Spring Cleaning: Getting Your Agency in Order for Sale

Rising interest rates have clipped the bloom from the rose in terms of sky-high sales multiples for many agency sales transactions. Despite continued strong demand for acquisitions, buyers are simply constrained by prime rates above 8%.

Unfortunately, after two decades of attractive interest rates, it seems these higher rates are here to stay for a number of years. So, what is an agency owner who is planning to sell in the next few years to do?

Consider a good spring cleaning of sorts to start preparing your agency now in order to maximize your sale.

A Tale of Two Agencies

In my work, I’m frequently involved in helping an agency sell or buy another independent insurance agency. In the last couple of years, colleagues involved in two separate agencies sold their businesses for radically different multiples.

The first owned a traditional commercial agency where many of the leadership and staff had reached a traditional retirement age. They had been coasting for a few years with strong retention, but new business production was practically nil. Their website was as outdated as the office furniture and they had no idea what a “tech stack” was. Additionally, leadership paid themselves higher-than-standard commissions for cash flow reasons and had financial statements cluttered with personal expenses.

The principals of the second agency were in their 40s and 50s. Non-owner producers were in their 30s and 20s and other team members represented various age groups. The agency was growing with strong new business production. Leadership paid themselves and their employees competitive, market-rate, compensation and used a fractional chief financial officer to ensure their financials were clear of any personal expenses paid by the agency. They maintained state-of-the-art technology and had an impressive online presence.

Both agencies used a nationally known merger and acquisition (M&A) advisory firm to represent them in marketing and selling their agencies. The first agency sold for eight times EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) while the second sold for almost 15.

Regardless of what multiples may be at any given time, which result experienced by the two agencies above, would you prefer when you sell?

If you want to follow the lead of agency number two, read on for some simple, straightforward tips to tidy up your agency now, so you can ensure a higher price later.

Plan

Decide today when you want to sell and set a date. You don’t actually have to sell then but it will give you a goal and deadline to work toward. Three years is a reasonable and realistic time frame for most agencies.

Even if you don’t plan to sell for a decade, you’ll be ready, and stay ready, for an exceptional opportunity should one arise. An additional bonus of planning is that in the process, you will likely increase your agency’s profits, cash flow and value, which you can enjoy for the years you still own the business.

Prepare Your Financial Statements

Financial statements that aren’t prepared for a seller’s inspection can trip up an agency seller. Those who don’t know better can even cheat themselves out of a higher sales price. Agency purchases may be denominated as a multiple of revenue or commission, but most buyers use a multiple of EBITDA and Discounted Cash Flow (DCF) to analyze a deal and derive a purchase price.

To make this work for you:

• Stop using business funds for nonbusiness expenses. Remove cars, country club membership fees, meals with clients who are really friends and anything else that is strictly business. If necessary, form a separate entity apart from the agency to pay and track them.
• Pay yourself a reasonable salary and reduce commissions to appropriate levels. (The IIABA Best Practices Study is invaluable here for determining this.) Take cash flow from profits, not commissions.
• Ensure you are paying market rate compensation to employees. In some cases, this may raise expenses and lower EBITDA, but the buyer will adjust your figures regardless, so you might as well do it now and help ensure reduced turnover.
• If the agency owns real estate, transfer it to a different entity and make sure rental payments are market rate.
• If you have unusual items on your balance sheet, assets that have been disposed of but not written off, or other balance sheet items that your CFO does not like, dispose of them now.

Three years of clean financials will make the quality of earnings review that every deal undergoes after the Letter of Intent (LOI) is signed considerably less painful.

People Preparation

Recent government actions, and ensuing lawsuits, have created a confusing employee contract landscape. To the extent your attorney advises, agency owners should have employee agreements that include non-piracy provisions in place for every employee of the agency. All retirement plans should be up to date and properly funded. If you have relatives on the payroll, this is the time to take them off if they don’t actually work in the agency.

I frequently find agents employing people as independent contractors in an effort to avoid paying them properly. Consult your attorney for recommended changes.

Be thoughtful about the age distribution in the agency and strive to have a diversity of age groups represented within the staff.

If it’s been some time since you brought new producers into the business, consider hiring one or more new producers to increase new business production. By giving a new producer some of your book or the book of another older producer to manage, you will likely increase revenue, improve retention, and lower the average age of your team while making your agency much more attractive and valuable.

Finally, use benchmarks like the “Best Practices” study or the “Insurance Agency Growth & Performance Standards” published by the National Alliance for Insurance Education and Research to ensure that your team is as productive as it should be and you have no excess staffing.

Physically Clean Up the Place

Give your agency’s brick and mortar offices a facelift. Paint should be fresh and carpets clean and modern. Computers should be relatively new (three to five years old at most). Dispose of clutter and ancient records. Your employees will appreciate these efforts as will clients and prospects. Most importantly, you will send a strong signal to potential buyers that this is a growing business, not a retirement facility.

A cleaning, refresh and update should apply to your online presence as well. Be sure your website and social media reflect accurate information about your locations, people, products and capabilities. Project an impression of a business heading into a bigger future and not the sunset.

You may never plan to sell your agency, or you may want to do so tomorrow. Either way, taking the time to clean it up, maximize its efficiency and profitability, and lock in the valuable people assets who make it all work will increase its cash flow, profitability and value.