Common Mistakes The following are common mistakes agency owners
make when managing their agency business. 12
Mistake 1: Neglecting to protect the book of business The value of an agency is intrinsically tied to the customer book of business which is most often managed by the staff and producers. At the time of hire, every person working in the agency should sign a “non-competition agreement” that includes non-disclosure and non-piracy clauses to protect the confidentiality of agency records, customers and operating strategies. The agreement should also include a non-solicitation clause to protect customer, vender and other employee relationships. Some states will allow for a true non-compete agreement where the employee or producer can be inhibited from seeking work for a specified period of time. Because all states do not, you should seek the advice of an attorney that is knowledgeable of your state’s trade and commerce laws and restrictions before executing any agreements.
Mistake 2: Failing to address structural problems Every agency has issues and the diversity of issues can be quite broad. The agency may have too much revenue concentrated with a carrier/producer/client. It may be over-staffed or the staff may be compensated above a market rate. It may lack new business leads or the markets to write the business it’s getting. Nearly all agency owners know the problems that exist in their business; they are just unsure of how to either resolve them prior to the sale or address them during the sale. They make the mistake of assuming that a buyer will pay top dollar for the agency and then have to fix the problems. The best strategy is to tackle the problems and attempt to reduce associated risks before selling.
Mistake 3: Signing long term obligations While you certainly want to ensure the business continues to run without interruption, locking into a multi-year contract for office space, equipment or advertising can end up having a costly, adverse effect on the value of the agency to a strategic acquirer. A strategic acquirer is typically the most probable buyer because they usually have the credit, experience and
collateral to obtain financing and gain marketing, operating, revenue and profit synergies not available to non-strategic acquirers.
Mistake 4: Taking your eye off the ball The agency is not sold until the money is in your bank account. Often times an agency owner will slow down towards the end of their career, especially once they start the sale process. The trailing 12 months up through closing is the most important period. As a result, it is critical to continue business operations and marketing efforts up through the very last day.
Mistake 5: Assuming the selling process is simple When you do get ready to sell, the best result requires a structured, confidential process. A number of our former clients attempted to sell their agency before contacting us. The worst story was of a would-be buyer that contacted an owner to solicit interest in a sale and then proceeded to continually harass the agency’s employees – which was the case for more than one client. The buyers need to execute non-disclosure agreements and be screened financially which is best handled by a third party. Multiple potential acquirers should be disclosed simultaneously, educated on the agency and encouraged to present offers so that you obtain a true “market value”. Your professional advisory team should include an intermediary, business attorney and tax accountant that are familiar with insurance agency buy/sell agreements and the sale process.
For most agency principals, the agency is their most valuable asset. Understanding the value drivers and market conditions and using them to develop and execute a sale plan will greatly enhance the owner’s return on the agency asset.
ABOUT THE AUTHOR
Michael Mensch is a Certified Business Intermediary with Agency Brokerage Consultants, a company that specializes in the valuation and sale of insurance agencies. For more information, see www.agencybrokerageconsultants.com or call (321) 255-1309.