| 1. Conclude that selling your business is the right | | | | Examples of intangibles that may create value are |
| step to take. | | | | the professional credentials or industry presence |
| Selling a business is one of the greatest challenges | | | | of the agency owner(s). If a buyer is looking to |
| and potentially, one of the greatest rewards any | | | | create a platform or to have the buyers business |
| business owner will ever realize. Like marriage, | | | | play a key role in their operating scheme, the |
| career changes, and other major endeavors, it is | | | | intangible value of a mature, well respected, |
| not something that should be taken lightly. Serious | | | | management team is an intangible that will receive |
| contemplation of the risk vs. reward must be well | | | | higher consideration. |
| thought out. | | | | 6. Evaluate all aspects of the offer in detail. |
| If there are business partners, their concurrence | | | | If you elect to subscribe to the recommendations |
| and support are, no doubt, essential. If you have | | | | set forth thus far, the next step is to send the |
| family members directly involved in the business, | | | | offering memorandum out to prospective buyers. |
| their welfare and ongoing contributions must also | | | | Generally, buyers will need to perform preliminary |
| be evaluated and taken into account. Selling your | | | | due diligence prior to formally presenting an offer. |
| agency is certainly a decision that requires careful | | | | This will occur after receipt of the offering |
| deliberation and potentially, collaboration among | | | | memorandum and prior to the offer. Offers |
| close associates, family members, and partners. | | | | generally are presented in a non-binding letter of |
| One of the biggest questions that you will face is | | | | intent (LOI) and are generally time sensitive |
| whether the time to do so is right. Many | | | | requiring the agency owner's acknowledgment and |
| dynamics dictate whether the timing is | | | | acceptance of the offer in writing. The best way |
| appropriate. Generally, the goal is to sell when the | | | | to characterize this stage is to compare it to |
| business is peaking on its trend of revenues and | | | | getting engaged. There is intent for the two |
| earnings. The old adage of selling high certainly | | | | businesses to formally proceed, but either party |
| applies here. Another adage to remember is that | | | | can terminate it at any time prior to closing. A |
| pigs get fed and hogs get slaughtered. The trick, | | | | LOI is always contingent upon the buyer's |
| more often than not, is staying ahead of the | | | | satisfactory completion of legal and financial due |
| market curve, timing everything just right so that | | | | diligence. Is the LOI negotiable? Absolutely. Again, |
| you can sell out just at the peak of the trend. | | | | the value of a business advisor can be enormous |
| Selling a business usually takes between four and | | | | during this phase. They can draw upon their |
| twelve months, assuming everything falls into | | | | experiences and recommend items which should |
| place. The risk to the agency owner, quite frankly, | | | | be negotiated. There are numerous components |
| is that the acquiring entities are so tuned into | | | | included in a LOI that go well beyond the price |
| industry trends that by the time the market | | | | offered for the sale of your agency. All of these |
| begins signaling price compression, the acquirers | | | | components are critical and need to be carefully |
| are packing their bags, or at the very least, | | | | evaluated. Some examples are the long-term |
| lowering their multiples. The valuation | | | | value of stock options, employment agreements, |
| methodologies run concurrently with demand. If | | | | non-compete covenants, deferred purchase |
| product demand or rate of return on revenue | | | | consideration, hold-back provisions, base |
| declines through market softening, the value of | | | | compensation and benefits, contingent bonuses or |
| the distribution channel certainly will decline by | | | | performance incentives, and the tax treatment of |
| relative proportions. | | | | the transaction. Examine how deep the acquiring |
| Sometimes the sale of a business is used as a | | | | entity goes in your business to make offers of |
| succession-planning vehicle where the owner can | | | | incentives, employment agreements, stock |
| easily liquidate his ownership interests in the | | | | options, etc. It is important that you evaluate |
| business without disrupting the ongoing viability of | | | | these matters carefully. Remember the |
| the operations. This requires a careful fit between | | | | importance of your key people in the day-to-day |
| the buyer and the existing business. Most often, | | | | operations of the business and be mindful of how |
| timing and market conditions are not as | | | | their continued contributions are key to your |
| important; rather, it is up to the owner's discretion | | | | ongoing success. |
| as to whether it is right. | | | | A business advisor can guide you through the |
| Often, agency owners face limited growth | | | | technical aspects of the proposed offer(s). Often, |
| opportunities for their business due to the lack of | | | | a key-determining factor behind selecting to sell to |
| capital. The desire to grow bigger is there but the | | | | a specific buyer is the reputation of the |
| capital is tied up in the business. By selling the | | | | organization in the market. Take not only the |
| agency interests to a larger, national company, | | | | economic elements of the offer into consideration, |
| this can release the liquidity from the company | | | | but give considerable weight to the reputation of |
| and allow the business owner to continue to | | | | the buyer. |
| manage it as a platform. Often times this | | | | 7. Negotiate! |
| represents a new opportunity for entrepreneurs | | | | If you have made your decision and are about to |
| to flourish. Being part of a larger organization | | | | sign the LOI, do so without any material |
| brings new challenges; a change of business | | | | concessions. An advisor can help you negotiate |
| objective, and handsome rewards should the | | | | for higher consideration such as splitting synergy, |
| entrepreneur make a marked change in his new | | | | which is the revenue or expense benefit gained |
| employer's company. | | | | by the buyer through the combination of the two |
| All this being said, market conditions, personal and | | | | businesses. Do not be afraid to counter-propose. |
| financial objectives all have to be carefully | | | | It is extremely important to remove any |
| evaluated prior to making the commitment to sell. | | | | obstacles from an impending transaction before |
| 2. Consult with a business advisor and M & A | | | | the commencement of legal and financial due |
| lawyer. | | | | diligence. If there are any issues that make you |
| This can be an important, often overlooked, | | | | uncomfortable, raise them now. This will save you |
| consideration. Once you are determined to sell | | | | time and money in the long run. Whether the |
| your business, it may be worthwhile to should | | | | concern is your compensation, consideration, or |
| seek the guidance of a business advisor and an | | | | transaction structure, these issues really must be |
| attorney who is specializes in mergers and | | | | addressed and presented in a revised LOI. Don't |
| acquisitions. Many times, business owners depend | | | | be afraid of the buyer closing down the deal. |
| on their local CPA and corporate attorneys. While | | | | Rarely will a buyer walk if you are within a 10 |
| these people are highly important and may have | | | | percent tolerance on offering price. They have |
| created value for the organization in the past, it | | | | opportunity cost tied up in you and do not want |
| may be better to have experienced specialists | | | | to lose the deal. |
| who can navigate through the acquisition process. | | | | 8. Get your house in order. |
| The acquisition process encompasses many | | | | Be prepared for a convergence on your internal |
| components and requires the understanding of | | | | business operations. While the next steps of a |
| the sequential events that generally occur during | | | | transaction are usually smooth and relatively |
| the process. These events consist of the business | | | | painless, it requires probably the greatest amount |
| valuation, assessment of seller's market | | | | of hands-on effort. Once you sign the LOI, the |
| opportunities, preparation of offering | | | | buyer will schedule a formal legal and financial due |
| memorandums, review of the tax implications of | | | | diligence visit to your operation. The primary goal |
| a potentially complex transaction, and legal and | | | | of the buyer is to completely validate everything |
| financial due diligence. Additionally, there is much | | | | that has been represented about your company. |
| drafting, review and negotiation required for the | | | | This almost always requires a several day site |
| definitive, employment, non-compete and option | | | | visit for the buyer's team to review systems, |
| agreements. Arming yourself with these | | | | contracts, accounting records, articles of |
| professionals will most likely provide you greater | | | | incorporation, employment files, payroll records, |
| consideration, which will outweigh their costs by | | | | bank statements, etc. Not only do they want to |
| reasonable proportions. | | | | validate the financial statement representations, |
| 3. Clearly recognize the value of your business. | | | | but also to do risk assessments such as |
| A business advisor can guide you here. Although | | | | production concentration, personal production |
| this is not rocket science, it is important to be | | | | levels, any threatening or pending litigation, etc. |
| well armed with a clear understanding of the value | | | | Another drill that the buyer will perform is an |
| parameters of your business. Acquirers will | | | | overall assessment of personnel and their related |
| sometimes reduce their valuations to an "art | | | | skill sets. This is primarily directed toward the |
| form" and will not specifically disclose how they | | | | management of the business, but is seen as a |
| appraise your business. Establish benchmarks for | | | | critical element of the review. The buyers team |
| an acceptable selling price that you are willing to | | | | must come away with an affirmative view of the |
| tolerate. It is not an expensive to obtain a | | | | management's depth of knowledge; experience |
| valuation, and well worth the investment when it | | | | level; technical skills; work ethic; stability, and |
| comes to comparing it with a buyer's offer. | | | | commitment to the business. The due diligence |
| 4. Avoid reactive selling. | | | | review lists are generally pretty exhaustive and |
| It is highly recommended that you take the | | | | can range from having you prepare information |
| initiative and go to market under your own | | | | on as few as 40, up to 150 individual categories. |
| volition. Typically, this will provide a much greater | | | | The best tactic to adopt here is to be proactive |
| chance of optimizing your sales proceeds. Being | | | | and to solicit due diligence check lists a few |
| reactive and allowing the buyer to initially approach | | | | weeks prior to the scheduled visit. This gives your |
| often puts the buyer on the defensive where you | | | | staff appropriate time to pull all of the materials |
| are subject to buyer timelines and pricing | | | | together. Once you sign the LOI, the first call you |
| methodologies. They have you right where they | | | | should make is either to the legal counsel or senior |
| want you; you are in their pipeline and they | | | | finance representative of the acquiring entity to |
| maintain control over the process. Do not hesitate | | | | ask them to provide you with the list. If you don't |
| to take the offensive and find the buyers before | | | | call them, more than likely, they will be the ones |
| they find you. There is an overwhelming | | | | calling you to schedule the due diligence visit. A |
| abundance of buyers in the marketplace; | | | | few things to remember are to provide ample |
| therefore, consider shopping among multiple | | | | time to compile all the requested materials for |
| suitors. A business advisor will prove to be | | | | due diligence; communicate with key office staff |
| extremely helpful here. Depend on your advisor | | | | of the impending events to allow them to get |
| to maintain control of the selling process while | | | | prepared; and to coordinate the due diligence |
| diligently and vigorously representing your | | | | activities with the schedules your lawyer, business |
| interests. | | | | advisor and accountant. While it may not be |
| 5. Present your company properly. | | | | critical to have them on site for the entire visit, |
| Typically, a business advisor will recommend | | | | they must be accessible in the event that they |
| putting an offering memorandum together after | | | | are needed. In general, the formal legal and |
| you conclude that selling your business is the right | | | | financial site visits last two to three days. The |
| direction for you. An offering memorandum | | | | salient matter is to be prepared and have all |
| includes historical financial performance; business | | | | permanent file information readily available. Most |
| and market trends, ownership interests and | | | | buyers are sensitive enough to conduct most of |
| pertinent tax information; forward projections; a | | | | the activities at a neutral location if you are |
| narrative overview; and other historical | | | | uncomfortable with announcing the visit to general |
| information on the business. Additionally, it includes | | | | employee population. |
| certain key metric information that is key to the | | | | 9. Perform your own due diligence on the |
| business. The biggest mistake made by | | | | acquiring entity. |
| entrepreneurs is that they open their books and | | | | If you are going to be directly involved in the |
| immediately provide an internally generated, cash | | | | acquiring entity, post-transaction, this is a must. |
| basis, financial statement to a prospective buyer. | | | | While they are kicking your tires, you should be |
| The primary goal of any small to mid-sized | | | | reciprocating. Do not allow the transaction process |
| business owner always should be to minimize their | | | | to go by without satisfying yourself that the |
| tax liability while maximizing their personal cash | | | | buyer's operating model is conducive to you and |
| flow out of the business. Often, this skews the | | | | your business' culture. You should visit the buyer's |
| presentation of the business from a GAAP | | | | headquarters, meet their key people, and ask |
| accounting basis, which really should be the means | | | | about their plans for integration. Be certain to ask |
| in which an agency is valued on. A business owner | | | | about any employee casualties that may be a |
| should carefully evaluate and quantify all personal | | | | result of any integration activities and be |
| expenses charged to the business and treat | | | | absolutely sure that the buyer has a track record |
| these as "add backs", which ultimately increases | | | | of handling these situations with class and dignity. |
| the book income of the agency. Add backs are | | | | (Be certain that there will be a grand fathering of |
| adjustments that a purchaser usually makes in | | | | tenure for severance purposes) Additionally, look |
| "normalizing" the income of a business. More often | | | | at their benefit plans, evaluate their |
| than not, many add backs are over looked. If a | | | | communication methods, and review their |
| buyer pays a multiple of earnings, the seller faces | | | | complete operating cycle. Ask to talk to other |
| the prospect of leaving significant sales proceeds | | | | former business owner's whom they have |
| on the table. | | | | acquired. It is recommended that you obtain the |
| Did you ever think about how other financial | | | | buyer's permission to speak to these people |
| dynamics may misrepresent the performance of | | | | before hunting them down. Speak to at least two |
| your agency? Remember taking Accounting 101 | | | | former business owners in a one on one format |
| and learning about the matching principle? This | | | | and you will learn more about your prospective |
| states that in order to fairly present your financial | | | | employer's culture than any brochure could ever |
| statements, costs should be proportionately | | | | convey. |
| matched with revenue as it is earned. Insurance | | | | 10. Take it slow. |
| agencies are inherently put at odds with this | | | | It is the best and only way to conduct a serious |
| principal when they present cash-basis financials. | | | | transaction. Haste never benefited anyone. |
| Think in terms of where the preponderance of | | | | Carefully evaluate every aspect of the deal along |
| expense is generated in an agency...creating a sale | | | | the way. Generally, companies who acquire on a |
| or placing business. Yet, when an insured elects to | | | | frequent basis will put the offer out for a few |
| defer payments to monthly, quarterly, or even | | | | days, or weeks or threaten to walk if there isn't |
| semi-annual mode, the agency commission income | | | | a quick decision. Put this into perspective, they are |
| will follow the same payment cycle. The agency | | | | asking you to make one of the biggest |
| has expended a large amount of resource placing | | | | commitments of your life in the matter of days? |
| the business, yet they may have received only as | | | | This is typically a tactic used to keep the deal |
| little as 1/12th of the actual annual commission | | | | momentum going in hopes that there is no seller |
| due. In order to clearly "match" costs with | | | | remorse or slow down for further contemplation. |
| revenues, numerous adjustments such as | | | | They own the momentum and you, the seller, |
| accounting for deferred commission revenues, or | | | | really should be the one synchronized with the |
| alternatively, deferred acquisition costs, need to | | | | schedules, not being drug along without an |
| be taken into account to properly present the | | | | understanding of what is next in the sequence of |
| true earnings of the business. Remember, every | | | | events. This puts sellers in an unfair disadvantage. |
| buyer will value your business based on earnings. | | | | The secondary reason why things are generally |
| It is extremely important that you include all | | | | rushed is because of the fear of other parties |
| details that will assist in optimizing your agency's | | | | coming into the mix with offers, which could |
| earnings. One final and equally critical component | | | | potentially raise the stakes. Take it slow, rely on |
| of the offering memorandum is its ability to | | | | experienced advisors who can bring intermediary |
| accentuate value creation for the buyer. In other | | | | experience to your side, and evaluate every single |
| words, to bring to the surface certain intangibles | | | | aspect of the transaction, at your own pace. |
| or revenue components that can and may create | | | | Selling your agency can and should be a very |
| exceptional value for a prospective buyer. | | | | rewarding experience. Trust your instincts and |
| Recurring revenue is something that makes all | | | | stand firm on your convictions. This is a |
| buyers salivate. If the selling agency has a | | | | life-changing endeavor and should be dealt with |
| seasoned book of business with a robust renewal | | | | very cautiously. If you are uncertain of which |
| stream, this is a primary example of economic | | | | direction to take, stand still and seek the guidance |
| value creation. This may help to significantly | | | | of a professional to make recommendations to |
| increase the profit margins of the buyer. | | | | you. |