Jim Lehmann was on a golf course one day, chatting with a business colleague about why they didn’t do more business together. Age 65 was approaching, and Lehmann mentioned that he had been thinking about whether to sell his insurance marketing company, Innovative Marketing Strategies, and retire.
But he wasn’t sure he wanted to stop working just yet. He also worried about what would happen to his employees. “There were many good people at Innovative,” he recalled. “It was like a family business and I didn’t want to lose that.” And he wondered what would happen with the insurance agencies with which his firm worked.
“I knew I didn’t want to wait until I’m 93,” he said, but he also didn’t know when he would retire. Nor did he know what to do in order to start the process. He needed a plan and some help.
That’s the case for a lot of independent insurance agents these days. The situation is aggravated by the much publicized decline in number of advisors and paucity of young recruits.
The average age of independent agents and registered investment advisors is now in the late 50s, pointed out Allen Duck, a partner at Eighty20 Advisors, a practice management consulting firm in Fort Collins, Colo.
Furthermore, fewer young people are coming into the independent side of the life and health business. Those who do come in are culturally very different than their seniors – some may have an entitlement-orientation and poor work ethics, for instance – and that is making for difficulty in succession planning, he said.
This is a big concern for the insurance distribution business. “The business is in a very fragile position,” Duck contended. “Within the next five to seven years, insurers in the independent channels, the broker-dealers (B/Ds), insurance marketing organizations (IMOs) and field marketing organizations (FMOs) will suffer from the decline in the number of advisors,” he predicted.
It’s a problem for today as well. “If owners don’t sell their practices, the book of business goes back to the insurance company or the investment company,” he pointed out. Owners may wind up getting little or nothing for their business.
The problem is compounded by inaction. Only 11 percent of financial advisors responding to a survey by Signator Investors said they had completed a succession plan, according to a July report from the firm’s parent, John Hancock Financial Network. Earlier this year, the SEI Advisor Network reported that 68 percent of financial advisors it had surveyed had no formal succession plan; and in 2011, Fidelity Institutional Wealth Services found that 75 percent of registered investment advisors either had no such plans or had plans that weren’t ready to implement.
The situation may look bleak, especially for selling the firm. But experts say sales can and do happen, with lucrative offers possible for practices grossing $1 million to $3 million a year. Smaller shops, in the $500,000 category, can attract buyers too, depending on agency particulars. Even smaller firms can find buyers, if the firms have recurring revenues. But one-person shops bringing in up to $100,000 often just close the door – unless they learn what to do to become saleable.
Following are suggestions from experts on how to go about preparing to sell.
First, always look inside the firm to see if someone there is interested in buying, said Scott Tietz, chief executive officer of Partners Advantage Insurance Services, a national marketing organization in Riverside, Calif.
Assuming no one inside is interested, then look outside. “But before you do that, clean up the business,” Tietz said. Some businesses that at one time were making $400,000 a year are now making only $100,000, so the owners panic and want to sell now, he noted. “I tell them to turn it around first, and then sell.”
Turning it around means doing things like cutting out inefficiencies, getting out of long-term leases, paying off outstanding debt, keeping the profit-and-loss statements up to date and making sure that agency is using only one bank account.
Only one bank account? That’s right, Tietz said. “If a prospective buyer’s due diligence process finds more than one bank account, that will raise questions about whether you are transferring money back and forth between accounts. That looks suspicious to buyers, and it will take time to sort it out.”
Another step is to determine if you are selling the assets or the entire company, Tietz said, noting that “buyers typically want to buy the assets, but sellers typically want to sell the company because there is no tail to deal with later on.”
The seller also needs to put together some background information, such as the history of the agency and its financials, organizational structure and special niches, said Rob Lieblein, executive vice president at MarshBerry, a consulting service for independent agents and brokers.
“Also include how you grew the business, where it is today, and provide information about the employees (salaries, bonuses, etc.), carrier relationships and client base,” Lieblein said.
Be sure you are able to make a quality presentation of the agency, added Douglas C. Moat Sr., founder and chairman of Moat Associates, insurance agency consultant in Bluffton, S.C. “Did you lose some business? Tell why you lost the carrier or why the people left.”
Don’t try to do this alone, Lieblein cautioned. “Great insurance sales people sometimes think they can sell their agency on their own, but they do need advisors,” because of all the technicalities involved.
However, it’s important to get professional advice from someone with expertise in insurance mergers and acquisitions, he said. These experts may include attorneys, certified public accountants and insurance merger and acquisition specialists.
If the advisor has no insurance expertise, that could lead to problems because the person might not understand the terminology, commissions and other details of the agency business, Moat cautioned. He recalled one deal that fell apart because of the structure that was used to describe the transaction. “The outside expert had been unfamiliar with insurance agency transactions, used wrong terminology and didn’t understand the issues involved,” he said.
His advice is not to trust friends or people who lack experience to do this. “You could end up leaving money on the table or doing it the wrong way. Instead, get referrals to people who have done this before and ask questions about their experience,” he said.
Some people want to do this work for a percent of the value of the deal, Moat added. His recommendation is to find out the amount in dollars. Alternatively, he said, look for a fee-based business advisor, or consider building an incentive into the contract for certain things. In a word, he said, “negotiate!”
The importance of outside expertise makes sense in view of the legalities involved. For instance, Lieblein said the selling advisor, working with the outside experts, will need to put together a “confidential memorandum.” This document details the information mentioned above and other business details. This is given to the prospective buyer for use in preparing an offer.
Lieblein said other necessary documents related to the sale include:
A legally binding confidentiality agreement.
A non-binding letter of intent that outlines the basic transaction terms.
A legally binding asset purchase agreement.
If the seller is going to stay with the firm for, say, three to five years, there also will be an employment agreement to work out.
The other employees typically are informed about two weeks before closing, Lieblein said. “That needs to be done because the new owner has to do the work necessary to hire the employees.”
Other notifications will need to go out to carriers, clients, vendors and others who will be affected. Most provider and vendor contracts will carry over to the new owner, but sometimes amendments to those contracts need to be made.
A sensitive and confusing area for many agents and advisors is determining the value of the practice. “Some agents will say, “I want $1 million,” Moat pointed out. “I ask, ‘Based on what?’ Sometimes they say, ‘I just made it up.’ ”
In setting the value, “you need to be realistic,” Moat said. “You can’t just make things up. You can’t hide the skeletons, because if the potential buyer finds out, they won’t trust you.”
A good way to approach this is to differentiate between three words, he said. Those words are: value, price and terms.
Value is the worth the agency represents.
Price is what the buyer actually pays. This might be different from the expected value, because the buyer might have different plans for the firm than what the seller has had, Moat said.
Terms are the provisions that can reduce or increase the price, based on incentives and other factors, even tax issues.
“Most owners don’t understand the true value,” Lieblein observed. “It could be that a practice is worth two times revenues or less, but until an expert looks at it and weighs all the factors, this is an unknown.”
To illustrate, Lieblein cited the example of two very different sellers, whose agencies both have $3 million in revenue at time of sale.
One seller is age 65, has three clients who represent 40 percent of the agency’s revenue, employs people in their late 50s and early 60s, has seen no growth in the last five years, has little or no growth strategy and wants to retire. By comparison, the other owner is age 45, has employees in their 30s and 40s, grew the business from $1 million three years ago to $3 million at time of sale, and plans to stay on after the sale.
The first firm may sell for one times revenue paid over three years, Lieblein said. “But the second may receive two times revenue paid up front and may receive additional payments in the future based upon growth.”
Actual offers depend upon many factors, Tietz said. For instance, if the owner is renting the office, when is the rent agreement up? Is the rent too big in comparison to the number of employees? Will the new owner be able to replicate the profits after the sale?
“If the seller is in a one-person shop, the block of business depends on the owner. So, if the owner leaves the agency after the sale, the new owner will have to hire someone to take over, creating questions about cost and revenues.”
Revenues are a very important piece of the equation. Buyers are looking for agencies that have recurring revenues, Duck explained.
Many insurance firms don’t have recurring revenues, he said. Instead, the agencies take heaped commissions up front and no trailers, they don’t cross-sell their accounts, and they don’t do much about offering investments. In those cases, he said, the value derives mainly from the effort the owner has put into the business. But when the owner leaves, the buyer wonders what value will remain.
When he encounters such firms, Duck says he encourages the owners to spend the next 18 months cross-selling existing accounts and possibly adding investments to the practice. “Also create databases and powerful systems that add to the intellectual property and create legacy value for a third party to buy.” Do that before putting the practice up for sale, he said.
Ideally, it’s best to get started at age 40, Duck added. “That way, you can retire at 65.” But even if the owner is older, making changes that increase recurring revenues will make a difference.
That is one reason why many life agencies branch out into employee benefits, experts say. The benefits business contributes substantially to the all-important recurring revenue stream.
What happens to the seller? The exits are as variable as the people making them. Here are two examples of sellers who went through the process and are glad they did.
When he decided to retire, John W. Cruickshank III had been an agent with Northwestern Mutual in Northbrook, Ill., for nearly 40 years. He was in a career agency, so he did not have to sell his practice. Instead, he assigned some of his clients to a new agent and turned over other clients to the general agent.
But after two years, the agent assigned to the accounts had not sold even one policy to those clients, Cruickshank said. That was a concern from a customer service point of view and also from a monetary perspective since, as a retired agent, Cruickshank is to receive not only his renewal streams but also a portion of the commissions on new business written on the assigned cases.
But there’s more to the story. The agent ended up leaving the firm, so Cruickshank said he reassigned the clients to another agent. The new agent was a go-getter, and has since made sales to every one of the assigned clients, sometimes more than once and even in recent times, Cruickshank said.
“In the end, everything has worked out. I’m in a whole new world now, enjoying life tremendously.”
Jim Lehmann, the California owner who was talking about whether to sell his firm at the beginning of this article, said the answer to his question turned out to be “right in front of me.”
The man with whom he was talking on the golf course that day was none other than Scott Tietz, the CEO of Partners Advantage. The two men had known each other for more than a decade as members of a marketing group. But on that particular day, their business talk morphed into discussing a merger. One thing led to another, and a few months later Lehmann sold the firm to Tietz.
Lehmann didn’t go cold turkey, however. Like many veteran business owners, he enjoys working. So the agreement he signed with Tietz includes a phased retirement plan that allows Lehmann to work full time at Partners Advantage as senior vice president-business development for three years. Then he will shift to part-time work as a consultant until he reaches age 70.
He said the arrangement suits him just fine. “I treat the job with the same integrity and commitment as before. But at the end of the day, the ultimate liability is no longer mine.”