Selling an Insurance Agency at the End of Your Career

At some point, many independent agents make the decision to sell their agency. Yet, before they come to that decision, there are often a lot of questions or uncertainty. What’s involved in the process? How can you make sure to receive what your agency is truly worth? In this article, I’ll explain what you need to know to get ready to sell your insurance agency within the next three to five years. 

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Get Ready to Sell by Taking Your Agency Off Autopilot

If you’re ready to sell your agency, there are several things that you’ll need to do to prepare your agency to get it to the maximum value. If you’re part of the group of agents who dream of going on to other things (maybe even just retirement), you might have been on autopilot. 

The problem with autopilot is that while it certainly gets things done, it will not get you what you want in the long run. It also won’t help the growth rate for your book of business. 

My rule of thumb is if your insurance agency sales aren’t growing 5 to 10% or more each year, this is the time to make the investments in people to improve. If you don’t get off autopilot and start growing as you should, you won’t make as much from a potential buyer as you want.

Potential Buyers Are Always on the Prowl

The first thing to keep in mind about selling an insurance agency is that there are always potential buyers on the prowl. Agency owners are always interested in finding out which successful insurance agents are interested in selling their business. 

However, this does not mean that every prospective buyer you meet has the cash flow or financing to meet the purchase price and close the deal. It also does not mean that every potential buyer will agree that your independent insurance agency is worth what you think it is worth and offer you what you want for it to close the deal.

Prospective buyers are also interested not just in the process of insurance agency acquisitions. They want a return on their investment. They want to know if they take over your agency, whether they’re going to grow and how much risk is involved. 

The purpose of acquiring an insurance business is to increase cash flow and to minimize risk.

If You Decide to Sell, Think Like a Potential Buyer

If you’re an agency owner who is interested in selling an insurance agency, the best piece of advice that you can be given by anyone is this: think like a potential buyer. You know that if you were a potential buyer, you would be interested in minimizing risk and improving annual insurance sales. 

Put yourself in their shoes. What wouldn't you want to see in their business if you were in the market to buy out a specific agency owner? In many respects, this is no different than selling in real estate. When you’re trying to sell your home, you need to fix the flaws to make it more attractive to buyers. 

So when selling an insurance agency, you need to fix all of the problems. How do you know if there’s a problem? You start by reviewing a couple of your most important records.

Reviewing Your Balance Sheet

Let’s start with the balance sheet. What does your balance sheet say? Do you have any cash? If you’re sucking all of the cash out of your business, stop. By not having cash, you’re paying ordinary income tax on it. Building up the cash shows you’re professional and have thorough agency management.

Reviewing Your Income Statement

With the income statement, that’s where you can find bigger problems. Many business owners are providing some of their lifestyle needs out of their business. Stop doing that. If something is coming out of that account that is not 100% related to your independent insurance agency, it should not be part of your income statement. You’ll have to do it when you find a buyer and close the deal. 

The problem is that even when you adjust your historical statements to show the buyer, you still have to explain every one of those things. And every one of those things you explain still reduces the value to the potential buyer. It makes the transaction complicated.

Pay Attention to Unnecessary Agency Expenses When You’re Getting Ready to Sell

As the agency owner, make sure you’re not paying yourself too much. I know that may seem like an odd statement. However, many agency owners pay themselves a higher than average market rate commission. They do it for cash flow reasons, but it needs to stop. It needs to stop to get that money to show up as profit, cash flow, and EBITDA when you’re ready to sell. So, the money is still there. It’s just in a different place.

Also, if you have someone who is paid a salary because they are managing your agency, there is no reason for you to also take a salary. They’re being paid to handle the management side. 

If you're being paid a salary for the same thing, it's double-dipping. It's not reasonable, and you're reducing your cash flow.

What would you think of an independent insurance agency with unusual marketing, travel, and other expenses as a potential buyer? Would you want to buy it? So, put that into practice when you’re selling your agency. Cut the unnecessary expenses. A prospective buyer is likely to pay you more money if you do that. If they have to take them out, your deal will not be worth as much.

Human Resources Expenses

The biggest cost in your independent insurance agency is people. If you're overstaffed for some reason, you must take the necessary measures to correct your staffing issue. If you don't, the buyer will, and they will not pay you for it. So, you might as well do it ahead of time to improve your agency's worth.  

Start by taking a hard look at commissions. Most agencies with under $1 million in revenue pay significantly higher commission rates than agencies with over $1 million dollars in revenue. Remember that this doesn’t need to be an overnight matter. Generally, you begin to plan to sell an insurance agency on a five-year timeline. 

But think about this: every dollar of expense reduction you get from cleaning up your business expenses from your income statement will be worth around $15 when you sell.

Work with the Right Insurance Agency Acquisition Professionals

Many insurance agency owners have purchased an agency in the past. Maybe it went really well, and maybe it didn’t, but they have experience with it…and they’ll have a story to tell you. In fact, they’ll believe that what happened to them holds true for everyone, especially since they are a professional who went through it. 

Yet, they aren’t actual insurance agency acquisition professionals. So, what happened to them as they navigated through it on their own isn’t necessarily what will happen to everyone. There’s a much bigger picture. What happened during their experience doesn’t necessarily make them an expert. It doesn’t mean that the way they did it means it was the most profitable or the most efficient way to close the deal.

A non-compete agreement is why you need to hire professionals to get you through the insurance agency acquisition process. Non-compete agreements are governed by state laws. Most states at least allow the use of a non-compete agreement to protect trade secrets or your client list. However, there has to be a valid agreement in place. 

So, if you don’t have one and one of your producers leaves after the transaction because he doesn’t like getting his commissions reduced, he can take all of his customers out of the book of business if there is no agreement to prevent it, and it reduces the value of your business. So, you need a non-compete agreement, and you may need an employment agreement.

Where can you find the right professionals, especially if you live in a small area where there aren’t a lot of other agents around that you can talk with to get referrals? Because, really, who doesn’t like getting a referral to a network of professionals who might be the right fit?

This is where joining an insurance agency network can be very helpful. An insurance agency network can put you into contact with insurance agency owners in your region who can refer you to professionals who may be a great fit for your needs. You can also get additional training and additional commission-making opportunities.

Stratify Your Hiring Before You Find a Buyer

During the time that you are planning to sell your business, you should be proactive about your hiring strategy when it is time to hire. While you should always hire the person who is most qualified, you must be concerned with the financial worth of your agency. You must consider turnover. 

Do you want and need people who are close to or at retirement age who only may wish to work part-time or who may quit soon? It’s important to consider the multiple in your decision to sell when you’re also thinking about staffing.  

Note: please understand that I am not saying in any way that you should violate the Age Discrimination in Employment Act or any state law that prevents age discrimination. I am also not suggesting that you treat anyone unfairly based on age or any other factor. Ever.

Get to Know Your Prospective Buyers & Keep in Touch with Them

Prospective buyers have a choice when it comes to which insurance agent business they want to buy. While you do have a three to the five-year timeline when it comes to setting up and executing a successful insurance agency acquisition, you should get to know each of your prospective buyers and keep in touch with them. 

Ask them about the ideas they may have on how to maximize the value of your agency. Having this information will give you a range of values. You already have an idea of what you’re willing to sell your business for. So, having this information from prospective buyers helps you analyze any additional gaps that you may need to fill.

The value spread gives you room to negotiate a higher price than you might even be aware was possible. Every sophisticated buyer, including private equity firms and national brokers that are buying, will perform a discount of cash analysis on your agency. So, you should perform one as well. If you’re not sure how to do one, talk with your investment banker. Then consider what you can do to get your value up to that point. 

Let's face it -- the money will get made by someone, the buyer or the seller, and you would certainly prefer that most of it is made by you.

Potential Tax Implications When Selling Your Agency

And it makes a lot of sense to prepare for the potential tax implications that you may experience as a result of selling your agency. The federal and state government will get anywhere from 20 to 40% of the value of the business that you’re selling, maybe less if you do a really good job of tax planning. This is where you need to have the right professionals in place. This isn’t just the people that currently prepare your tax returns. You need to talk with merger & acquisition specialists to find out who they recommend for this kind of sophisticated tax planning.

As your agency becomes worth more money, taxes become a very big deal. If you’re selling an agency with $10 million in revenue, you’re looking at a transaction that could be worth tens of millions of dollars. It's wise to spend a few thousand dollars on good tax advice early. It is a great investment.

You can read more about potential tax strategies here, but it’s important to understand things like how deal structure has a lot to do with how you’ll get paid. For example, if part of the compensation for your business involves a covenant not to compete, you’ll pay ordinary income taxes on the money received for the covenant, as opposed to capital gains tax for the sale of the asset. You want to minimize covenants while the buyer wants to maximize them. If you’re able to structure the sale so that you’re selling the cash on your balance sheet or the assets on your balance sheet, you can possibly face capital gains tax on those assets instead of income tax.

For example, if you have $500,000 in depreciated furniture, fixtures, and equipment, and you can sell it all, you must recapture the depreciation you took and pay ordinary income taxes. It could be as much as 40 to 80%. On the other hand, if you raise the multiple on the income and sell those assets for nothing, you may get the same amount of cash, but you pay less cash. This shows you how the sale is structured affects what you receive.

Of course, as I said in the longer overview of taxes when selling an insurance agency, this article is also not tax advice. Please consult your CPA or accountant.

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