Selling an Insurance Agency Financing for insurance professionals a complimentary whitepaper for agents and brokers How to get the right price from the right buyer As a wave of consolidation readies itself to sweep the insurance agency business, more and more agency owners are hoping to ride the wave to financial advantage by selling their businesses. Selling your agency is an obvious solution if you are planning to retire or want to start a new venture. It may also be an attractive choice if you are in your 50s or 60s and are thinking ahead to retirement, but do not want to end your career abruptly. For those owners who have been holding off until the next hard market, get the agency ready now. Selling your agency now could allow you to negotiate a deal that lets you wind down slowly over the next five to 10 years in a management capacity. You may be able to continue to enjoy serving clients and selling policies, while freeing yourself from worry about ownership obligations. In other words, selling isn t solely a retirement strategy. You may want to consider selling if: You want to scale back the time you spend on the business You re unable to risk personal capital or generate the capital required to take your business to the next level You want the advantages of being part of a larger company, such as greater management depth, more advanced technology or better financing You want to provide your management the opportunity to take the agency to the next level If you don t intend to retain a management role after the sale, you ll want to be sure of leaving your employees and customers in good hands. In short, the objective of a good sale is not just to get a fair price, but to find a buyer who will be a good fit. Once you decide to go ahead, you may feel some urgency since today s favorable capital gains rates expire in 2012. You re not the only one with this concern. Many owners are putting up their agencies for sale after waiting out the recession and soft market. How can you best position and sell your business? Give yourself plenty of time The reality is that if you want to sell your agency in the next 12 months and are just getting started, you re already behind schedule. For optimum results, preparing an agency for sale should begin at least 2-3 years before you put it on the market. During this time, you need to devote special attention to these potential selling advantages 1 : Continuing or developing upward sales and profit trends Keeping clean, accurate financial records Maintaining organized files and corporate governance Minimizing major changes Making sure your agency and its assets are free of liens or other encumbrances This is also the time to begin assembling a support team of advisors with experience in mergers and acquisitions, such as a business attorney, tax consultant and CPA, who can guide you in developing your sale strategy and advise you throughout the process. Some prospective sellers include a business broker on their team. An experienced broker specializing in agency sales and purchases www.oakstreetfunding.com
Selling your agency now could allow you to negotiate a deal that lets you wind down slowly over the next five to 10 years in a management capacity. can save time and hassle during the selling process, but it pays to do your homework before signing up with someone. To find a professional who provides quality service, you might consider seeking referrals from colleagues who have used brokers in buying or selling an agency. Be sure you choose a broker accustomed to working with agencies of a similar size, or you may receive limited attention. It s also best to work with a broker who specializes in insurance agencies and understands how to determine their value and may already have a network of potential acquirers. A year or two before you intend to sell, you should start developing your selling strategy. Selling Strategy part 1: assess your strengths and weaknesses For example, do you have state-of-the-art technology? Strong producers under contract? Great carrier relationships? Exceptional customer service? An excellent reputation? What issues need to be resolved? Now is not the time to let your guard down! Selling Strategy Part 2: Develop a financial platform. There are three parts to this all-important process. 1. Estimate the fair market value of your business. Most agencies are sold at a price driven by projected earnings, risk and availability of financing, according to Michael Mensch of Agency Brokerage Consultants. 2 Earnings: This first and most important factor is actually earnings before interest, taxes, depreciation and amortization (EBITDA). To calculate your agency s adjusted EBITDA: Add together net profit, interest on debt, income tax paid, depreciation and amortization, non-recurring expenses and your salary and benefits Then adjust for projected expenses such as rent, employee compensation and the cost of replacing you as manager The average small agency may sell for four to five times its adjusted EBITDA. 3 Risk: Be prepared for prospective buyers to scrutinize your financials in order to assess this second determinant of agency value. Some common risk factors: Declining revenue or earnings Revenue concentrated in a few carriers, producers, or accounts Revenue concentrated with non-rated carriers or substandard markets Low account retention or renewal commission base Employee issues High loss ratios Poor recordkeeping Financing: In a marketplace where credit continues to be tight, you should be ready to steer a buyer to ample third-party financing. As Mensch observes: In any business sale, third-party financing makes a deal more attractive to both parties. Without lenders, you may be forced to accept a lower price or hold a larger note to sell your agency. Financing also opens up the sale to a larger pool of prospective buyers, which is essential for competitive bidding. Typically, the more money that can be borrowed to finance 866-625-3863 www.oakstreetfunding.com 2
an acquisition, the more likely it is that you will obtain the best price and terms for your agency. 4 2. Analyze your firm s comparative profitability and performance You ll use this information to develop a confidential summary for prospective buyers. Joseph Totah, a former agency principal who now heads AgencyEquity.com, suggests 5 that this summary should include: Reports by client and by carrier on the book of business Average policy count per household Average premium per policy Breakdown by line of business Location of accounts Accounts by premium size and by revenue size Largest clients Supporting documentation from carriers such as loss ratio reports, commission statements and schedules A slowdown in revenues because of the recession may be a concern. But as Dave Evans, vice president of retirement and financial planning for the Independent Insurance Agents & Brokers of America Inc., pointed out in a 2008 article 6 : The reality is, everyone understands at the end of the day that the major asset of an agency is the goodwill of the agency. Buyers are looking at factors like how automated is the agency, what is the agency management system and do they have contracts with producers. When you look at all these different kinds of metrics, in any given year, there is probably reasonable value given. You will also need to provide pro forma financials, which project future revenue and profitability. Be sure these numbers don t include one-time (non-recurring) transactions. 3. Determine the most advantageous sale structure. You ll want to consult your estate attorney, CPA, business broker and/or tax advisor to determine which of these structures would be the best fit for your objectives and tax situation: In a leveraged buyout, a buyer acquires a controlling interest in your agency s stock and finances most of the purchase price with a loan. The assets of your agency are used as collateral for the loan (sometimes along with assets of the buyer). In an earn-out, a buyer typically pays 60 to 80 percent of the purchase price upfront, with the remaining 20 to 40 percent paid out over time as your agency achieves certain levels of revenue or profitability. This method is often used to bridge a gap between the seller s and buyer s assessments of a firm s value. In a seller-assisted sale, the buyer makes a sizable initial payment and gives you a note to cover the rest. You can choose to receive the buyer s regular payments on the note, or resell it to a company that specializes in note purchases. 866-625-3863 www.oakstreetfunding.com 3
Successful agency owners follow processes that allow them to understand and meet client needs. Seeking a buyer Do you know a family member, employee or business contact interested in the agency? If so, don t exclude this potential buyer because of a lack of cash or less-than-perfect credit. Newer forms of financing may allow a mutually advantageous deal to be struck. A qualified business broker can generate interest for you, pursue leads and help negotiate the best deal. If you re working on your own, Oak Street Funding s Agency Exchange (www.osfagencyexchange.com) is a free resource you should consider. Sponsored by Oak Street Funding, this online marketplace allows you to list your business for sale and potentially allows you to connect with thousands of motivated buyers. Key advantages: It s a quick, easy and FREE way to get your listing out to potential buyers. Oak Street marketing and exposure of the Agency Exchange website provide benefit by increasing the number of agents who might see your listing. Agency Exchange traffic is estimated to consist of five times as many buyers as sellers. This exposure could produce multiple inquiries or offers for your agency. With an extensive network of knowledge in leveraged buyouts, earn-outs and seller-assisted sales, Oak Street can not only help you find a buyer for your agency, but also help refer you to advisors who can help at no cost to you. Negotiating a price Negotiate the purchase price based on several factors, including multiples of revenue and EBITDA. Also determine whether it should be a stock buy or an asset buy (more common with acquisitions of smaller agencies). Typically, a preliminary price will be agreed upon subject to due diligence. Doing due diligence When an acquisition falls apart, it s often because one or both parties don t do enough (or the right kind of) due diligence. Once you identify a buyer who meets your criteria, these tasks should be part of your homework: Compare the prospective buyer s goals for the agency with your goals. Review your goals for selling and see if the buyer can meet them. For example, if you re counting on the buyer s capital to upgrade technology, hire more support staff or fund a new marketing campaign, be sure the buyer is willing to invest in the agency s future. Determine the buyer s financial stability. Ask for full disclosure of financials, how the money will need to be raised (including the lending source) and how the transaction will be closed. Be sure there s proof of funds to support the buyer s ability to pay. Make sure a commitment letter from a reputable lender is signed so the deal will go through with no surprises. Clarify management structure. as an agency principal accustomed to your own management style, you need to be comfortable with the buyer s way of running the shop. This is important for you, especially in an earn-out structure, and for the employees who have worked alongside you for years. 866-625-3863 www.oakstreetfunding.com 4
Don t hesitate to call off discussions early if things don t feel right. Among the biggest reasons why negotiations fall through are a lack of cultural fit and a bidding war possibility, according to a Pennsylvania agency buyer who talked with close to 30 possible acquisition targets in 10 years before acquiring 11 of them. 7 Arranging financing If discussions between you and a prospective buyer are promising, the next big hurdle may be finding a source of financing for the purchase. The obvious place to turn for a commercial loan is a bank, but the vast majority of banks don t understand the cash flow embedded in your in-force book of business and aren t willing to lend against it. To make matters worse, the liquidity crunch in the financial markets has caused banks to raise their credit standards to levels that shut out prospective borrowers without a high FICO score. Crowdfunding, microlending and peer-to-peer lending are the newest borrowing options, but a prospective agency buyer is likely to be frustrated by low lending limits, relatively steep interest rates and high failure-to-fund levels. Fortunately, there s another alternative: a commercial finance company that can facilitate the sale by requiring relatively little or no out-of-pocket cash. Oak Street Funding recognizes the value of an agency s best asset: renewal commissions. Capitalize on what you ve built Whether you step away completely or stay connected as a consultant and/or landlord, you may have the satisfaction of enabling your staff to have more career opportunities or younger family members to carry on the business. Oak Street Funding is ready to help create opportunities with capital to help your agency stand out from others on the market. With Oak Street Funding s Agency Exchange and specialized financing, Oak Street can speed up the selling process to provide you the financial rewards you ve earned. For assistance in selling your agency, visit www.osfagencyexchange. com. 866-625-3863 www.oakstreetfunding.com 5
Negotiate the purchase price based on several factors, including multiples of revenue and EBITDA. About Oak Street Funding Since 2003, financial services professionals have benefited from hundreds of millions of dollars in loans from Oak Street Funding, a direct, non-sba lender that understands their business model and appreciates their most valuable assets even though they are intangible. Our strong financing expertise, innovative technology, proprietary actuarial models and experienced niche-lending team align to develop new products to meet the growing demand for CPA financing. To learn more, call 844-343-1417 or visit oakstreetfunding.com/cpa_valuation. The materials in this paper are for informational purposes only. They are not offered as and do not constitute an offer for a loan, professional or legal advice or legal opinion and should not be used as a substitute for obtaining professional or legal advice. The use of this paper, including sending an email, voice mail or any other communication to Oak Street, does not create a relationship of any kind between you and Oak Street. Loans and lines of credit subject to approval. Rate may vary at any time. Potential borrowers are responsible for their own due diligence on acquisitions. CA residents: Loans made pursuant to a Department of Corporations California Finance Lenders License (#6039829). 1 Kathryn Christ, Preparing your agency for sale, 3/1/11 (www.oakstreetfunding.com/ Article. aspx?articleid=17&categoryid=2) 2 Michael Mensch, Preparing for selling an insurance agency, undated (www. agencyequity.com/ preparing_selling_insurance_agency), downloaded 6/8/11 3 Michael Mensch, How to maximize the sale of your agency, 9/17/10 (www. oakstreetfunding.com/article. aspx?articleid=11&categoryid=2) 4 Ibid. 5 Joseph Totah, Key Statistics to include in your agency prospectus, 1/25/2011 (www. oakstreetfunding.com/article.aspx?articleid=13&categoryid=4) 6 Keith L. Martin, Agency Values, Part 1: Insurance agency owners battle selling versus staying, Insurance &Financial Advisor (IFAwebnews.com), posted 3/2/08 7 Keith L. Martin, Agency Values, Part II: Efficiency trumps the economy in selling agency, experts say, Insurance & Financial Advisor (IFAwebnews.com), posted 4/6/09 866-625-3863 www.oakstreetfunding.com 6