Controlling Bids & Communication
Tensions can get high during the negotiation over the sale of a business. Both sides can be prone to brinkmanship in negotiations. By acting in the role of intermediary, a broker can take the edge off of some heated moments and communications between buyer and seller. This alone can prevent a lot of deals from collapsing in the heat of a misunderstanding – and of course, save both the buyer and seller from having to start the process from scratch with another counterparty.
A good broker can also diplomatically move the deal forward. “Time can be a deal killer,” says Mensch. A big part of the value a good intermediary can add is in nudging both sides to move the football toward the end zone – before something happens to derail the deal. If the deal is good, all sides benefit from it happening quickly.
Persky elaborates: “A general practitioner who doesn’t do agencies all the time might take a deal and shotgun it to 20 people. But then the seller has to talk to 20 different people, fielding questions because the broker doesn’t understand the industry. Plus, word gets out. You can get a nondisclosure agreement, but that doesn’t protect you people start talking, and when word gets out that an agency’s for sale, people can start leaving… We might shop a deal to, say, five people – not twenty – who we really know are qualified and serious.”
Using an Insurance Agency Specialist
Selling an insurance business is a lot different from selling a restaurant or tire shop. Many general business brokers get lost when they try to broker insurance agencies, says Mensch. First of all, they have a narrower pool of potential buyers to choose from, compared to an insurance industry specialist that has been in business, talking specifically to insurance agencies and the people who acquire them, for years. That Rolodex of contacts has value to the seller.
Second, there are issues with regulation, agent retention, production contracts, goodwill, residuals and cash flows that are very difficult for people who don’t have a background specific to insurance to understand. An insurance industry specialist can work with the seller to establish a reasonable asking price, taking into account all these factors that someone who sold a golf pro shop last week and a liquor store the week before would likely miss. “We know what’s realistic,” asserts Persky.
Understanding the Variables of Insurance Agency Operations
Dan Menzer relates a story from his own practice that underscores the importance of using an intermediary with a deep understanding of the insurance business. One of many possible sales structures is to assign a value to the business equal to a multiple of annual revenue – at least as a starting point for valuation purposes. One of Dan’s buyers – a frequent purchaser of insurance agencies – would routinely structure the deal as a multiple of revenue, payable in stages over two or three years after the sale, based on the revenue that actually came into the agency.
The hitch came when it became clear that a one-time hit due to a contingent commission that didn’t come to pass was going to result in an exceptionally low-revenue year for the agency. Because the risk that caused the agency to lose the contingent commission prior to the sale was a very unusual occurrence, Menzer was able to negotiate a variation to the contract with the buyer: “Give us an additional six months,” Menzer said, to allow the anomaly to fall off the books and for the firm’s revenues to revert to the mean. The buyer was an experienced agency buyer understood immediately, and the seller received a much better price as a result, which more fully reflected the true value of the business.
“General practitioners miss that,” Menzer says. “We see experienced lawyers miss things like that all the time.” Menzer, a CPA by training, asserts that this kind of detailed understanding of agency earnings and revenue streams helps him and other agency brokerage specialists “routinely” add much more value than broker commissions reflect.
Persky also goes an extra mile with potential clients: Suppose a seller is looking for a $1.5 million sale price to retire on. But after speaking with Persky, he finds that perhaps only a $1 million asking price is realistic. “We’ll leave him with a game plan – with specific recommendations – on what he can do to get the value of his agency up to the level he needs it to be.“
Broker vs. Doing it Yourself
That’s one way a broker who specializes in insurance agencies adds value. Had the seller tried to do it himself, he likely would have spent a lot of time and effort courting buyers – only to come away disappointed, and without much of a road map towards achieving his goals.
“Often you hear about people saying “I sold it myself,” and so they think they saved the commission,” says Persky. “That’s true to a certain extent, but it discounts the value that we can unlock. In 9 cases out of 10, the broker more than pays for their fee in value added to the sales price,” he estimates.
Menzer likens the agency sales brokering process to the process of insurance brokering. Yes, there is a commission for their efforts. But good intermediaries can consistently earn that commission back for their clients, many times over, in securing a faster and more efficient sales process, and also in helping agency principals secure a higher price for their business than they otherwise would. Just as your clients benefit from the value that a qualified, experienced and knowledgeable insurance professional brings to the table, and just as they need your help, you can also benefit from the services of a qualified and experienced business broker with specific expertise in the transfer of agencies.
Looking to start an Agency? Get detailed information by reading our Guide to Starting an Insurance Agency
