and clients?
- Do you know your agency’s Fair Market Value based on your buyer? Asking buyers to make you an offer is a terrible way of valuing your agency. If you have five buyers you will likely have five very different offers based on their individual views of the cashflow potential of your business to them. You are much better situated generating your own value based on the cashflow assumptions that are most likely for your agency’s future. Agency Consulting Group, Inc. assists hundreds of agencies with valuations annually.
- Use an intermediary to negotiate for your sale. Just as the end insurance buyer is not the best qualified person to judge what coverages he needs and the best product from the variety of carriers available to supply their insurance program, neither is the business owner the best qualified to determine the validity and quality of offers for his insurance agency. The intelligent insurance buyer uses a broker/agent whose expertise is risk management to advise him regarding the products and pricing best suited to protect his assets. Using an intermediary (like Agency Consulting Group, Inc.) will likely result in the highest value for your agency sale under the circumstances that meet both the buyer’s and the seller’s goals and objectives.
Call Al Diamond at 856 779 2430 (al@agencyconsulting.com) to discuss your particular succession or perpetuation needs. Every agency transaction is different based on the particular goals of the selling agency owners.