Timing Your Exit to Maximize Agency Value
Unless you live in Arizona or Hawaii, congratulations on making it through the first week of Daylight Savings Time. One of two weeks each year, where “time” is a topic of conversation.
Timing is something we talk about every day at INS Capital Group. Cheap debt and aggressive private equity groups have created ideal conditions for insurance agency sellers to capitalize on the hot M&A market. Valuations for insurance agencies are up dramatically, between 20 and 30 percent, depending on who you talk to or the publication you read. We agree, though it is too simplistic to assume all agencies are worth more. Not all agencies are created equal. [Read about the Key Valuation Drivers for an Insurance Agency] However, the trend of increased valuations and purchases prices has created a key structural change required by buyers; the length of time the seller is required to stay on after the transaction closes.
Why are buyers requiring sellers to stay involved longer? With prices up an average of 25 percent, the margin of error for buyers has nearly disappeared. No longer can they afford to risk losing a large client, a key producer or have an unforeseen operational issue lead to even the slightest decrease in revenue in their newly acquired business; there is no cushion.
In the years leading up to a sale, a business owner will highlight how vital they’ve been to the growth of the organization. No one can do what you’ve done, which likely isn’t far from the truth. However, when you are ready to sell the agency and embark on your three-month Bora Bora vacation, your tune will change to assuring the buyer the business will continue to run smoothly, without any hiccups, when your expertise is no longer available. Current buyers are too savvy and know this isn’t the case. The reality is they likely need to increase revenue and profitability by 5 - 10% over the next few years to make a return on the acquisition.
The most common question potential buyers ask during the initial marketing process is how long the seller is willing to stay on post-closing? If our answer is “a few months”, buyers often dismiss the opportunity without even putting in an offer. On the flip side, if the answer is, “the seller is committed to staying on for a few years to ensure a smooth transition”, buyers become aggressive.
Each buyer integrates their acquired businesses differently, but it isn’t hard to see their logic in wanting the seller to stay on after closing. The first-year post closing is typically spent on integrating the business into their operation. The second year is spent growing the firm as much as possible and the third is used to properly transition the former owner out of the business.
What does this mean for someone interested in selling their business within the next few years? You might need to start the process a few years in advance of your desired “walk away” date. If not, be prepared to receive a lower offer, pick from less than ideal buyer candidates or work longer than you wanted.