This checklist is sponsored by our friends at Donovan, Sullivan & Ryan
A checklist outlining eight points that will help an insurance agent sell their agency in the safest and most profitable way.
Make a plan before you take action. Before doing anything, make a plan that will allow you to sell your agency in the safest and most profitable way. The earlier you start planning for the sale, the better off you will be. The usual time frame from beginning to actual closing is six months to one year depending on the size of the agency and the complexity of the transaction.
1. Shine up the agency and fix what’s broken
One of the first things to do is to look at the agency through a buyer’s eyes. The more organized and professional your agency appears, the more valuable it will appear to be to the buyer. For example:
- Are your client records complete and organized?
- Do you have professional looking complete financial statements?
- Are the financial and accounting records clean of any unnecessary items that may detract from the real value of your agency such as owner automobile lease payments, etc.
- Have your employees and producers executed confidentiality, non-solicitation, non-disclosure and/or non-compete agreements?
- Are your producer appointment contracts with your insurance carriers in order?
- Do you have reports from your carriers such as loss runs, commission statements, etc.
2. Don’t let potential buyers get your business without paying. Protect your assets with a preliminary agreement.
Showing potential buyers your expiration lists and sharing information about key clients and business strategies without a preliminary confidentiality and noncompetition agreement puts your valuable assets at risk. Make sure all potential buyers sign such an agreement before you share anything. This especially holds true if you are entertaining offers from competing agencies in your neighborhood who may already be attempting to solicit your clients. (See Agency Checklists non-disclosure agreements).
3. Don’t rely on the buyer’s “valuation experts”, get your own.
An agency’s valuation is not necessarily a reliable indicator of the sales value of an agency. The potential sales price of an agency is based on the market for agencies like yours. It is a function of supply and buyer demand, not any EBITDA formula. Buyers may hire an expert to value your agency. Don’t take what that expert says for granted. Get your own expert or at least question the premises that the buyer’s expert has used to value the agency. There may be factors that impact the value of your agency that the buyer’s expert has not taken into account. For example, a potential buyer may have carrier incentives, higher commission percentages because of size and profitability, as well other economies of scale that make EBITDA or “standard” multiples of commission less important to this particular buyer.
4. There’s more than one fish in the sea. Don’t solicit just one buyer.
You might have a buyer in mind that you would like to sell your agency to but there is no guarantee that there will be a match between what you want and what that buyer may be looking for. By concentrating on just one buyer you may have wasted valuable time if it doesn’t work out. In addition, you lose the benefit of having multiple buyers compete with one another to purchase your agency.
If you are going to seek maximum value, there are outside consultants that spend their time identifying and keeping track of which agencies, banks, insurance companies, hedge funds or private investors are actively seeking insurance agency assets and which of these entities are just “kicking-tires.” (For example, see Agency Checklists “Engaging a business broker to sell or acquire an agency”).
5. Don’t agree to a price until you have agreed on other critical terms.
There are many factors that will affect the actual value that you will receive. For example, will the buyer be paying cash up front or over ten years? Don’t commit to a price before negotiating other terms that will affect the monetary value of the agency or you will lose your negotiating edge.
6. Is the buyer qualified?
All potential buyers should be required to submit a letter of intent (LOI) clearly stating all the relevant terms of their offer.Once you sign a LOI the buyer is going to want a lot of information about your business. However, before you put your signature on a LOI you should get some critical information about the buyer. For example:
- Does the buyer have the capital to make the acquisition or does the buyer need or have bona fide loan commitment from a qualified source?
- If the buyer is paying over time, is he creditworthy?
- If the buyer has made previous acquisitions, request permission to contact the sellers of those agencies
7. Other agreements — get it all in writing.
The parties may agree to more than just the terms of the purchase and sale. For example, the buyer may wish to employ you to help run the agency for a period of time. As with the purchase and sale agreement itself, agreements such as these need to be in writing and need to carefully specify all of the details of the agreement. Don’t rely on the buyer’s oral statements that you will not really need to come in but only be available to answer questions. If that’s the case, make sure the agreement says so.
8. Don’t introduce potential buyers to your employees. Be discreet.
Under certain circumstances, it may be wise to keep your intent to sell the agency as confidential as possible. It may take months to find the right buyer and complete a deal. In the meantime, you do not want to upset the ranks. For example, there may be employees that believed that they one day might have owned the agency that will get rankled knowing you are not planning on selling to them. You may have a producer that was thinking of leaving for another agency and this may convince him to leave sooner rather than later. In order to avoid these issues, plan your meetings with potential buyers off-site or after hours. The confidentiality agreement that you require potential buyers to sign will help to maintain it.
Clearly communicate to potential buyer the best way to confidentially communication with you. e.g. cell phone, personal e-mail account, etc. Premature disclosure of a potential sale or even the agency’s solicitation of buyers can cause havoc with employee morale. In the worst case, critical employees may jump ship because of the uncertainty associated with the terms of the agency’s acquisition or who the buyer might be. Certainly, when you feel the time is right, let your staff in on the plan. If you know the buyer may wish to keep some of the staff, you can let them know that too.
9. Make sure you have professionals that are knowledgeable about insurance agency acquisitions.
Don’t rely on the buyer’s Legal counsel or accountants for advice. You want to have your own lawyer and accountant and bring them in at the beginning of the process so that they can protect you right from the start. You may have sold thousands of insurance policies, but how many times have you sold an agency? Lawyers, accountants and business brokers that know the insurance industry and the contract and tax law applicable to agency purchase and sale transactions will likely get you your price and avoid post-sale problems.
More about our sponsor
Donovan Sullivan & Ryan,
Donovan Sullivan & Ryan, is committed to being the pre-eminent accounting and management consulting firm in Massachusetts for insurance agents and brokers. They understand insurance agencies and their unique problems and challenges uncommon to most other businesses. Their insurance clients range from small agencies to large agencies to millions of dollars in commissions.
Since its founding in 1976, Donovan Sullivan & Ryan has successfully advised their insurance agency clients in—mergers, acquisitions and forming clusters—agency accounting and training—operations profitability reviews—agency sale negotiations—insurance agency valuations—agency expansion and financing—agency perpetuation and succession planning—tax planning and compliance—financial statement reviews and compilations—accounting systems review and evaluation.
To contact them in person, email Partner Christopher Ryan via the email link below or connect with him on LinkedIn.