Thinking about selling your middle market insurance brokerage or agency?

No doubt, today's thriving acquisitions market — fueled by asset-hungry private equity companies, venture capitalists as well as national and regional insurance firms — is certainly enticing. It is safe to say that these interested buyers will continue to seek profitable brokerages and agencies (together referred to as “agencies”) as we move toward the latter part of 2017.

One explanation for the continued interest in middle market agencies is the relative lack of alternatives for capital in this broader market. To date, many larger independent agencies have either been sold or do not intend to sell. Yet despite the trend of middle market acquisitions, not all available agencies will receive top dollar. Notwithstanding substantial demand, buyers have become increasingly selective as they round out their portfolios.

For you would-be sellers hoping to command real value for your companies, profitability is key, as is a forecast of ongoing growth and a plan to attract new commercial line accounts. Beyond these basic principles, this article discusses three important steps you should take to turbocharge your agency for sale:

1. 1. 1. Organize your finances for acquisition;
    2. Conduct preemptive due diligence; and
    3. Know your market (not just your business) and identify meaningful opportunities for expansion.

Organize your finances for sale

Hands down, the most important factor in the sale of an independent agency is its profitability. Indeed, a successful acquisition ultimately comes down to dollars and cents. Remarkably, however, most business owners fail to organize their finances for acquisition. But to best position an agency for sale, owners must shape — in purposeful and deliberate ways — their revenue and expenses. For many, this is easier said than done.

Too often, owners do not determine from where their revenue derives and expenses occur, a critical mistake in the insurance industry. Thus, if serious about selling your agency, you must first understand your revenue sources. This means:

- - - Knowing your largest clients’ growth or decline year-on-year and over the prior three-to-five-year span;
    - Determining your client retention rate and with whom you might have an opportunity to expand business; and
    - Pinpointing overall revenue growth and decline.

Regarding expenses, you need to dig deep when analyzing them too. As with revenue, not all costs are created equal. For instance, personnel expenses (e.g., salary and benefits) associated with new employees expected to bring in additional income should be looked upon differently than outlays for personnel having no corresponding ROI. The same can be said of costs for new technology. The financial impact of technological investments that increase productivity and, in turn, revenue should be accurately reflected in financial modeling.

Financial statements can tell a number of different stories. By way of example, financials simply demonstrating an overall 3 percent increase in revenue are unlike those illustrating that same 3 percent rise, but also emphasizing a 15 percent gain in a market segment critical to future growth — a fact sure to be of great interest to a buyer. And when it comes to the articulation of expenses, a potential purchaser would find a year-on-year cost increase of 7 percent far less daunting when the surge is solely due to investment in platforms sure to boost income and cut expenses in the long run. The takeaway: sellers must organize and convey their finances in ways that best represent the value of their agencies.

Have you developed a clear picture of your business? (Photo: iStock)

Preemptive due diligence

Once you have developed a clear picture of your business and fully appreciate, among other things, which lines are growing, lines that are stable, and those in decline, you are ready to move on to the second step toward turbocharging your agency for sale — making sure the business will survive buyer due diligence.

Sellers that fail to perform a bit of housekeeping prior to sale — like confirming licenses are in good standing or ensuring regulatory mandates have been complied with — stand to leave money on the table. To maximize value, it would be wise to do all of the following in anticipation of the sale of your agency:

- - - Confirm your licenses are up-to-date and ascertain their renewal dates.
    - Verify all employee licenses have been properly maintained.
    - Identify any regulatory changes that impact your business (both positively and negatively).
    - Solve any outstanding employment issues.
    - Understand the nature of your contracts with carriers and any restrictions they may impose.
    - Know your insurance coverage.
    - Recognize any prior, ongoing, or potential litigation.
    - Confirm that all compliance manuals and training are current.

This is by no means an exhaustive list, but it is representative of the types of housekeeping items sellers should have on their collective radar screens when preparing agencies for sale. By addressing these matters ahead of time (and before your buyer does during its due diligence process), you avoid, for instance, the buyer discovering your licenses have expired in two of the three states in which you operate, or that you have failed to implement a new cybersecurity policy as required state regulation. Such lapses create doubt about the health of your business and provide the buyer leverage on price.

There is no denying that it makes buyers more confident when a business is well organized and tidy. Make sure yours is both in order to extract a maximum sales price.

Identify opportunities for market expansion

You now know to organize the revenue and expenses of your agency to tell its best financial story, and are poised to take pro-active housekeeping steps to tidy the business up for sale. What is left to do to add value to any potential purchase?

Step three is to know your market and be able to explain its worth to the parties lining up to buy. Toward that end, ask yourself these questions:

1. 1. 1. What are the value drivers for your current and prospective clients?
    2. How do clients judge your product or service offerings?
    3. What is the economic, political, and cultural landscape of your target client?
    4. How are you creating a value-added experience for your client base?
    5. Can client value be created through collaboration?
    6. Are there any proposed statutes or regulations which may affect your business?

In-depth responses to these queries should provide benchmarks to understand how to increase customer acquisition, satisfaction, retention, and add-on selling — data that can be conveyed to your prospective buyer, serving as a roadmap for continued success and growth of your agency.

As stated at the outset, the market for independent agencies is a hot one. But a top dollar sale is certainly no guarantee. To command the best price for your business, be mindful of the three turbocharging steps.

Michael Hatchett (hatchett@mrllp.com) is a leading transactional lawyer and a partner in Michelman & Robinson, LLP’s New York office. JillAllison Opell (jaopell@mrllp.com) serves as chair of the Insurance Industry Group at Michelman & Robinson, LLP.

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3 ways to turbocharge the sale of your insurance business

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