Following these “10 Commandments” can save you time, money, and hassles.
If you're 50 or over and don't have a person in the agency with sufficient financial resources to succeed you, your most realistic strategy is likely to be an external sale. You need at least five years to qualify a potential successor, and if the first buyer doesn't work out, there's no time left.
For the deal to be financially viable, the successor(s) should be able to pay at least 20% of the purchase price as a down payment, without using agency assets as collateral. You, as the seller, will finance the remaining 80% and will want the assets as collateral.
If the internal person you have in mind to succeed you doesn't have that kind of money, don't kid yourself about selling the agency internally. The closer you get to retiring, the less willing you will be to accept your payments from agency cash flow alone. A second consideration is the skills that will be lost when you or other key owners leave. If sales skills are being lost and the successor's skills are primarily administrative, you have another reason to consider an external sale. Your future payments will depend largely on the continued sales power of the agency, especially if there is an earn-out element in your payment arrangements. Only agencies with strong sales cultures will be successful in the future. Realistically assess the agency's sales power without you.
Once you get a realistic overview of the sale's advantages and defects, you can begin to make the moves that will maximize the value of the agency.
The lack of qualified internal candidates for perpetuation is only one reason to consider an external sale. If you decide to take this route, here are a few rules that may help you begin the process:
RULE 1. There are more buyers than sellers, but not all have sufficient financial resources. Some are true to their word and others aren't. Hire a consultant to help. Consultants act much like a bonding company, sifting out non-qualified buyers so you won't waste your time. Their experience and objectivity will save you time and money, usually saving you more (including legal fees) than you pay them. While they're helping you on the sale side, keep doing what you do best to maintain agency value.
RULE 2. Don't ask more for your agency than it's worth. Only deals that are fair on both sides work. You can't make the agency worth what you need for retirement; it's worth what it's worth! In most parts of the country, the commission multiples of the past aren't appropriate in today's tough market. The larger your agency, the more sophisticated the buyers, and they will make a careful analysis of what cash flows to expect. In most cases, they expect to cash flow the price in five to seven years.
RULE 3. Before you start the sale process, make sure your agency is in top condition. Compare yourself to your peers now; there's useful comparative data available from many sources. Don't wait until the year you want to sell. If you're overstaffed, skinny down now; if you aren't using transactional filing throughout, get it done now. In other words, do a self-assessment and make the necessary changes as soon as possible.
RULE 4. Spend a lot of time understanding your balance sheet. Buyers- public brokers and private purchases alike-expect and usually demand approximately 60 days' worth of expenses in Tangible Net Worth (TNW) as part of the sale terms. If you don't have 60 days' worth, start leaving profits in the business. Calculate it this way: Assets minus Intangibles (goodwill, expirations, and covenants) minus Liabilities equals Tangible Net Worth. Remember to add in off-balance-sheet liabilities, too! These include deferred compensation or covenant payments to former owners or acquisitions that are not carried on your balance sheet. Use only the principal value of such obligations, if any. If you owe the agency money, start paying it off regularly. Once you get the debt to zero, keep it there.
RULE 5. Clean up your receivables and invest the money collected. Adopt a regular program to charge off doubtful accounts. Be aggressive with collections; buyers pay more for agencies with clean balance sheets. Use finance agreements whenever possible. Change expiration dates on accounts that experience cash-flow problems at particular times of the year. Pay attention to the small things; you've already taken care of the big ones.
RULE 6. Make sure your producers have employment agreements. It's not as easy to get the terms you want if your producers have no agreements. Have your lawyer make sure the agreements are enforceable if they have been drawn up well after the producer was hired, and make sure they are assignable to a new buyer.
RULE 7. Demand and expect good collateral for any future installments. Agency assets alone are not enough. The buyer's corporate and personal guarantees are a minimum. It's good to have other collateral, which is usually available if you are an attractive purchase.
RULE 8. Expect and be prepared to sign or warrant your accounts receivable, unknown liabilities, and a covenant not to compete. A sale is definitely a two-way street, with promises on both sides.
RULE 9. Establish a realistic time frame for the sale, and expect to reveal everything to the buyer. Don't withhold the bad news; let your consultant know if the agency has a problem. Allow plenty of time; it will take longer than you think. Don't become anxious. If you have confidence, let your consultant control the process. Participate rather than dictate.
RULE 10. Ask to be informed each step of the way. Make sure you understand the tax ramifications of sale proceeds. Don't bring your attorney in until you have agreement on the business issues first. Buyers generally draw the agreements, but you will spend just as much time reviewing their language and negotiating terms. Expect ups and downs, but above all, keep a sense of humor; it will help you over the rough spots.