Use these guidelines to increase your agency’s value and get the best price when it comes time to sell.
Even if you have no immediate thoughts of selling, it’s reassuring to know that there’s a strong market for your business and analyzing what’s in most cases a significant component of your net worth. Besides, everybody’s curious about what their agency could sell for.
However, the fact that this is a seller’s market, with agencies in strong demand doesn’t mean that you can realize the value you set on your agency. Buyers have learned from their mistakes and become more sophisticated in calculating agency values and determining their offering price. Although prices paid for agencies can be translated into simple multiples of revenues, agencies aren’t valued in this way. The key is to understand the “drivers of value” and to be prepared to present and position your agency using these drivers when the right opportunity comes along.
Understanding these critical drivers and being prepared to present your agency will enable you to both recognize the “right” opportunity when it does come along and keep you from operating under fire drill conditions when you respond to this opening. Missteps due to lack of preparation might create the perception that you lack a good grasp of your business. This will cost you in terms of value and price. More important, proper preparation will enable you to feel in control and evaluate the sale of your agency in a logical, rather than an emotional, fashion. Being prepared will also enable you to move quickly if your personal circumstances change; for example, due to an untimely death or disability of an owner that forces you to sell your agency.
MAINTAIN ORGANIZED FINANCIAL STATEMENTS
The first item a potential buyer will want to see when valuing an agency is financial information, including income statements, balance sheets, and tax returns. Buyers will look at top-line growth and its composition, as well as bottom-line performance and the ability to manage expenses. They’ll probably want to see a five-year history, as well as year-to-date performance and a current balance sheet. Whether the financial statements are printed from your internal accounting/management software or compiled or reviewed by a certified public accountant, they should be organized and contain enough detail to enable a buyer to understand your business.
It’s usually worth the expense to have a CPA prepare a compilation or review your financials and state them in a uniform format on an annual basis for easy presentation to a potential buyer. A “review” is a step above a compilation that involves the CPA analyzing the procedures used to prepare the financials, providing an additional level of comfort to the potential buyer. Use your agency management system to produce any additional reports requested, such as producer statements, carrier production, or account information. These systems can also track budgets, historical financial performance, and productivity ratios. Ultimately, your ability to present organized and detailed financials speaks highly for your agency and makes for a more efficient evaluation.
ANALYSE YOUR FINANCIAL STATEMENTS AND TRACK PRO-FORMA ITEMS
Understand and be prepared to discuss specific items on your income statement and balance sheet. Your inability to answer specific questions reflects on your managerial capabilities. It also raises suspicions if you don’t know how specific expenses, revenues, assets, or liabilities are classified. For example, you should be able to explain when income is recognized, how receivables and payables are tracked, etc. You’ll also need to differentiate between employment compensation and ownership compensation and identify all one-time, non-recurring, or unnecessary expenses. These items are critical to enabling a prospective buyer to construct a pro forma income statement that eliminates or adjusts them. Because going back beyond one year to reconstruct these expense items is extremely difficult, maintaining an annual schedule of expenses will help you provide an accurate history to potential buyers.
UNDERSTAND THE VALUE OF YOUR AGENCY
Agency acquisitions are often valued as multiples of revenues. In reality, when dealing with sophisticated buyers, the revenue multiple states the price based on the valuation of sustainable earnings. In most cases, buyers’ evaluations are far more elaborate and include such fundamental criteria as lines of business, growth rates, profitability, productivity, pro-forma and projected operating income, financial position, cash management, quality of customer base and markets, geographic location, and a variety of other factors. Understanding how these components come together to create your agency’s value proposition will help you focus on additional steps to maximize agency value.
One way to do this is to obtain an independent valuation. An effective valuation will give you a reliable approximation of your agency’s value, spotlight positive and negative attributes of the business that impact this value, and provide recommendations to improve current operations.
CLARIFY OWNERSHIP AND UPDATE PRODUCER AGREEMENTS
Owners are often surprised to find that buyers won’t attribute full value to non-owner producer books-of-business without clear non-compete and non-piracy agreements. This is because the potential buyer has less certainty that the producer(s) will maintain their accounts with the agency. After all, it’s the producers who have the relationships with the customers. By reviewing your arrangements with producers and putting agreements in place before there’s a deal in progress, you can avoid being “held up” by a producer, strengthen the ownership of your book, and increase the value of your agency.
Before changing producer agreements, keep two points in mind. First, unless you provide adequate consideration in exchange for the producers accepting the revised agreement it won’t hold up in court. Second, tie the consideration explicitly to the change when feasible; i.e., modify the producer agreement to state that monetary and/or punitive damages will be payable if the producer pirates business. In return, the producer will receive commission points on all renewals for the period of the non-complete agreement.
TRACK AND DEMONSTRATE GROWTH AND RETENTION
The ability to track and demonstrate agency growth and retention forms an important component of preparation. Being able to demonstrate a healthy growth rate, as well as a strong history of account retention, can have a significant impact on maximizing your agency’s value because it gives the buyer confidence that the business can continue to produce good growth and retain accounts. Robust organic growth can demonstrate that your agency has a strong sales mentality and cross-selling capabilities. Strong growth in a soft market also showcases the agency’s ability to adapt to marketplace changes and makes a positive statement about sales management. Similarly, strong account retention across all lines highlights strong client relationships with producers, quality service from your account managers, and good service management.
Proper use of your agency management system is critical in providing this information. You’ll need to differentiate between true new business revenue and revenue from upgrading or rate increases. Track new business production by producer, producer renewal books per year, retention of key large accounts by line, and overall retention of small accounts and new business. Since the information in your reports is only as good as the data in your system, you’ll need effective standards for inputting and updating information.
PREPARE A PRESENTATION ON YOUR AGENCY
When the Business Management Group assists in the sale of an agency, we prepare a presentation on the business to send to prospective buyers. Surprisingly, we usually have to create these presentations from scratch. As a result, we’re trying to pull together many years of highlights at once, rather than having something to build on. Although we sometimes work with customer presentations, these have been prepared for a different purpose and don’t target agency buyers.
We’d recommend that the principals sit down and prepare a presentation on your agency, highlighting the key aspects. This will help you focus on the agency’s strengths and weaknesses. Develop and refine the presentation over time so you’ll have it ready to give to potential buyers.
THE BOTTOM LINE
Preparation is essential to maximizing the value of your agency. There’s no predicting the right time to sell to the right buyer. However, positioning your strengths appropriately with potential buyers, having a firm grasp on your financials, and solidifying ownership of your book of business will help you maximize your agency’s value when the right opportunity arrives. These guidelines should help broaden your perspective on how your business is doing and pinpoint areas for improvement that can benefit your bottom line in the near term, as well as boost your agency’s value in a sale.