Preparing in advance—ideally over the course of a few years—will have a profound impact on the speed of the sale and the selling price.
You may not be thinking about selling your agency right now, but what about a few years down the road? To make the process as fast and headache-free as possible – and to ensure you receive the full value of your agency – it’s important to be prepared.
Don’t wait until you’re ready to sell – a proper evaluation of your agency could take months. Implementing steps to make your agency attractive to buyers may take even longer. Ideally, you should begin preparing your agency for sale at least three years ahead of time.
As Jeff Huff, Vice President of Strategic Projects at Smart Choice, says, “Whether you’re two years out or three years out, you’re in countdown mode.”
Ask yourself:
- Have you and your team optimized agency operations?
- Are your tools and technology an asset or a liability?
- Are you reviewing your book for excessive loss ratios?
- Does your financial record-keeping meet requirements?
Have You and Your Team Optimized Agency Operations?
If you’re creating a plan to sell your agency, the first step is to make sure you’re operating at peak efficiency. That means optimizing your workflows, systems and team performance so the agency runs smoothly and delivers consistent results.
Chase Scott, CFO of Carriage Hill Insurance, knows this well. His firm has acquired about 35 agencies in multiple states to grow its book. With so many acquisitions under his belt, he knows what to look for in an agency. When evaluating potential acquisitions, he focuses on what he calls the four pillars of agency performance:
- Managing existing business
- Creating opportunities
- Converting opportunities
- Deepening relationships
But it’s not just about the numbers - the “people” factor is huge.
“We're always looking for good people to join our team,”
Chase says, explaining how culture and performance drive long-term success.
Jeff also emphasizes the importance of the people at an agency. “I think it’s important to really look at the human side of it,” he says, explaining that buyers want to know who in the agency brings the value they need. For example, if the buyer is looking to break into employee benefits, and a prospective agency has an agent who excels at this, it might be a great fit. “That gives the seller a huge advantage in negotiating a price, because it’s about more than the value of the agency – it’s about having a proven success lever within the team. You don’t always find it, but those are the transactions that can be really great for both sellers and buyers. If you see a very high agency purchase price, the human factor is often the driving force behind it.”
“Agency owners often need to face some harsh truths about the efficiency of their team members,” says Ashley Wingate, Executive Vice President of Sales and Distribution at Smart Choice. He warns that agency owners sometimes hire friends or family members who may not be the best workers. “It’s important to address this sort of problem prior to sale, as it could make the agency less attractive to buyers,” he adds.
Are Your Tools and Technology an Asset or a Liability?
In the past decade or so, agency management systems have become the norm, but some older agency owners have been holding off on tech investments because they’re planning to retire soon. This way of thinking may be detrimental to the sale.
“Potential buyers want to know if the agency is automated and paperless,” Ashley explains.
What if you’re not paperless yet? “Because everything’s paper, now you’re starting to rely on bank statements only; you’re starting to rely on carrier reports only,” says Jeff, explaining how a paper-based system may become a problem when determining valuation. “It becomes more challenging than if all the records are digital.”
Adopting a modern agency management system now may pay off when it comes time to sell your agency. You may also find that it makes your final years as the agency owner much easier. When selecting tech solutions, the options can be overwhelming, especially when you’re trying to balance your current needs with your future plans. You don’t want to replace your core systems every year as your agency grows – and you won’t have to if you select solutions that work together and grow with you.
At Smart Choice, we’ve seen agencies grow from scratch start-ups to multimillion-dollar books, and we’ve also seen how EZLynx, an Applied Systems brand, supports this growth. EZLynx delivers a digital ecosystem for insurers, connecting various workflows through an intuitive user experience. With EZLynx, agencies can choose the solutions they need immediately, with a path to expand functionality as needed. For example, you might start with EZLynx Rater, the cloud-based insurance quoting solution, and then add an agency management system and other tools later.
Are You Reviewing Your Book for Excessive Loss Ratios?
A poor loss ratio doesn’t mean your contract will be terminated. However, it does indicate that the market is volatile, which could give potential buyers a pause.
Mike Miller, a State Director at Smart Choice, explains: “Let’s say you’ve got a 123% loss ratio. That might be okay when we have a hailstorm in 2024. But if you’ve got a 123% loss ratio in 2024, and 110% ratio in 2025, and a 99% ratio in 2026, the carrier will inevitably be shutting you down, after five years of frustration.”
Understandably, potential buyers don’t want to inherit a poor loss ratio that could put their carrier contracts in jeopardy. Because improving your loss ratio takes time, this is something you need to address as early as possible, in the years prior to your retirement. Your carriers have a vested interest in keeping loss ratios under control, so they can be a great source for advice.
Does Your Financial Record-Keeping Meet Requirements?
In addition to knowing your loss ratio, potential buyers will want to know your expense ratio. “People who are buying agencies use ‘the money minus the cost equals the profit’ formula,” says Mike. This is earnings before interest, depreciation, and amortization (EBIDA), and it’s a common way to calculate profit. Because a buyer may pay four or five times this figure, having accurate numbers is critical.
Chase explains that he takes a hard look at the numbers before he agrees to acquire an agency and notes how helpful it is when owners have all their documents organized. He needs financials for three years – including income statements, P&L reports, and taxes. He also recommends having carrier reports with loss ratios, production, and growth.
When you’re getting ready to sell, having digital copies of everything is ideal. “You start scanning every document now,” Mike says. “Then when it’s time to turn over that agency to somebody else, it should be completely digital.”
Avoiding Common Pitfalls
In addition to taking steps to position your agency for success during the sales process, there are some common pitfalls to avoid.
Infighting. In the case of a partnership, everyone needs to be on the same page as early as possible. “You see a lot of deals get derailed while the infighting goes on,” Jeff says. “Even if they don’t have the veto, they need to be rowing in the same direction as the person who does.”
Having frank conversations early on prevents family strife. Many agencies are family businesses that may have been passed on from one generation to the next. Problems may arise if the current agency owner decides to sell the family business without first talking to the rest of the family to see if someone is interested in buying it.
Making it personal. Mike explains that the buyer will also want to purchase your web domain, email address, and phone number. If the agency has your name and the phone number is your personal number, the agency will be less attractive to future buyers. Likewise, many agency owners function as sole proprietors instead of establishing an LLC or S Corp. Once again, this may decrease the agency’s value when it’s time to sell.
If you’re just getting started, consider setting up an LLC and using something that’s not your personal name. If you’re already established, set up an LLC and start transferring your business over to another phone number and email. Doing this ahead of a sale will make the sale easier and increase your agency’s value.
Having too few carrier contracts. Carrier contracts are attractive to buyers. Mike Miller recently helped an agency owner acquire another agency. The buyer paid a good price, but he was only willing to do so because it gave him access to Progressive. If you can secure contracts with preferred carriers before you list your agency, you could snag a better deal.
Another good strategy is to get appointments with excess and surplus carriers. Mike explains, “You go out and you attract these E&S carriers because they come to you with no production requirements, right? And then, whatever commissions you have, you own any policy that you write.” If you have 40 of these carriers, you have a decent list to advertise on your webpage, which may round out a smaller selection of top national carriers.
Relying on a few big accounts or one powerhouse producer. Diversification is important. If you have a thousand accounts but just a few of them make up the majority of your total revenue, this could be a cause for concern. Likewise, if one producer is generating most of the revenue, that’s also a problem. Even if you have a non-compete agreement in place, there’s no guarantee that the producer won’t leave, taking customers with them.
The Pros and Cons of Joining a Network
You may be wondering if joining a network will hurt or harm your prospects when you decide to sell your agency. The answer largely depends on the network in question.
A restrictive network contract could count against you – but it’s still important to be honest. “Don’t start your negotiation hiding the fact that you are part of a network,” Jeff says, explaining that some agencies may be tempted to hide contracts with exit fees and other restrictions. “If they want the agency, they’ll find a way to work through whatever the hooks are. Now, having said that, obviously some hooks are deeper and sharper than others. So, the fewer hooks the better.”
The right network can help with carrier access and the technological solutions to make your agency more attractive. Some networks can also help with the sale – for example, by connecting buyers with sellers or by offering access to financing.
That’s exactly what Smart Choice does. Whether you’re looking to grow your agency through acquisitions, or you want to sell your agency to retire, Smart Choice can help.