For optimum results, preparing an agency for sale should begin at least two to three years before you put it on the market.
Record keeping Most business owners focus their energy on sales and
marketing because it’s what makes the phone ring and generates income. They have neither the patience, time, nor desire to be a bookkeeper. This is completely understandable. One of the challenges faced in preparing an agency for sale, though, is organizing the documents that are needed to sell the agency. These include the following items.
• • Financial, bank and commission statements. producers.
During the sale, the ability to verify all information and educate the buyer on the daily operation of the business can make or break the deal. Time is of the essence when you are selling the agency so not preparing these in advance can lead to delays that cause a deal to fall apart or lead to a renegotiation of purchase price and terms. The goal should be to keep and organize all reports, agreements and account information in printed or electronic format for two to three years in advance of the sale.
Managing costs Many agency owners assume the value of an agency is
a multiple of revenue. In 2010, my firm sold agencies for anywhere from 1.2 to 2.6 times revenue which is obviously a very broad range. At the end of the day, a deal may be negotiated as a multiple of revenue for simplicity but the determination always factors in the projected earnings of the agency. There is no avoiding
• Contracts with third parties such as carriers, landlords, advertising agencies and employees/
Book of business details regarding active policies, production/loss history with carriers and client demographics.
it because either the agency is purchased with financing (which means there will be debt that has to be serviced) or with cash (which means the investor(s) will have a return on investment requirement). Particularly if you are selling an agency as a going concern, then the existing expense structure can have a significant impact on the value.
The profitability of an agency is strongly dependent on the operating model and market segment it serves. Generally speaking, an agency with a strong sales force, such as many commercial lines P&C and benefits brokerages, will have pro forma earnings of 30 to 40 percent of revenue. Agencies with more marketing-driven sales, such as personal lines and specialized P&C agencies, will often have a profitability that is 10 percent higher than the former. There are very few industries where the profitability of like-sized businesses can vary so significantly as in the insurance industry. Therefore, cost control is critically important leading up to a sale.
The National Alliance Research Academy produces a Growth and Performance Standards (The National Alliance Research Academy, 2010) report which is compiled from financial information obtained from agencies across the country. The report details income and expense averages for agencies falling under various categories. Comparing your agency’s financial metrics against a blended average is not the best method for determining the right financial model for your agency, but it is a start. Preferably, you should hire an outside party experienced in agency valuations and sales to conduct an analysis and offer feedback on ways to improve profitability and market value.
Learn more from Michael Mensch at an upcoming webinar: