Timing Your Exit

At this point it’s no secret that valuations for insurance agencies are up dramatically the last few years.  Depending on who you talk to, or what publication you read they’ve increased 20 - 30%.  We agree with this assessment, though it’s too simple to simply assume all agencies are currently worth more.  Not all agencies are created equal (a topic we’ll cover in a future post).  

Back to the topic at hand.  Over the last few years cheap debt and aggressive private equity groups have made it a great time for insurance agency sellers to capitalize on a hot M&A market.  But with the trend of increased valuations and purchase prices, there’s been a key structural change required by buyers that often determines whether a seller is able to reap the rewards of this current spike in prices.  That change is the length of time the seller is required to stay on after the transaction closes.

If you think about it, with prices increasing by 20% - 30, the margin of error for buyers has nearly disappeared.  No longer can they afford to potentially risk losing a large client, key producers or have unforeseen operational issues that lead to even the slightest decrease in revenue in the seller’s business…there simply is no cushion for that to occur.  Oftentimes in the years leading up to a sale, a business owner touts how vital they’ve been to the growth of the organization, after all, no one can do  it like you can…which likely isn’t far from the truth.  However, as soon as the time comes to sell the company and plan your 3 month long vacation to Bora Bora, that same business owner will tell the buyer that they’ll experience no business interruption when the seller suddenly is no longer present in the business.  Buyers these days are too savvy and understand that isn’t the case, and frankly want no part of that discussion because they have to do everything possible to, at a minimum, keep the business in it’s current state.  The reality is they likely need to increase revenue and profitability by 5% - 10% over the next few years, at a minimum, to make a decent return on the acquisition.  

Over the past few years there is one question asked by nearly every buyer at the onset of the marketing process during our engagements:  How long is the seller willing to stay on post-closing?  If the answer to that question is “a few months”, buyers will oftentimes walk from 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 begin to get aggressive.  

There is no one size fits all approach to how a buyer will handle integrating the seller’s business after closing, but it isn’t hard to see their logic in wanting the seller to stay on after closing.  The first year after the deal takes place is typically spent on integrating the business into the buyer’s operation.  The second year is then spent on trying to grow the firm as much as possible and the third can be spent properly transitioning the former owner out to the business.  

What does this mean for someone looking to sell their business within the next few years?  You might need to start the process a few years in advance from your “walk away” date.  If not, be prepared to either receive a lower offer for your business, be forced to pick from less than ideal buyer candidates or work longer than you wanted.