It’s never too early to start thinking about succession, and this article is a part of my series on things to think about when you’re considering selling your insurance agency.
Listen, we're all going to leave someday, feet-first or voluntarily, so how do you plan for your move from active insurance agency owner to the retirement that you and your family have thought about over the decades?
You've got a time horizon. Ideally, it's 6 to 10 years from now, but it can be much shorter, often because people didn't plan ahead. At any rate, whether it's 6 to 10 years or 6 to 10 months, the advice in this article still applies, it’s just that the time to get ready just gets shorter.
The bottom line is: the longer you have to plan, the better off, you'll be. But don't despair. If you've arrived at the day when you say “I'm ready to go”, you just need to do all the things we're going to talk about in the next two articles within the time that you have available. So let's get ready!
The longer you have to plan, the better off you'll be.
First of all, let's realize what drives the value in your agency. That's key because this is a transaction that you're just going to do once, and you want it to be for the most amount of money that you can possibly achieve. So let’s start here: the number one driver of agency value is strong profitability.
Many agents express agency transaction values as a multiple of revenue or top-line income, and that's a great shorthand to get an estimate, but the truth is that no one buys revenue, they buy profits. You need to be a profitable insurance agency and you need to be as profitable as possible, so I'm going to give you some suggestions for improving profitability, at least on paper, and a little bit.
The other thing that really drives agency value is strong, consistent growth. Prospective buyers look for growth over the years. It's just a fact: if your agency isn't growing, it's not worth as much as one as growing 5% or 10% a year. So if you've got that 6 to 10 year time horizon, focus on solid, consistent, repeatable growth, and that will drive your agency value as much as 25-30%, and even as much as 100% in some cases.
We recently had an agency that sold for six times revenue. Why? Because they have strong, consistent growth, and the buyer wanted to buy that growth.
Another important thing is to make sure you are growing organically. If you're adding 5% of new business every year, that's great, but more is even better. I'm talking about new customers and new policies, not premium rate increases from your carriers. You've got to be growing organically to maximize your value, and for buyers to determine that your agency is worth top dollar.
You need to really make sure that you've got our strong carrier relationships, that you have a stable book of business, and that you have good consistent loss ratios, that will all result in a predictable profit sharing income stream, which can factor into the sale value of your agency and what potential buyers may be willing to pay.
Along with that, you want to make sure that most of your business is placed with those strong carriers, not siphoned off into lower-paying brokers and carriers that maybe have a reputation for volatility in their underwriting appetite - that will affect your agency value, and make finding a buyer harder.
Always focus on making sure that your employees are writing business with your most profitable insurance companies. Some insurance companies pay you more than others - work really hard on that for the next four or five years, and it will pay you dividends for the rest of your life.
Your willingness to stick around after the transaction is key to get more value. If you make the decision to sell and then say “I'm leaving and you've got six months of my time”, you're not going to get as much money as if you say, “Guess what? I'm willing to stay for three to five years and make sure this agency you're buying makes you money, Mr. Buyer.” If you'll do that, and negotiate an earn-out period, you'll simply get more money.
So let's get your income statement and your profit and loss statement cleaned up. Let's make it look the way the buyer is going to make it look after he buys you. So the first thing you want to do is strip out any owner benefits that aren't typical, and make sure your salary isn't higher than what you would pay to someone doing your job. If you were hiring them, take out the country club memberships, the expensive cars, whatever it may be - take all that stuff out, because it's just robbing the bottom line, and the bottom line is what the agency value is based on.
The other thing you need to do is bring your staffing expenses into the best practices levels. So grab a copy of the best practices, look at the 25% most profitable independent insurance agencies, and bring your staffing in line with that. That may mean growing into the staff you have without adding more people over the next three to four years, or it might mean not replacing somebody when they decide to retire or move on. Whichever way you decide to go about that, get your staffing expenses in line, because that drives money to the bottom line and adds value.
The other thing to think about is what are you paying producers. You know the average sophisticated Insurance Agency owner today is paying 30%, to 35% commission to commercial lines producers, and 20 to 25% or less to personal lines producers. If you're paying more than that (let's say you're paying 50%) then 20% of your agency's income is not going to the bottom line. And that's robbing you of wealth. Now's the time to fix that!
A small and often overlooked detail is to be sure that all of your employees are on non-piracy agreements. The buyer wants to make sure that the book of business that he or she is buying is going to stick around and not walk out the back door with one of your former employees.
Now let's talk about driving performance to maximize agency value when you sell. First of all focus on being a world-class retention agency. That means more policies per customer, it means communicating with them all the time, it means doing everything you can do to have a 90 to 95% retention ratio. That kind of retention ratio is going to result in tens of thousands, hundreds of thousands, or even millions of dollars of additional revenue in your pocket when you sell your agency. And by the way, that's just really important in the time of COVID when it's harder to get new business, right?
Once you have done all this, focus on doing anything else you need to do to bring yourself into the top 25% most profitable agencies based on a comparison with best practices standards. Doing that will mean a lot of dollars in your pocket when you finally get ready to sell.
In the next article, I'll have some more suggestions on things to execute the plan.