Firms with superior leadership, young talent and a sales cultureget the best price

You've all heard the story about the agency down the street andthe deal they got when they sold out to the bank, or the nationalbroker, or the newest insurance consolidator. They gottwo-times-revenue! Or three-times! The ubiquitoushigh-multiple-of-revenue deal is enough to make you wonder whetherit makes sense to remain privately held.

Before you pack it in and head off looking for the ultimatepayday, keep in mind that you are probably only getting half of thestory from the seller, if that.

The truth is that since most agency sales today are tied to an“earn-out”–in which a significant portion of the purchaseconsideration isn't paid for several years after the dealcloses–the “real” sale price is generally unknown at closing.

In an earn-out arrangement, the ultimate purchase price isheavily influenced by the selling agency's performance after theagency is sold. So, more accurately, the seller should say, “I mayget two-times-revenue for my agency.” That one word, may–it makesall the difference, doesn't it?

What if I told you I'd buy your business for two-times-revenueif you grow it for three years at 15 percent per year and generatea 25 percent margin? If you sold it to me, you'd be on the golfcourse next week bragging about your deal.

Fast-forward three years, after you delivered three years of 7.5percent growth and an 18 percent margin and your final earn-outcheck brings the total purchase price multiple to1.5-times-revenue. Are you going to bring your agency owner buddiesback together to inform them of the “real” multiple you were paid?Probably not. They'll go on kicking themselves that you got thetwo-multiple and they didn't!

Be very careful before you believe everything you hear aboutwhat an agency sold for. Many times, the reality differs from thestory told. High-multiple agencies are, in fact, rarer than youmight imagine.

There are, however, agencies that actually sell at the hugerevenue multiples–north of two-times-revenue, sometimes well northof it. What do these exceptional agencies look like? What do theyhave going for them that the average agency does not? Is it a goodname? A storied history? A prime location? A stellar reputation?What really makes an agency a high-multiple firm?

Simply put, a high-margin, high-growth agency is one that sellsfor a high multiple of revenues, but that answer is too broad. It'slike answering the question, “what does a major league baseballplayer look like?” by saying it's someone who is “fast, strong andable to hit a curve ball.” We know that. The question is how did hedevelop those attributes? What were the disciplines and habits thatgot him to the major leagues? What does his DNA look like?

What does a high-margin, high-growth agency look like, when youreally break it down? How does an agency become a high-margin,fast-growing agency? What is the DNA of a high-multiple agency?

We know many agencies that really sold for high multiples andthere are, in fact, distinguishing characteristics that definethese insurance powerhouses. They generate high margins and growrapidly because they have many of the followingcharacteristics.

o Superior Leadership:

Superior leadership is perhaps the most common characteristic ofthe high-multiple agency–and not necessarily for the most obviousreasons. In his book “The Art of the Start: The Time-Tested,Battle-Hardened Guide for Anyone Starting Anything,” Guy Kawasaki(the former Apple Computer visionary) describes a highlyundesirable (and very common) organizational phenomenon called a“Bozo Explosion.”

A Bozo Explosion occurs when a “B-level” leader recruits andhires “C-level” players–who, in turn, recruit and hire “D-level”players, and so on and so on. Mr. Kawasaki's premise is that sub-Aplayers tend to hire individuals less talented than they are.Before you know it, you have an organization filled with Bozos!

Mr. Kawasaki states that “B-level” (or lower) leaders arelargely incapable of recruiting, hiring and retaining “A-level”talent, because “A-level” talent generally refuses to work foranyone who is not also an “A” player.

A Bozo Explosion is avoided when an “A-level” leader recruitsand hires other “A-level” employees, who, in turn, do the same.High-multiple agencies often have “A-players” as leaders that arecapable of recruiting and hiring other A-players throughout theorganization.

Ours is a people business–attract the best people and you arelikely to become the best agency, a high-multiple agency.

o Young Talent:

We recently represented a high-multiple agency in a sale inwhich the average producer's age was 35. For a buyer, this type ofyouth pool is a highly desirable characteristic of an acquisitiontarget. An agency in which the buyer will have to “reload” thetalent base shortly after the sale is not a high-multipleagency.

Buyers will necessarily account for the future “people”investment required when pricing a deal on an agency with too fewyoung employees. High-multiple agencies invest continually andheavily in young talent.

o Creative & Innovative:

High-multiple agencies beat the competition by being morecreative and innovative in the way they do business. One suchagency literally transformed its entire market area by offering asignificantly enhanced service experience–at no additional cost tothe buyer. How would you like to compete with someone selling avastly superior product at the same price?

This agency personified an “outside the box” attitude throughits creative and innovative commitment to continually improving itsservices. It did what its competitors said could not be done. Thisagency's growth rates averaged over 30 percent annually in theyears leading up to its sale.

Another high-multiple agency makes a practice of regularlyworking with its key markets to identify and exploit new nicheopportunities. These efforts sometimes result in exclusive programsthat greatly enhance the agency's competitive position.High-multiple agencies can generally offer solutions lower-multipleagencies cannot.

o Geographically Lucky:

Remember the old saying regarding the three most importantfactors in real estate–location, location and location? The sameholds true for many high-multiple agencies. Such a firm may besimply a very good agency that finds itself in the right place andthe right time.

Simply put, certain communities are more desirable to buyersthan others. If you find yourself in a high-growth communityunderrepresented by bank-owned insurance agencies or nationalbrokers, you may find yourself in a very fortunate position as aseller. To get the right agency and the right people in the rightcommunity, a highly motivated buyer may be willing to pay a“strategic” price that exceeds the actual economic value of anagency.

o A Sales Culture:

Excellent service is the cost of admission to the insurancebusiness. But excellent service is rarely a defining characteristicof an agency–without it, any agency would be hard pressed to remainin business very long. More often, agencies distinguish themselvesby their exceptional sales cultures, and this is almost always trueof the high-multiple agency.

An exceptional sales culture is one populated by exceptionalproducers. High-multiple agency producers tend to be well trained,specialists (rather than generalists), highly accountable forresults, highly selective about the business they target, wellsupported (and thus free to sell, rather than service), hardworkers and disciplined.

o Attractive Customer Base/Lines ofInsurance:

It's been said that you are known by the company you keep, andagencies are no different. High-multiple agencies are generallyvery focused on writing desirable lines of insurance with the rightcustomers. Generalist agencies that strive to be all things to allpeople are rarely high-multiple agencies–which tend to focus onprofitable, low-turnover business with affluent and loyalcustomers.

One high-multiple agency we know is, surprisingly, a 100 percentpersonal lines firm. With annual growth of 15-to-20 percent in acoastal resort community, this agency wrote high-ticket vacationand retirement homes. By focusing exclusively on this highlyprofitable niche, the agency quickly developed a reputation as apremier provider of high-end personal lines business.

When asked why his competitors hesitated to focus on thisbusiness, this agency's owner responded, “They think there's moremoney to be made writing all kinds of insurance for all kinds ofpeople.” This high-multiple agency sold to a local bank for amultiple well above two-times-revenue.

If and when it's time to sell your business, you no doubt hopeto negotiate a high-multiple sales price. By focusing your time andattention on what real high-multiple agencies look like, you mayget just what you hope for.

Tom Doran is a senior vice president and principal of ReaganConsulting Inc., an Atlanta-based management consulting firm thatdeveloped and produces the “Independent Insurance Agents &Brokers of America Best Practices Study.” The study may be accessedfree of charge at www.reaganconsulting.com.Mr. Doran may be reached at (404) 869-2534 or by e-mail at[email protected].

Caption for clown shot:

A “Bozo Explosion”–in which mediocre leaders toleratepoor-performing subordinates–devalues an agency. Those getting atop sales price employ “A-level” managers who attract top talent,not clowns who hire incompetent staff.

Quotebox, With Doran mug:

“Be very careful before you believe everything you hear aboutwhat an agency sold for. Many times, the reality differs from thestory told. High-multiple agencies are, in fact, rarer than youmight imagine.”

Tom Doran