In today’s independent agency space, the increased frequency, size, and temptation of external sales are both inevitable and undeniable. IA Valuations, a DBA for the Ohio Insurance Agents Association (OIA), cares about seeing agency owners exit well, regardless of whether it is an internal or external sale. Good exits create good stories, which generates interest from the next generation in the IA industry.
Would you sell a house without staging it? Would you sell a car without detailing it? If not, then do not sell an agency without preparing it. First, define your exit strategy. If selling externally is an option for you, then you will want to focus on preparing these three aspects of your insurance agency: talent, book of business, and financials.
Talent
Operations – Get your agency’s operations delegated to unlock growth.
Among best practice agencies, deemed by the Big “I” and Reagan Consulting, the role that agencies are most frequently considering adding to their leadership team, if any, is a Chief Operating Officer (OOO). Why? This is so the principals can focus on growth. So many agency owners get distracted from selling insurance because of having to operate the agency. Strong growth metrics are a primary way to maximize your agency’s value in preparation for a sale. Whether it’s a COO or not, consider passing the reigns of the agency’s operations to someone whom you trust.
Whole Staff – Get younger at every position.
This sounds like advice for an NFL team, but it applies to insurance agencies as well. Having staff that make up a wide range of age bands decreases the risk associated with the transferability of the agency. Transferability is the ability of the agency to operate under new ownership. When thinking of age diversity, we suggest thinking of your staff in the following bands: under 35, 36-45, 46-55, and over 55. Depending on agency size, try to have employees from 2 or more age bands in service, sales, and leadership positions.
Agency Principal – Do not wait until you feel “ready” to sell or retire to begin preparing the agency.
Unlike staging a home or detailing a car, getting ready to sell can take years. If you wait until you are ready to sell or retire, then you are behind. Oftentimes, once owners are at this point mentally, they want to get the deal done within the next 6-12 months, which may not be enough time to get your agency prepared in the ways that we, and other insurance consultants, recommend.
Book of Business
Take care of your clients.
Retention is king above any other variable of an insurance agency. The appeal of insurance agencies and the EBITDA multiples they fetch are built on their recurring revenue streams, aka retention. So, do not let servicing your clients, especially the large ones, fall to the wayside while more attention is diverted to the future of the agency. Continue to exceptionally take care of your clients above all else! Target the mid-90s for retention rate to be best in the business. If a carrier does not provide retention rates as part of their production reports, try calculating retention rates yourself. Base it on the policies in force, if possible, or written premium if PIF is not available.
Increase the profitability of your book.
Creditors and buyers from inside and outside the industry know that an agency’s loss ratio results reflect the quality of their book of business. If high loss ratios can be explained by catastrophes or shock losses, then do not fret if you are looking to sell in a year where the agency’s results are sub-optimal. What could really hurt the value of the agency is consistently high loss ratio results that do not have specific explanations. Agencies that we have worked with have an average loss ratio amongst their top 5 carriers in the 45-55% range.
Financials
Clean up the agency’s bookkeeping.
What are your agency’s bookkeeping practices? We have worked with agencies all over the bookkeeping spectrum: from the owner spending “2%” of their time on the books to completely outsourced bookkeeping to insurance agency-experienced accountants. When going to sell an agency, one of the largest potential time-sucks in the sales process is non-succinct and unclear income statements or balance sheets. Selling an agency is all about eliminating potential questions for buyers. Messy financials can raise a lot of questions, which slows down sales.
If you have not had a third-party review your agency’s financial statements, then do so as a next step. Get an agency valuation, look for a CPA with insurance agency experience, or have a trusted advisor review them and have them review them for clarity. This is the first step to cleaning up the bookkeeping.
Get non-agency related expenses off the books.
Are your NFL season tickets run through the agency? Personal automobile expenses? Social club dues? Although these things can be easily justified to help an agent sell insurance, preparing an agency to sell is about demonstrating the agency’s ability to return high profit margins.
This is where the analogy of staging a house to sell is the strongest. As you clean and stage a house to sell, so should an agency owner have their expenses cleaned up. Typically, the attention to detail when staging a house to sell is far greater than the average weekend “de-cluttering.” Apply this same extra rigor and attention to detail when considering what expenses can be taken off the agency’s books. The potential short-term financial decrease in personal income will be well worth it for the long-term gain on the sale of a high profit margin agency.
Finally
The insurance agency is the agency owner’s largest financial asset, usually. Too often, agency owners do not prioritize exiting ownership the same way they prioritize their clients. If not prioritized, it is not only to the detriment of the agency owner but also to the detriment of the industry. Sub-par ownership exits create negative stories. Negative stories lead to a lack of interest from the next generation in the IA industry.
IA Valuations, as a DBA for the Ohio Insurance Agents Association, cares about protecting, progressing, and promoting the health of the independent agency channel. It matters to us that agency owners take great care of their agencies. It matters to us that they make the most of their exit from ownership. Maximized exits of agency owners create overwhelmingly positive stories that fall on the ears of the next generation of owners, thus, spurring on the future of our great industry.
By: Jarod Steed, Business Planning & Valuation Analyst for IA Valuations and OIA
About IA Valuations and Agency Link – Founded in 2017, the IA Valuations team has performed over 270 valuations to independent insurance agencies across the U.S. Our advisors have 25+ years of experience guiding agency owners on maximizing their agency value, planning, and legal needs for ownership transition. In addition, IA Valuations has provided perpetuation planning, financial modeling and business planning for independent insurance agencies. Finally, IA Valuations has advised dozens of agency owners on selling their agencies through our Agency Link process. Agency Link is a platform that connects buyers and sellers together to further the growth and strength of the IA system. To learn more about IA Valuations, please visit IAValuations.com or contact@iavaluations.com.
The information provided in these documents is general in nature and shall not be construed as personal legal, tax or financial advice for your situation. Please contact@iavaluations.com to discuss your personal situation.
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