When Selling Their Business, Brokerage Owners Should Not Go Bare

How hiring an investment banker who specializes in agency mergers can maximize value for a seller

Only the most naive person would say it is not necessary to hire an attorney for a civil litigation. It is that same naiveté that might cause owners of a business to represent themselves in a transaction that is, most likely, the most important financial decision they will ever make.

The Scenario

You have built and own a financially strong and reputable insurance brokerage business. Through strong management, the business has held its own during soft markets and grown during hard markets. Your success and reputation are well known in the industry. You have been approached to sell your business, not once, but several times during the past few years, and, so far, you have rejected any thought of selling.

Now, someone has contacted you with what seems to be a serious and very attractive offer. Maybe now is the time to sell. What to do?

The obvious first step is to decide whether it makes sense for you to pursue a sale of your brokerage, providing the terms and conditions are right. Deciding the best time to sell for personal reasons varies from owner to owner. There is no good standard advice on how to make that decision. You must do it yourself and on your own terms.

Before making that decision, you need to know that most savvy buyers understand that it is the people who built the business to where it is today. Things like ensuring the jobs of your employees or your personal desire to continue working can generally be structured into a deal. Often buyers prefer to make as few changes as possible in the operation.

Plan of Action

If you decide to proceed and see where the process takes you, the following is a good plan of action.

1. Listen to what the buyer has to say. Make no commitments other than to agree to give it serious consideration.
2. If the initial proposal sounds enticing, even if no price has been mentioned, sit down and make a list of the pros and cons of entering into a transaction with them.
3. If the pros out weigh the cons enough to proceed, then ask for an offer price. At some point the buyer likely will have requested financial information on your company, but without serious due diligence, the buyer may only provide a price range for discussion.
4. If the proposal and price range are enough to proceed with a full commitment to sell, the next step is to stop!
5. Do not have another conversation with the buyer until you hire an investment banker who specializes in insurance mergers and acquisitions.

Large brokerage aggregators have what is generally known as a business development group. These specialists have worked on many transactions in the past and are very knowledgeable about the acquisition process. It is the equivalent of their own investment banking department. Even if an acquirer is not large enough to employ their own business development specialists, experienced buyers typically hire an investment bank to represent them. To negotiate with an experienced acquirer as a seller without professional representation is the equivalent of appearing at that civil litigation without an attorney.

Why Hire an Investment Banker?

To understand why, it is important to understand the basics of the process.

A buyer’s first offer is never their top price. As a seasoned buyer, they know far better than you the maximum market value of your company. Even if you are a good negotiator, there is a high probability that you will either walk away from a good deal or leave far more money on the table by negotiating without an experienced advisor to guide you. Either way, you lose.

Investment bankers usually work on modest retainers tied to a success fee which is based on a percentage of the transaction only if it closes. If you already have the eventual buyer identified, the success fee is often reduced significantly.

An experienced and knowledgeable insurance M&A advisor brings much more to the table than negotiating skills. The first thing they bring is your statement to the potential buyer(s) that you are fully committed to a transaction and you have ensured maximum value by engaging an expert. The buyer will actually appreciate the presence of a qualified banker on your side of the table. The investment banker helps educate the seller on the current market dynamics and assures the buyer that time will not be wasted dealing with a seller who has unrealistic expectations or, even worse, one who has no intention of actually selling their business.

Nothing maximizes value like competition. Even if you think you have the buyer identified, it is still prudent to test the appetite of some other known buyers. An investment banker who specializes in the insurance industry knows who would have a true interest in acquiring your particular operation. By bringing more serious buyers to the table, the increased competition naturally increases the demand and thus maximizes value.

What About Confidentiality?

You may be concerned that involving more potential buyers would put the word in the market that you are for sale. A breach of confidentiality could be disastrous in terms of losing good employees, damaging carrier relationships or potentially motivating clients or sub-agents to take their business elsewhere. This is a legitimate concern; however, investment bankers are experienced and well versed in the importance of confidentiality.

The investment banker controls the entire process for the seller, and that process begins with understanding the need for confidentiality. If the banker is to effectively create a market to ensure you receive maximum value for your company, they must be selective about whom they bring into the process. Generally, an experienced buyer does not want to be part of an auction. However, a seasoned buyer understands the process and accepts that if there is an experienced investment banker involved, there will be multiple buyers involved.

The buyer also knows that the investment banker will only involve a very small and select group of buyers who ideally fit the profile preferred by the seller. Limiting the number of potential buyers to a small group helps to ensure maximum confidentiality.

Who Else Would be Interested in Buying the Business?

Part of the value added by an investment banker is in identifying the buyers who have an appetite for your particular type of operation. The investment banker will know who the most likely buyers are because of their in-depth familiarity with their acquisition appetite and their specific knowledge of the deals they have done in the past.

What is the Business Worth?

Every time a deal is announced, it is a common reaction for an owner who has a business similar to the announced deal to assume they will receive the same announced multiple for their company. To make an assumption like that without understanding the market dynamics is a very serious mistake. As a matter of daily necessity, an investment bank focused on the insurance industry tracks all announced M&A transactions in the industry and even some that are not publicly announced. Comparable deal information and your financial statements will enable the banker to determine a base market value for your business. However, while it is true that sale comparables are a big driver in determining price, it is often the always important intangibles that drive the multiples even higher.

What dDoes the Investment Banker Do?

Once the banker is engaged, they take over the selling process. They handle all of the details and allow you to continue to run your day-to-day business with minimal interruptions. The banker and their team gather the substantial data and operational details that are pertinent to buyers’ decision processes. They then undertake the labor intensive task of assembling it in a format the buyers are accustomed to seeing.

By this point in the process, the investment banker, with your full involvement, has also identified an elite list of the most likely candidates that, on the surface, would also meet your approval as the new owner.

When fully prepared, they will contact the pre-agreed upon list of buying candidates to determine each one’s level of interest. Once buyers express a serious interest, a confidentiality agreement is signed and detailed information on the opportunity is shared with them.

As buyers begin to express a sincere interest, negotiations begin. The negotiation process is where the banker’s knowledge of the insurance market ensures maximum value. Remember how they have tracked all of the deal activity in your sector? Remember how they have built up knowledge about what is important to each buyer? Now is the time the banker uses that knowledge to reduce the pool only to those remaining interested buyers who best fit your deal criteria.

The banker answers the buyers’ questions and helps them move as quickly as possible to determine if they have any interest.

If you have an attractive business, it is not unusual for three to five buyers to provide a verbal expression of interest and a price range they envision, providing nothing egregious shows up in due diligence. A few of the buyers, when pressed for a specific number, may fall short of expectations, but, usually, it doesn’t take too long for one buyer to step up and make a specific offer that would be acceptable. They will then submit written indication of interest or a non-binding letter of intent (LOI) which will include the exact price the buyer will pay subject to due diligence. An LOI, which is normally good for 60 days, usually allows a buyer to have exclusivity while they complete due diligence in the hope of signing a definitive agreement after the diligence process is over.

Brokerage deals are rarely done for 100 percent cash upfront. Buyers are usually willing to pay more if the seller agrees to an earnout payment which is tied to the future performance of the business over a given period. The earnout is usually for two to three years. It, too, should be structured in such a manner that is as favorable as possible with minimum risk to the seller. An investment banker is experienced in structuring earnouts.

At the finish line, it may or may not be the original buyer who prompted your interest in selling, but one thing is certain: it will be a buyer who is willing to meet or even exceed your price expectations and, at the same time, oblige your post transaction intentions for your employees.

Through it all, the banker has driven the process. You have run your business with minimal interruptions, and, most likely, the selling price exceeded the original offer by enough to pay the investment banker’s fees and even add substantially more money to your pocket.

A final word to buyers of insurance brokerages: It is the investment banker’s job to secure the most favorable results for his client regardless of whether the banker represents the buyer or the seller. A good investment banker is completely comfortable sitting on either side of the table.

Topics Agencies Market