Many insurance agents dream of the day when they can sit back,kick up their feet, relax and enjoy the rewards of their hard work.They may be thinking they'll just slow down and work less, or theymay think they want to retire completely.

Either way, they typically have only one of two options in mindfor their business when that day comes:

1. Create a business that runs on its own and provides its ownerwith consistent cash flow — one with very little dependence onowners being present to accomplish growth.
2. Sell the business to an outside investor for a nice valuation,based on a multiple of the practice's revenue or earnings.

Related: 6 tips to get your financial services practiceready to sell

Whether it's the automated cash flow machine you want or a sellout, both of these strategies would be a great option for asuccessful advisor to have in order to live the retirement yearsthey've always dreamed of.

But nine times out of 10, these businesspeople either end upwith a practice that is much more dependent on them than theyexpected, forcing them to work and not retire at all. Or thevaluation they get on their business and what they thought it wouldbe worth, are miles apart.

I spoke with a successful financial advisor recently —let's refer to him as “Mike” — who was at this point in his life.He was reaching retirement age and was very proud of the businesshe had built over the last 30 years. He knew all of the blood,sweat and tears it took to build his business. He was sure thebusiness would be very attractive to buyers, and expected to get ahigh valuation for it. Besides, he had heard, the bigger thebusiness, the higher the multiple he would get… right?

Unfortunately, outside investors had another opinion on what hiscompany was worth.

An earn-out vs. a sale

I asked Mike two simple questions: “If you left yourbusiness for two months, would it run by itself? Would it be ableto grow on its own?”

His answer? “No.”

This highlights one of the biggest fallacies regarding the timewhen an advisor tries to sell his or her business. Most believethey can sell their business for cash and sail off into the sunset.Many advisor practices, however, are reliant on the business owner,making it very hard to sell.

Related: How to maximize the value of youragency

Rather than a sellout, in almost every one of these situations,the purchase comes in the form of an 'earn-out.' An earn-out, onthe surface, is much like a sale. An investor gives you a cashmultiple on your business. However, since it's an earn-out, thedeal requires you to stay on as an employee for a minimum of twoyears are more. This effectively takes you from owning a businessthat you built, to working as an employee in the business you builtbut no longer own, which is far different from being retired.

Does that sound like a good idea to you? Welcome to the world ofearn-outs.

A sale, on the other hand, gives a business owner a nice payoutand no obligation to stay on as staff. So how can you build asuccessful advisory practice that gives you the option to get areal sale when it's time to retire as opposed to an earn-out?

Many of the same steps you may need to take to build a moresellable buisness will ultimately create a better-run business.(Photo: iStock)

Building a sellable business

One of the biggest issues with a insurance agent's practice isthat many advisors focus on cash flow but forget about equityvaluation. It's a service-based business, so this is natural. Butin order to create a sellable business, you need to focus on cashflow and overall equity value.

You essentially need to create a well-oiled machine that can runwithout you.

After speaking with Mike, here are seven things I suggested hedo in order to create a business that sells, rather than one thatearns-out:

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            1. Delegate operations. Your financial advisoryfirm needs to be able to operate without you being there. Thismeans that you need to better train your employees to handle all ofthe responsibilities within your office. You've got to wean yourbusiness off of it's dependence on you, and every other employee aswell. You more than likely will need to hire additional employeesin order to do this. The business needs to run smoothly while youare away. If you aren't sure if your business can do this,here's a test. Take a 1-2 month sabbatical and you will seereally quick whether or not your business can run without you beingthere. This test will also bring light to whatresponsibilities and problems your being gone creates. Thingsyou need to fix will be exposed.
            2. Build out processes. In addition to bettertraining your team, you've got to build out and document yourprocesses. Your processes should be so clear that if any oneemployee left, another employee could easily step in without havingto reinvent the wheel. This gives potential buyers confidence thatyour business is resting solely on your shoulders, or the shouldersof any single employee.
            3. Set up a solid sales team. Many advisor salescome 100 percent from them, and no one else. This is not the makingof a sellable business. Instead, focus on creating a sales teamthat can bring in the lion's share of revenue so that your businesscan not only operate, but grow, when you are gone. Again, yoursales process needs to be documented and easy to follow so that anew owner could bring in fresh sales people to follow it andsucceed with the tested proven formula you created.
            4. Know your niche. Many advisors build abusiness where they are the “jack of all trades” and handle everylittle thing a client needs. To maximize the value of yourbusiness, however, you are better off focusing on one or two areasthat your business can do really well. It's much easier toduplicate your process with others this way, and it also increasesthe quality of the work you do as you can train and hirespecialists as opposed to generalists.
            5. Your numbers are golden. You need to measureand track all of your numbers in order to sell your business. Youneed to be able to show real cash flow. You should be able to showthe cost of acquiring new clients, as well as the sales ratios. Ifa new owner were to invest $100,000 in marketing in your business,with your processes built, they should have a reasonableexpectation regarding the amount of revenuethat investment wouldgenerate. All of these are things that a potential buyer will wantto know in order to take buying your businessseriously.
            6. Establish high-volume, reoccurring revenue. Isyour business built solely on up-front commission sales, or do youhave reoccurring revenue that comes in each and every year? Inorder to maximize the value of your business, you've got to haveongoing revenue. The bigger your business is, and the more ongoingrevenue you have, the more attractive it is to the potential buyer,which will increase your valuation.
            7. Diversify your client base. You also need yourbusiness diversified among a large and type of of clients. If 35percent of your revenue comes from one client relationship, it'sgoing to be discounted. This is a perfect example of the success ofyour business being dependent on one person.

As an insurance agency owner, whether you want to create asellable business, or one that is just a cash flow machine, many ofthe same steps that we've outlined above are required as you areultimately creating a better run business. This is a work inprogress, and will take time, but once this is created correctlyyour business will give you more freedom and satisfaction than youever could have dreamed. The possibilities for your success areendless.

Related: Selling your agency: Top 10must-dos

Shawn Sparks is the author of the “The Advisor Breakthrough.” Email him at [email protected].