Selling an Agency: Plan Early for Peace of Mind

A goal without a plan is just a wish. Successful agency owners strategically plan business operations thinking ahead several years. Yet how many owners consider the end game in those plans? Are you building an agency to sell? If so, here are a series of questions to start asking yourself.

How Do I Prepare to Sell?

There are many steps in preparing to sell your business, but the process doesn’t have to be daunting. Breaking it down into manageable pieces and delegating as appropriate make the process easier.

Identify what you want from the sale. Some owners want to sell and walk away; they’re ready for retirement or a different career. It’s becoming much more common, however, to have phased sales, where the owner transfers ownership and responsibilities gradually. It’s important to take the time before you start to consider this question and consequences carefully, as it will impact the kind of buyer to seek. The most important thing here is to be honest with yourself as to what you are looking to accomplish with the sale.

Streamline operations. Few buyers are looking for a fixer-upper business. They want a solid business with little to no problems. Take a hard look at your agency to identify any red flags that would cause a potential buyer to look elsewhere. Is the office technology out of date and causing productivity to suffer? Is there a staff member undermining morale? It’s best to deal with these issues before the sale rather than hoping they go away or that potential buyers won’t notice.

Keep financials in order. The business will need clean financials for the previous three years, along with evidence of appropriate compliance with all applicable industry regulations before entering into a sale. Don’t wait until after a potential buyer is identified, as this should be done regardless of whether you sell or not.

Do an agency SWOT. Make an inventory of the strengths, weaknesses, opportunities and threats (SWOT) for your business. Does the agency have a strong reputation in the local area? Does it focus on a particular industry niche? Are those strengths or weaknesses? Remember what you consider a weakness or threat could be opportunity. For example, buyers are looking for ways to get into new growth areas, either based on geography or coverage type, and could be interested in an agency already established in those areas.

Get a solid valuation. One of the more challenging parts of any sale is coming to a sale price. Sellers can have more confidence in their price negotiations if they’ve established a solid valuation first.

For businesses, such as insurance agencies whose assets are primarily cash flow rather than physical items, valuation often starts with EBITDA (earnings before interest, taxes, depreciation, and amortization). That figure is adjusted (subtracting expenses unlikely to continue after the sale and adding in revenues that will increase) to come up with a pro forma EBITDA. Many agency owners find it’s worthwhile to hire an outside consultant to help determine a valuation for their business.

Talk to potential lenders. Many business sales today involve the seller holding some portion of the debt, and that may involve the business owner needing help with financing. It’s never too early to talk with potential lenders about upcoming plans for selling. Even if they do not end up providing financing, lenders with experience supporting independent insurance agents can be a valuable source of information and may know of potential buyers.

How Do I Find a Buyer?

It may seem like a challenge to find a buyer, but there are some good options for business owners who do not have an identified successor.

Networking. Talking with associates at conferences and business events is one way to learn about people in the market for an insurance agency. It’s a bit hit-or-miss, however, as it only spreads the word as far as one’s professional network extends.

Working with an industry specific investment banker or broker. An investment banker rooted in the industry can help you present your agency in the best light for a buyer, solicit targeted buyers, negotiate the structure and price, and bring you options. A business broker for the insurance industry can serve as an agent, connecting sellers with potential buyers. However, the number of potential buyers is limited by the size of the broker’s network. In addition, brokers charge a commission depending on the size and scale of the agency, ranging from 1% to 5% of the sale price. Paying these fees can be frustrating because it minimizes the profits from the sale of the agency. However, the expertise of an investment banker or broker can translate into a higher sale price for your agency than you could negotiate on your own. Thus, your overall profit is higher, and the fees can be recovered.

Using a business exchange. A business exchange is a site that connects buyers and sellers across broad geographic areas. It allows people who would not otherwise know one another to identify businesses for sale and buyers in the market for an agency. Many business exchanges, especially those operated by business sale lenders, operate without a fee. Users post only the amount of information they want to share, so they are a safe way to test the market.

After years of providing reliable service to others, selling your agency doesn’t just mean maximizing the price. Don’t forget to focus on what’s right for the management team, your customers and you. Following simple guidelines and seeking advice from other professionals can make the sale process go smoothly.