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12 Reasons YOU Should NOT Sell Your Own Agency (Part 3 of 4)

Author: Howard Candage

Have you ever bought or sold an agency? Did you use a consultant to structure the deal or did you do it yourself? If the latter, there's a good chance you might have left a considerable amount of money on the table and didn't even know it. Good mergers and acquisitions consultants don't come cheap but, in this article, Howard Candage explains how a consultant will usually save you money far beyond his or her consulting fee. If you're thinking about buying or selling, you MUST read this article!


Twelve Reasons YOU Should NOT Sell Your Own Agency!

"Selling your own agency is like telling your clients they should buy their insurance over the internet."

I hope you got the message of the story you just read. Now, let me share another experience with you, then we'll get on with the "12 Reasons." I walked into a consulting project and was asked to sell a division of an agency. My reaction was different from what you might expect...

It was a division of a mid-sized agency with a need for cash. I was a fledgling management consultant, still wet behind the ears. (I check periodically even now to make sure they are at least semi dry.) We had a management meeting that lasted all day, trying to decide what to do to get some additional money. The agency was in pretty good shape but was out on it's line of credit, and the senior family member was so close to retiring and taking the boat to Florida for the winter, he could smell the salt water.

The project began with a management consulting assignment and a few business planning sessions. We embarked on a strategic plan with the employees followed by the thrilling task of financial analysis. We met at the principal's beautifully restored home. Bright and early, the agency managers came running through the doors to tear passionately into the financial statements. They were as excited as if the old cape had just been painted and they were coming to watch the paint dry.

Anyway, the meeting produced several options to raise cash. I sent them to another, more senior, management consultant (who happens to be a good friend and mentor) that they had worked with in the past. I told them, "Talk to Roger, He has been doing this a lot longer than I have." In a meeting a couple days later, he picked three options and sent them back to me. We met all day to make a decision on what to do. They chose option 3...Sell this division of the company. The principal, (the one with salt water in his eyes) looked at me and said, "Will you sell it for us?" With soaring dollar signs in my mind I looked at him and said "Why do you want ME to sell it? Sell it yourself." (In case you are wondering, this is NOT a particularly encouraging sign if your consultant says this!) He replied with a laundry list of reasons for me to sell the book of business. "You have the knowledge needed to sell this. We know you have never done this before, but we have great confidence in you. How much will it cost for you to sell it?" We made a deal after I talked to a couple of business brokers and a close friend who does mergers and acquisitions work in another part of the country.

To give credit where credit is due, my friend, referenced above, is an absolute expert in his field. He literally gave me the keys to the store! He helped me with every phase of the transaction and taught me his craft. (Thank you my friend... you know who you are.) We went through the sale and achieved a very good result! And I realized that there was a real role for an intermediary in the sale of an agency. Thus, a segment of my portfolio career was born.

So, at this juncture, I will tell you...break with convention and use an intermediary to sell your agency, or your insurance company. Why more people don't use an intermediary, I don't know, but they try to sell it themselves. They think the consultant costs too much! But, it the consultant does the job properly, they should make you money as well as earning their fee!

I contend that 75% of the deals which are begun by individuals on their own are never consummated. If they are consummated, they are not maximized from either the standpoint of the purchaser or the seller. Several crucial and definable steps exist in the sale of an agency and I can find a million reasons not to do it yourself. In this article I will speak of but twelve and point out examples of what may happen if you do not use a consultant.

Twelve Reasons:
1. Confidentiality
2. Cash flow
3. Seller security
4. Maximizing value
5. Knowing the agency market
6. Understanding the tax law
7. Understanding the types of sale
8. Leverage
9. Keeping the deal moving
10. Managing the emotions
11. The role of other advisors
12. Closing the deal


1. Confidentiality

Your first reaction when you sell is to talk about it. You discuss it with some trusted marketing people and, the first thing you know, you have a herd of 'Buyers'." From experience, let me tell you there is a world of difference between a "Buyer" and a "Purchaser." A lot of buyers have no money. They want you to hold the paper and expect you to do the deal on a wing and a prayer. An unsophisticated buyer is truly dangerous. You can get into more trouble than a little.

One of the questions usually asked is for a list of your top ten accounts. No confidentiality agreement...just gave him the list. I saw an agent give out the list and then not sell it to the party. The purchaser who consummated the deal lost five of the top ten accounts within the next year as a competitor had an ex list of the best and biggest accounts in his new book of business. At the closing, the purchaser did not even know the list was out. Surprise!

In another case, a marketing rep who thought he was being helpful told the agent, "I can give a run of your volume to your competitor who I brought in to purchase your agency." When the list was finally delivered to the seller (approximately three weeks after it had been given to the competitor), what he had given the competitor was a complete ex list of the policies in the book of the seller. Can't tell you the outcome as the seller has been trying to close his own deal for nearly a year now. But the consultant is "too expensive." They have had five buyers at the table, that I know of, who have walked away.

When consultants approach potential purchasers, the first thing we do is get a confidentiality agreement. Subsequent to that, we scrub all of the data you give us and make sure that, should the deal not go through, there is nothing in there they can use! This is paramount. The value of the book diminishes with time and abuse. The last thing you want to be as a seller is a Wanna Be...employees get spooked, purchasers pick up bad things on the street...this can turn into a real mess trying to do this yourself.

I remember reading about the "now gone bad" merger of Chrysler and Daimler, about clandestine meetings in Switzerland to negotiate the deal. In a publicly traded company the stakes are bigger but, in a private firm, lack of confidentiality can ruin a deal. In one situation I was working, a marketing rep learned of a situation that was for sale. They told another buyer and all of a sudden we had a potential purchaser that we did not even want to sell the agency to in the picture. The marketing representative almost cost the agent the deal on which we were nearly complete. I could see a strong possibility of the company being sued. The marketing rep nearly cost the agent the deal. People from insurers cannot be expected to know how an agency sale works. Leave it to the professionals and keep the deal confidential.


2. Cash flow

The Price of your agency depends on what the purchaser can afford to pay. Too many deals are set up to sail from inception. A good example exists in a recent sale of a small book of business to another small seller. They thought my price was outrageous! They just did it themselves. Nothing in writing...just did it. Guess what? The first month went by and the purchaser was calling the seller. Why? According to the purchaser, "I thought I was getting income here. I haven't gotten any commission checks." "Well, they are not yours," replied the seller. "This is business I sold last month." "Well, guess what Seller," said the purchaser, "you ain't getting a check this month. I don't have any money!"

And then, when the purchaser realized the seller was entitled to the contingencies, it really hit the proverbial fan. It is my understanding that the seller has discontinued payments altogether. The Profit Sharing payments and the overpayment for the book has angered everyone. The purchaser had been through bankruptcy in the past and it looks like they simply are not going to make any more payments. These people were good friends. I doubt if they will be exchanging laughs at the next cocktail party. The deal was doomed, from day one, over simple stuff and missed expectations. The seller's last conversation with me revolved something around balking at my fee.


3. Seller security

We all know stories about the kids taking over the family agency and dad or mom being back in the business at 70 years old. My friend, the consultant who taught me my craft, has a saying about family perpetuation: "Just Say NO!" Aside from the family issue, several deals are built with inadequate security. The transaction needs to be treated like a banking transaction and appropriate security and payment terms must be secured. A negotiation between two parties rarely is objectively done. Attorneys are trained to find problems, not make deals work. Rare is the attorney who has the ability to make a balanced deal. They properly represent their client and see one side of the issue. The consultant can talk to both sides of the deal. The attorney cannot.

To negotiate your way through a minefield, you need a long stick. The consultant is this long stick. When the deal terms go to the attorney, they need to go in such a way the attorney can make them work, not in such a way that the attorney is put in the position of trying to make the terms work for both parties. While there are attorneys who can do this, most are trained to advocate for their own client only. In fact, they are ethically bound to represent their client, not to balance the deal. The consultant will assist in working out terms that work.

Increased security also comes from people feeling much more secure with an independent third party in the middle of the transaction. The purchasers can say what is on their mind, even if it is negative. The seller can feel comfortable that all of the "skeletons" that everyone has are out in the open, or that they are not pertinent to the sale. Many times people are selling under distressed circumstances. When this occurs, the consultant can put many fears to rest on the part of both the purchaser and seller. It saves embarrassment on the part of both parties and makes the transaction go much smoother. In fact, as I indicated, in most cases it makes the difference between a good deal and a great deal.


4. Maximizing Value

To maximize your value you need to have a perspective of how deals work, know how to manage the time value of money, and have plenty of time. Howard's law is "It's not about money, it's about time." Most deals can work if they are properly structured, but improper structure sets the parties up to fail. Extensive experience is required and extensive knowledge of how the insurance industry works are needed to make deals work. To maximize value, you need to understand the principles of business appraisal. You need time and you need the will to change the way you do business in the interest of maximizing value. This is true when we handle the sale of an agency or an insurer. You can see it in the way a company operates. YOU CAN HAVE A DRAMATIC INFLUENCE ON WHAT YOUR ORGANIZATION IS WORTH. To do this you need professional advice and you need time.

Recently, an agency that was owned by an out of state entity was sold. Several times I had solicited the principal of the out of state agency and told him I had several interested purchasers for the book of business. The agency was subsequently purchased by a local agent, without the benefit of a consultant. The purchaser called me to help them with details of the cash flow and other information for the purchase. As sophisticated purchasers, they had gathered the information and had made an offer for the book of business. Curious to see what was up with the out of state seller, I asked the purchaser how the seller was feeling about the deal. I was somewhat surprised they had not used me to market the agency, knowing we could create competition for the book of business.

"Well," the purchaser said, "they are not particularly happy with the amount we are paying them for the agency, but we have a signed deal." Knowing the particulars of the purchase, I know the Seller left at least $150,000 to $200,000 on the table that I could have gotten them from one of my own clients. My entire fee would have been less than half that amount. My experience to date is that, by knowing how deals are structured, I can usually bring my fee and an additional amount at least equal to my fee, over and above what the seller could realize on their own. This held true in this deal, but the seller was so short sighted and so fearful of paying a consulting fee that they chose to leave this money on the table. It is hard for me to believe that good business people cannot see the value of the consultant and are so penny wise and pound foolish.


5. Knowing the agency market

Knowing the market is critical. You need to know who is buying and who is selling. You need to build a database of information relative to sale prices. You need to understand business appraisal. You need to have a perspective, which you can only gain by handling many agency deals.

Without this knowledge, you are dangerously unequipped to deal with the ramifications of selling your agency. You are like a plumber with no tools. Only consultants and the consolidators have access to this information. It is confidential in virtually all purchase and sale agreements. Which would you rather be, the seller at the hands of a knowledgeable consolidator or the client of a consultant who has knowledge in all these areas and is advocating for you? This choice makes the fee look quite small, doesn't it? It is like when a client says to you, "Boy, that's expensive," and you can look them right in the eye and say, "Yes, but if you have a claim, it gets really inexpensive really fast!"


6. Understanding the tax law

In a recent closing in which I represented the seller, the purchaser's attorney said. "Oh, one small change...the purchaser's accountant wants to reallocate some of the sale. It will give them a quicker write off." I questioned if this would give them a shorter amortization schedule. "The accountant says it will," answered the attorney. "Do you agree?" I asked. "I don't know, but the accountant says it will," then purchasers attorney replied.

Two days earlier, my client told me when the closing was scheduled. "But you won't need to be there," he said. "Your work is all done." "Wrong," I said, "I intend to be there." "Why?" asked my client. "I don't know, I just need to be there," I answered.

I asked the attorney, "How much does the accountant want to reallocate?" "Fifteen percent of the sale price," was the answer. "May I borrow your calculator?" I asked my client's attorney. I quickly calculated a couple of numbers. "Reallocation will result in no additional savings, just an acceleration of the depreciation and amortization schedule," I said. "Can we agree on that?" "Yes," said the purchaser's attorney. "Well, then lets arbitrarily assign a value of $5,000.00 to this that fair?" I asked. "Yes," came the reply from the purchaser's attorney after some thought. "Do you realize that this reallocation is going to change the seller's tax liability on this portion of the transaction from Capital Gains to Ordinary Income?" I asked. "I don't know," replied the attorney. "Well it will," I said, "so to realize this phantom $5,000 you just saved your client, do you realize you cost my client approximately $60,000.00?" A surprised look emanated from the purchaser's team. "May we step out of the room?" they asked.

After they left, my seller's attorney looked at me and said, "Thank God you were here. I haven't studied this type of taxation since law school. I didn't realize how much this would have cost our client." The purchaser returned to the room and said they would leave the allocation as it had originally been proposed. The seller would have agreed with the purchaser's proposed reallocation willingly if not for my presence. "You just paid over half your fee," my client told me afterward. "It sure makes you worth your money!" As a consultant working exclusively with insurance mergers and acquisitions, you gain a thorough grasp of the IRS and these types of transactions. Attorneys and accountants understand taxation and the law, but they seldom work with any one type of entity enough to have the specialized knowledge they need for specialized transactions, like insurance organizations.

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Copyright 2000 by Howard Candage. Used with permission.

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