HOW TO BUY, SELL, MERGE OR PERPETUATE AN AGENCY
by Larry Morrison and Gary Jacobson
A Comprehensive Look at the Best Ways to Handle the Biggest Events in the Life of Your Agency
Editor’s note: This is the first installment in a series covering buy/sell arrangements for any agency, valuation and tax issues, shareholder internal buy/sell agreements, related estate planning, employment contracts and non-competes. It’s part of a unique pre-publication book by the authors that gives you a practical street-level understanding of the biggest financial events in the life of your agency.
Because many agency owners are buyers, and every agency is eventually sold or shut down, this unique book is essential for anyone who owns, plans to buy, or will eventually sell an insurance agency.
You’ll learn better ways to buy, sell, merge or, perpetuate an agency internally from a team of experts responsible for hundreds of successful agency transactions. You don’t need to be a technical expert to buy or sell an agency, but you do need to know enough to guide your attorney and C.P.A. This will teach you how.
In addition to the essential foundation on buy/sell arrangements, this material covers related estate planning, valuation and tax issues, shareholder buy/sell agreements, employment contracts and non-competes – all as essential parts of a comprehensive package of agency documentation.
CHAPTER 1, PART 1 - INTRODUCTION/GETTING READY
Overview
Eventually, every agency is sold, passed on, or shut down ... you don’t get to not do this!
The purpose of these articles is to help sellers plan and execute a successful internal or external succession/transition of their agency, and to help buyers find and successfully buy worthwhile agencies. Although we cover practical “street level” nuts and bolts about how to do this, we do not presume to make you a legal or tax expert. You’ll still need an attorney and C.P.A. for the technical details, but you’ll know how to spot key issues and the major options available to you. Unless your CPA and attorney are specialists in agency ownership issues, you might even end up knowing more about the “big picture” than they do. This should translate into a major advantage when the time comes for you to “get ‘err done”.
We provide details later in the book. However, here’s an overview.
Sellers
If you aren’t really a willing seller, with realistic price and terms expectations, then you’re probably just wasting your time. Know what your agency is realistically worth. Some agencies are worth two times annual revenues for example, but that might or might not mean yours is. Is your agency for sale, but only if you can get more than it’s worth?
Know your tax situation, and what to do if you’re sitting on a potential tax disaster. For instance, if your agency is a “C” corporation (or has been in the past), then the wrong sale structure means some sellers will owe the IRS more than half of the total sales price of their agency! Do you know if you have this problem? If so, do you know how to “fix” it?
What about payment terms? They affect both taxes and risk for buyer and seller alike. The buyer can afford to pay more if the risk is lower, or the tax effects are better. Ultimately, the “Price” is not the “Price” – terms are crucial. What counts is the after-tax cash-in-pocket you get to KEEP after you leave!
Perhaps most important: Be prepared emotionally. This agency is your baby – are you really ready to part with it?
Protect what you’re selling contractually. Might some or all of your producers or CSRs depart and take key accounts with them after you sell? Can you really expect to sell an agency that might lose large blocks of its business in this manner?
Make it easier for successors to preserve what you’re selling. Customer retention post-sale is crucial. How can you help the buyer keep what you just sold?
Make the buying decision easy for your successors. Start by preparing a short summary of your agency
First, be able to answer three questions:
- Who are your best buyers (make a list of top prospects)?
- Why would they want to buy your agency?
- Why now? If your agency is so wonderful, why is it for sale?
Create defensible pro-forma cash flow spreadsheets that show the true benefits of ownership you have received in the past.
- If you receive benefits of ownership other than profits and salary, make it easy for potential buyers to see that. Provide explanations for all the adjustments you need to make.
- You might sometimes see this referred to as “free cash flow”, “available cash flow”, or “EBITDA” (Earnings before Interest, Taxes, Depreciation and Amortization). Regardless of the terminology, the objective is to determine the true financial benefits of ownership.
If you’re selling more than just customer accounts, create a pro-forma balance sheet as well.
Know how much business you do with your top customers, and how you’re going to ensure that they stay with the agency after you leave.
Know your carriers and how they’re likely to react when you retire.
Have all of these answers in advance, with most of them written – perhaps even prepare a presentation binder.
Put your best foot forward, but don’t misrepresent and don’t predict the future. You don’t know how the buyer will do, and you don’t want to do anything that “predicts” results. Doing so can be grounds for rescission of the entire deal if things don’t work out for your successor.
Have abbreviated material ready to discuss and/or show, and be ready to provide more detailed information as soon as both parties express mutual interest and sign a confidentiality agreement.
This will probably be the biggest sale of your life – you owe it to yourself to be ready.
What about “Price”? “Price” deserves special attention, partly because it’s often a highly emotional issue. “Price” can be much more than just money to a seller. It can even be a subconscious measure of how this person values their life’s work.
One way to keep things in perspective is to keep in mind that the sale has to make financial sense to the buyer, or you won’t have a sale at all. The deal has to “pencil out”.
What about payment terms? Terms are crucial in determining how a sale will “pencil out”. In fact, terms are often more important than price. In addition to a major impact on annual cash flow, terms affect both risk and taxes for both sides.
Win/Win Negotiations: The chances are you don’t have to sell, at least to one specific buyer. Likewise, the buyer probably doesn’t have to buy your particular agency. That means the sale is likely to fall apart as soon as either party perceives the sale to be a “lose”. Terms are often the key to a “win/win” result. Creative terms can even be a “win/win/lose”. (The “loser” being the IRS.)
Larry Morrison, CLU, ChFC, is president of the Business Transition Network (Arlington, WA), a firm specializing in agency evaluation, purchase, mergers, and business succession planning. You can reach him at (866) 475-9992 (toll free); or e-mail: [email protected].
Gary E. Jacobson, JD, a partner at Vander Wel, Jacobson, Bishop & Kim, PLLC ( Bellevue, WA), offers expertise in the legal aspects of agency evaluation, purchase, mergers, and business succession planning. You can reach him at (866) 498-0008, toll-free; e-mail: [email protected]; or visit www.vjbm.com.