Agency Sellers Who Fly SoloRisk Crashing
Selling an insurance agency is not simple, according to executives familiar with the process, who suggest that for independent agents who do not seek professional help the outcome can often be disappointing.
The first place many agents turn to for help when beginning the process is their local or national association. Association executives say that while they do not provide services to assist agents with a sale, they can help with reference materials and a list of consultants who can smooth out the process.
Generally, association officials advise agents that after finishing their research and getting their books in order, they should contact a consultant to guide them through the merger and acquisition process, no matter what size the agency.
Among the calls received regularly at the Alexandria, Va., offices of the Independent Insurance Agents of America, questions about selling an agency are the most common, according to Madelyn Flannagan, the IIAAs vice president for research and education. Members can get articles and studies to direct agents in improving the value of their agency, but the nuts and bolts of the deal, Ms. Flannagan said, need to be left to the experts.
"No one should do this on their own," observed Ms. Flannagan, adding that those agents who have gone solo usually are unhappy with the result, especially concerning tax implications.
Strategically, sellers need to understand what a buyer is looking for, and that buyers often want more than just the purchase of a book of business, according to Patricia A. Borowski, division vice president for the National Association of Professional Insurance Agents, also based in Alexandria. The purchase, she said, is usually a strategic move aimed at helping improve a segment of the buyers agency business.
"The biggest mistake sellers make is to look at a book and determine a deal based on what they need for retirement; that is a non-starter," Ms. Borowski said. "The seller needs to think as a buyer and put their agency in the right position."
The next step in the process, Ms. Borowski advised, is to find an agency valuation expert, for which the association can be helpful.
The advantage to employing an outside M&A expert is not only to recognize the value of the sellers agency, but also to find the right fit, observers say.
What makes the expert's participation critical is that an insurance agency is valued differently from other business models, the association executives said. There are also critical questions about finding the right cultural fit in a merger or acquisition, they added.
Observers say that the critical advantages outside experts offer become clear during the negotiation process, which can be "a delicate balance" between the interests of the seller and buyer. If not handled properly, a poor negotiation can "destroy the future relationship" among the principals in a merger or takeover, warned John Wepler, senior vice president of M&As for Marsh Berry and Company Inc., an insurance consulting firm in Concord, Ohio.
Having a mediator in a transaction allows for some distance between the two sides and preserves a positive relationship as negotiations progress, he said.
The worst process a potential seller can follow is to create a list of target buyers and mail out solicitations, said Mr. Wepler. "The buyer believes you are only thinking about money and do not care about a partnership or if you plan to stay around," he said. "The seller needs to identify a partner for a perfect fit and figure out how to manage that fit."
Managing that fit can include considerations such as business philosophy, management style and plans for the future of the newly consolidated agency, Mr. Wepler observed.
While one philosophy of selling concentrates on finding the perfect fit and then negotiating the details, ultimately the sale comes down to finding the best deal among "qualified" bidders before negotiations begins, according to Tom Doran, a principal with Reagan Consulting in Atlanta.
While it is possible after looking at the financials to make a determination of what an agency should be worth, ultimately it is the price that a buyer is willing to pay that determines the sale, Mr. Doran explained. The bidding process, he pointed out, will often produce a price 20 to 30 percent higher than the appraisal.
In the current seller's market, where buyers are exceeding the number of agencies up for sale, the price for agencies is continuing to be pushed up, Mr. Doran pointed out.
Timing is also a major issue, because an agent wants to sell at the point where the agency is strong and not in decline, Mr. Wepler pointed out.
"Quite often the best option at the end of the process is to remain independent," Mr. Wepler observed. "If you cannot find the right partner with the right match of strategic options, then often not selling is best [option]."
However, the question of selling an agency is one that a producer needs to ask each year, beginning on Jan. 1, Mr. Wepler added.
"When you go through the process, its a tremendously eye-opening experience," said Mr. Doran. "Its like a marriage. You do not know until you are in it what the process is all about."
Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, November 19, 2001. Copyright 2001 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.
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