Preparing to Sell or Merge Your Agency

By | May 21, 2001

One of the most difficult decisions that an owner will have to make is whether to sell an agency or to merge with another party. For the typical owner, more time has been spent working and building up the business than with the family. In fact the business is often a second family. However, having made the choice, the next step will be to prepare to sell or merge the agency.

The key to negotiating a great deal is to have superb preparation before stepping into the marketplace. Jumping in without doing your homework is a poor strategy when the stakes are high—namely the owner’s life work. Preparing the business for sale or merger is not an overnight process. It can take months, if not years, of planning to maximize the bargaining position and the return on equity.

The best way to accomplish this is to address weaknesses and capitalize on strengths before presenting the business for sale or merger. Always assume that any potential buyer will do a thorough job of due diligence, which will ultimately uncover weaknesses. Proper planning will identify current problem areas and help determine how to fix them and/or treat them in discussions with buyers or merger candidates.

Factors affecting value
“People overvalue what they are not and undervalue what they are,” said Malcolm Forbes. Too many owners base their agency’s worth on “sweat equity.” They put value into the years of hard work and high emotion that they have invested in their business. Unfortunately, this is not what a buyer is interested in purchasing.

We wrote two articles for recent issues of Insurance Journal that extensively outline the process and factors that affect agency value: “New Forces That Affect Agency Value” (October 16, 2000); and “Three Factors That Affect Agency Value” (March 26, 2001).

The phrase “timing is everything” is especially true when selling or merging a business. Is the best time to sell/merge now before the hard market has had a full year to mature, or in two years after 25 percent is added to the existing account commissions?

When earnings are reaching record levels and next year looks more promising, most owners are not thinking about selling. Yet, when owners least want to sell, their company may command the highest value. So sell during growth, not after it.

Buyers tend to extend the past into the future and pay more when historical revenues and earnings are trending upward.

Create an agency profile
The purpose of creating an agency profile is twofold. First, it serves as a document that the buyer can use as a platform to understanding the unique features of the seller. This profile will save both parties a lot of time. The second (and perhaps the most important) purpose of creating the agency profile is that the process will help the seller better understand the unique features, strengths and weaknesses of the firm.

The first section of the profile should contain a thumbnail sketch of the operational fundamentals of the agency. Write a brief history of the firm and the background of the principals and key personnel. Develop an organizational chart and provide the positions, salaries and start dates of all employees. Outline the profile of all producers’ books of business, their compensation plans, and whether or not they have a contract or vesting.

Write an overview of the book of business and if there are any specialties/programs. A breakdown of the book by line of business is also helpful. The profile would also have a breakdown of at least the top 10 insurance carriers, loss ratios, contingent history and type of business placed with each carrier.

Do a third-party analysis
In most cases, financial statements of privately held companies are designed to minimize taxable income in any given year. There may be non-recurring or non-operating expenses that would not be considered ordinary business expenses. It is possible to reconstruct financial statements to show the true historical income to give a more accurate picture of future performance, which directly affects value.

When recasting income statements, owners will find that most adjustments fall into one of the following categories:

• Non-recurring items such as one-time purchases, unusual bad debts or litigation expenses.
• Related-party transactions or other transactions not representing arm’s length or market value. In other words, try to adjust the owner’s compensation to reflect a third party’s approach, so that “excess” compensation is shown as profit.
• Adjustments to eliminate income or losses from non-operating assets, including dividends from securities, CD interest income, and gains and losses on their sale.
• The balance sheet should also be adjusted for non-operating assets or items the buyer might consider undesirable. Examples might include loans to or from employees, excess equipment, cash value of life insurance policies or marketable securities.
• If the business owns real estate, the seller may want to place the asset in a separate corporation and enter into a lease with the buyer at market rent.

Obtain professional advice
In most cases, it is helpful to retain an advisor who can help prepare both the business and owner for the sale or merger process. Specifically, the seller’s representative can:

• Prepare a preliminary valuation analysis to determine the asking price or merger value.
• Consider different transaction structures and the tax consequences of each.
• Identify and contact confidentially logical buyers or merger candidates.
• Evaluate any proposed transactions.
• Assist with negotiation and closing.

Getting the business in shape
Much like a house, a business will sell at a higher price if everything is neat, organized and in working order. Here are a few tips:

• Clean up any old bad business habits.
• Eliminate functional problems within the agency.
• Generate and keep records and management reports current.
• Prepare a business plan or budget for the prospective year(s), if time permits.
• Prepare an organization chart showing funtional areas of responsibility.
• Document the producer sales efforts and workloads of the staff.
• Write an explanation of how sales are generated, make promotional materials available.

Pick the best ‘fit’
A seller needs to explore several options. The key will be to look at several prospects or have a consultant to help you in the process of doing so. Finding the best overall “fit” for the firm with another party does not often occur on the first try. It is not always finding the buyer/merger firm that will pay the most money.

It is actually more important to find a party that will make the transition and future life together the smoothest and the most beneficial for both parties.

A final thought
These are all things to think about in the sale and merger process. Selling a business can be hard emotionally, but if approached properly it will also be seamless and rewarding. The key is to keep in mind the buyer is looking at purchasing cash flow, and it is not a direct judgment on the seller’s business or insurance skills.

Bill Schoeffler and Catherine Oak are partners in the international consulting firm Oak & Associates based in Northern California. The firm specializes in financial and management consulting for national and international insurance agencies, including valuations, mergers, acquisitions, clusters, sales and marketing planning, as well as perpetuation planning. For more information, call (707) 935-6565, e-mail, or visit

About Catherine Oak

Oak is the founder of the consulting firm, Oak & Associates, based in Northern California and Central Oregon. Oak & Associates. Phone: 707-936-6565. Email: More from Catherine Oak

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