Through a Buyer’s Eyes

Kim Raymond, the principal of Raymond Insurance Agency in Coventry, R.I., started her firm from scratch just seven years ago, but already she’s preparing to sell. In fact, she’s had selling in the back of her mind since she opened her doors. “Once I’ve been in business for about 10 years, we’ll either look at clustering or being bought,” she says. “This is my perpetuation plan.”

The client base of her $3 million-in-premium business is aging, and to forestall a growth plateau, Raymond is acting now to snare young new clients. And she knows she needs a young producer to do it.

Although annual growth is currently 7% to 10% and referrals deliver a steady stream of business, many new clients are older people. If Raymond hopes to attract a quality buyer three years from now, she and her staff of five need to prepare to maintain a viable book of business. That’s why she just hired a young, new producer. “She’ll be on the road, going to colleges, setting up our Web page and figuring out how to reach people her age,” Raymond says.

How will potential buyers view your agency when you’re ready to retire? Whether you plan to sell the agency to your kids, cash in your stock to the ESOP or sell to an outsider, you won’t get a good price unless your agency has strong financials.

“Buyers are more sophisticated today than they were 20 years ago, so they have a much better idea of what suits their appetite,” says Sharon Cun¬ningham, president of Cunningham Consulting in Glastonbury, Conn. “But they’re always looking for strong financials; you can’t get around that. Your income statement for the last several years—not just one year—should show consistent growth and profit…the worst thing you can do is not take care of the business while you’re still there.”

When a Positive Becomes a Negative
In addition to steady income and growth, astute buyers will want to see your mix of business. And surprisingly, perhaps, niche markets and specialty business aren’t particularly desirable. “Buyers today are looking for a well-rounded book,” Cunningham says. A lot of specialty business tends to diminish profitability, since these lines often yield lower com¬missions, because the business may be hard to place and it has a lower-than-normal rate of retention. “Buyers might see a lot of personal lines business that can be added to an existing book, but when they see non-standard business, they start drilling down,” she says, to uncover other conditions that could hamper future profitability.

One red flag is employing more people than war¬ranted by agency revenues. On one hand, you demon¬strate flexibility by allowing some individuals to work part time and others to put in a few hours after they have formally retired. But too much of this can lead to overly plump payrolls, ailing profits and more than one person wandering the halls whose job description you can’t, for the life of you, recall.

“When you’re buying an independent agency, you’re really buying an intangible asset,” says Chad Maxwell, national sales manager in charge of retail insurance acquisitions for Brooke Corporation, in Overland Park, Kan. Yet employees are tangible, and their work habits and comings and goings give potential buyers a great deal of information.

Brooke’s subsidiary, Brooke Franchise Corp., buys agencies whose owners who want out of the business, and then recruits younger professionals to purchase what become Brooke franchises. Specifically, Brooke Franchise sets up the acquisition, finds a new owner willing and able to operate the agency and provides owner financing, access to carriers and an agency management system, backroom support and a business model.

To ensure that an agency will indeed succeed under a new owner and business plan, Brooke examines agency employees with more than casual interest. “Do they have real relationships with the customers, or did the seller keep his hand in everything so that the account execs had little contact?” he asks. Agencies whose producers move most accounts to service personnel are generally more valuable than those without this prac¬tice, Maxwell explains, because productivity is higher and retention isn’t likely to drop significantly with the departure of the original owner.

Court a Competitive Price
Brooke Franchise uses Claritus software to learn the traffic count around an agency’s location and find the average age and income of people in the area. It also examines the percentage of agency rev¬enues spent on advertising (8% to 15% is desirable), the extent of direct billing (the more the better) and of course, commission numbers. Additional due diligence varies according to type of agency. Generalist agencies are examined for their number of accounts worth $30,000 or more; fewer is better, Maxwell says, since these accounts are targets of frequent competition. Large commercial lines agencies are perused for their concentration in cyclical markets, such as construction, since ebbs in these industries can greatly affect agency revenues.

Usually, the more closely an agency matches Brooke Franchise’s criteria, the higher the price the company is willing to pay. “If I’m looking at an auto insurance specialty agency and their revenue is 80-20 or 70-30, that fits,” Maxwell says. “And if their advertising is in line, they have good cash flow and a good location, we’ll establish what we feel is an aggressive price and try to get favorable terms.”

But what’s an aggressive price today? With so much talk that most agencies are worth only 1.5 times revenue, how can you expect to get more? Howard Candage, president of H.E. Candage, Inc., in Portland, Maine, says agencies can still be worth two times revenue, “but you need to know the buyers’ market, create competition for the sale and make the agency look as good as possible,” he says.

To do these things, follow the suggestions above—and if you’re not big enough to represent more than two or three carriers, Candage advises forming an alliance with another agency or brokerage to obtain broader access. Then keep cash flow high and organic growth going to appeal to as many potential buyers as possible—or to allow your perpetuators to succeed while paying your price in monthly installments.

Mark Hamler, president of Hamler Fisher Insurance Agency in West Milton, Ohio, just took two important steps toward the perpetuation of his small agency: He bought out retiring partner Donald Fisher and hired a young new producer. “I like my autonomy and I really don’t want to sell,” says Hamler, who bought his share of the agency from his father. But with no sure-fire perpetuation plan in hand, he has realized that to continue the agency at all, he needs new blood—and lots of it.

As the agency force gets older, Hamler mulls, it makes sense that carriers are worrying about their books of business. And agencies without perpetuation plans represent a big question mark since carriers don’t know if a new buyer will keep and grow the book already established in the agency, let it die through attrition or move it to another company.

Hamler hopes to find the right person or people to assume ownership of the agency and finance it, either through a stock deal or other means. To strengthen agency financials, he is focusing on organic expansion and writing his first growth plan. “I’ve been lazy and haven’t done this, but I’m taking steps now to validate this agency,” he says. As part of the growth plan, he’ll also monitor a written referral program and set goals for each employee. “I’m going to be as proactive as I possibly can,” Hamler says. “I’m going to set new habits.”

Never Too Late
If your agency could use some validation of its growth and profitability, Alan Shulman, president of Shulman Consulting Group, Inc., says renewal questionnaires, client satisfaction surveys and exit surveys are important to help agents learn about their customers. A “directional finder” is a supplemental survey tool that you can add to questionnaires to find out how commercial customers see their businesses developing in the future. “Most agents look only at the renewal period, but this tool takes your view further,” Shulman says. Through information your business customers provide, you can determine which companies are pursuing active growth, which are gambling that growth will occur by itself and so on.

Why should you care about the aspirations of every commercial customer? “Because your job is to serve the customer,” Shulman says, “and you won’t know how to do that unless you know your customers and what they want.”

Continuing to work at making your agency the best it can be, right up until the moment you walk away, is the essence of most good perpetuation plans. If you’ve not given much thought to how potential buyers see your agency, it’s not too late to start now.

Susan Hodges (hodgeswrites@aol.com) is an IA senior writer.

Increase your Agency’s Curb Appeal
What can a seller do to make an agency more attractive? IA talked to Reagan Consulting’s Brian Deitz about how agencies can boost their selling power:

IA: When it comes to perpetuation, most people talk about long-term plans, but what are some short-term things owners can do?

BD: Understand where the hidden profit is in your business. There are always operational improvements a business can make. The ability to pay a large multiple for a deal and present a clear plan of where the profit is…that will really help sell your business.

IA: When a homeowner puts a house on the market, it’s been shown that staging the house (i.e. arranging the furniture a certain way, taking things out of the house, painting, etc.) increases its selling potential. is there an equivalent process when it comes to an insurance agency?

BD: Selling a business is different from selling a house, but there are cosmetic things to do to your financials. A lot of agencies have payable accounts out there from systems conversions and old CFOs—clean those things up. Have your CFO or advising firm look at your books and clean them up. It’s sort of like looking at a house and the yard is well-kept as opposed to having tree limbs hanging down in front of the house. Clean up your payroll and make sure all employees are operating employees of the business. Buyers are not going to be happy to see employees get¬ting payroll and benefits that aren’t really working in the business. In other words, stop keeping mom on the payroll.

IA: What classic mistakes do agencies make when preparing to sell?

BD: Anything that is going to hurt your business in the long term is going to be a mistake. You can’t sacrifice the curb appeal of the house for the long-term of the business. Anything that would fall into that category is going to be a mistake.

Don’t stop hiring talented people when you think about selling. Agencies become very margin-focused when they think about an external sale. A sale is based on the agency’s ability to grow business after a deal, so you have to make sure you have talent on hand to boost the revenue of the business and continue on a growth path.

Don’t overdo it. Keep in mind that your business may not be sold. You don’t want to put your business in a potentially adverse situation. You don’t want to lay off a bunch of employees to improve short-term margins. You want to protect your core operations of business by cleaning it up and putting your best foot forward.

All in the Family
Think that you don’t need to ready your agency for a sale if you’re planning to sell to your children? Think again.

“When your kids buy your agency, they should do a stock deal rather than an asset deal,” says Howard Candage, president of H.E. Candage, Inc. “If you the seller try to use the asset price [what an outsider would pay for the agency], it won’t work, because your kids won’t have sufficient cash flow from the agency to make the payments.”

And you’ll be left holding the bag.

Having worked with more than one agency to help untangle a lopsided perpetuation, Candage tells the story of a seller who nearly bankrupted his sold agency by charging his young relatives too much for too long. After 12 years, the new owners had paid close to $2 million for a business valued at much less—and they were still paying. Candage helped work out a financial solution, “but it took all kinds of adjustments and additional consultation with a tax attorney,” he says. “For what the newer owners were paying the seller, they could have made more money in the paint department of Home Depot than they were making with this agency.”