5 steps to take before selling your firm

This year is expected to be a strong year for insurance company merger and acquisition activity. Taking steps to prepare an agency or brokerage before putting it on the market can increase its valuation and attract more – and better – buyers.

Buyers want to acquire an agency or brokerage that’s already performing well so they can plug in their resources, tools and infrastructure to turbocharge that growth. They want to buy a well-oiled machine, not a fixer-upper.

Here are five steps agency owners can take to make their business the top performer acquirers want.

1. Maximize organic growth

Brian McNeely, chief financial officer and partner of insurance advisory firm Reagan Consulting, said that when he contacts a prospective buyer about an agency they may want to acquire, their first question is always, “What's their organic growth?” McNeely noted that while organic growth and profitability are the top two drivers of value, buyers prize sustained organic growth the most.

Sellers must be prepared to show what’s behind their organic growth. How long has it been going on? What’s the trajectory for the future? And how is that growth distributed among clients, producers, and carriers? The Agent Support Network of America (ASNOA) recommends choosing eight to 12 core key performance indicators, setting benchmarks for them, and establishing automated reporting on them through an agency management system. With those systems in place, potential buyers will be able to see the company’s strengths and growth outlook immediately.

2. Increase diversification

Too much reliance on a few clients or a single carrier can put a firm at significant risk of revenue loss should any of those pillars go away. Buyers are especially wary of acquiring firms with large concentration risks. Healthy cash flow today could slow to a trickle if a firm’s major client chooses to go elsewhere after the sale or if the firm’s primary carrier stops offering its main product.

To reduce concentration risk, bring in new clients by increasing advertising or offering producer bonuses for successful prospecting. Diversify product offerings, both with existing carriers and with new ones, to reduce dependence on any one revenue source.

3. Develop areas of specialty

Within an environment of diversified revenue streams, developing specialty areas can make an insurance company especially attractive to buyers. There is much value in building one or more areas of specialization – e.g., healthcare, technology, construction, hospitality, real estate or manufacturing - in an insurance firm. The key is to develop niche expertise without becoming overly dependent on one vertical.

4. Broaden management and production

Agency management too heavily controlled by the owner will be a red flag to potential buyers. What will happen after the sale and after the owner leaves? Will the company culture collapse? Who will provide leadership? To avoid this issue, broaden the agency’s management team and intentionally develop leaders who can provide continuity after the sale.

Buyers also want to see a strong team of producers, not just one star at the top of the leader board. It’s good business to intentionally develop all the firm’s producers and create an atmosphere in which everyone wants to deliver their best. Remember that for buyers, talent = assets. Protect those assets by investing in their professional development and certifications. And don’t be afraid to pay for top talent.

5. Prioritize transparent reporting

Potential buyers expect a clear picture of what they’re acquiring, and that means they need access to complete and transparent financial records. A company doesn’t need to be perfect to be a good acquisition candidate – every company has some warts. What the buyer needs is a firm understanding of the company’s financials so they can put a “why” to any blips that show up in the records.

It’s not unusual for a young agency or brokerage to do all its bookkeeping in-house. As the firm matures, however, it’s wise to bring in an outside accountant to provide impartial, audited financials. Many firms also employ either a full-time or fractional CFO to establish and maintain disciplined financial record-keeping. Having a history of strong financial reporting will make it easier to provide the transparent data buyers expect.

Preparing for success

McNeely recommended that owners – even those who aren’t planning to sell immediately - operate as though their business is going to be sold tomorrow. That means recruiting top talent and focusing on core business interests to build strong organic growth.

Developing niche specializations while maintaining diverse revenue streams and supporting the business with transparent record-keeping also helps make a firm attractive to a buyer. These preparations will pay off when it comes time to market and sell the agency.

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Alicia Chandler is president of Oak Street Funding, a First Financial Bank company. Contact her at [email protected].