What You Need to Know Before You Sell

When I ask agency owners to tell me what they value most about their agencies, they rarely talk about money. Instead, they speak with pride about growing their business, helping their clients and building a staff.

When an owner has regrets about selling or merging their agency, it’s often because they wish they’d spent more time reflecting on the Four Cs of the deal: culture, control, clock and calculation. In other words, what will your life look like after the sale? Will you be happy? Will your clients be happy? Will your staff have opportunities for growth and advancement?

Before you blindly accept the highest offer thrown your way, make sure you can answer these four questions:

1) What’s the Culture of the Acquiring Agency?

Agency culture is always a concern if you’re selling to a larger firm. Consider the stories of two owners who sold to larger agencies.

The first owner, “Charlie,” had a three-year earn-out and then left the agency. A year after his departure, only one of his original 20 employees remained at the agency. What happened? Quite simply, a clash of culture.

Charlie built an agency that valued collaboration. The staff worked well as a team. They brought each other in on sales and split the commission. They were focused on growing the organization.

Charlie agreed to be acquired by a larger organization because he felt it would give him the opportunity to grow and land even larger accounts. But the acquiring firm had a totally different culture – a “me” culture instead of a “we” culture. The acquiring agency was focused on the bottom line, with an “eat what you kill” approach to sales. The agents didn’t collaborate and fought over commissions. Even though the acquiring agency paid quite well, Charlie’s staff wasn’t being nurtured and encouraged like before, and they weren’t able to grow.

The second owner, “Claire,” sold her small agency to a large publicly held agency with a well-defined process for integrating new acquisitions. Claire had a niche practice serving hospital administrators that dovetailed nicely with the acquiring agency’s client base.

Claire spent time getting to know the acquiring agency and figuring out how they could complement one another. It was several years before the two agencies actually merged. After another two years, her original book of business had doubled.

Like Claire, you need to be comfortable with the management style of your potential buyer. Had Charlie done more to understand the acquiring agency’s culture, he probably would have sold elsewhere.

You don’t get married after just one date. You get to know each other first to see if you’re compatible. Too often, owners are preoccupied with who will pay the most for their agency. That doesn’t always lead to a good outcome. It’s better to be happier, even if it means getting less for your agency.

Will your employees be able to advance their careers in the new agency? Spend some time networking with other producers and agency owners to see who would be a good fit for you. It’s very rewarding to see your former staff excel – and very disappointing when that doesn’t happen.

2) How Much Control Will I Have?

Think about why someone starts their own business – it’s often because they want to be in control. Business owners don’t like being told what to do. When you put an agency owner in a corporate environment, they may feel like they’re in a straightjacket.

Consider an owner of a midsize agency who sold to a large, publicly traded agency. He is now part of a regional office and reports to a boss 10 years younger than him. He has to write reports to the corporate office, and he spends his days on conference calls. His earn-out is over, but he still wants to work – just not in this office.

In another instance, an owner who didn’t care too much about control was told by his new owner, “We’re going to leave you alone. You’re going to run the agency just like you are now, and we’re not going to bother you.” And they didn’t.

I know another owner who sold to that same agency, and they also left him alone. But it wasn’t a good fit, because that owner needed the organizational support and expertise to grow his client base. If he had sold to a process-driven agency, he would have had more success.

The reality is that when you sell your agency, you’re selling everything – you don’t own your book of business anymore, and you’re not in charge. You become an employee of the acquiring agency. Understanding the reporting structure is key, especially if you plan to work beyond your earn-out years. During your negotiations, imagine you’re sitting in a job interview. You need to understand the new owner’s expectations. Then do some soul searching: “Can I really work here?”

For owners who just want to produce, a corporate environment might be ideal because it frees them up to sell. They don’t have to run the office, do payroll or manage people. Alternatively, an owner might be willing to give up control to get the infrastructure and technology tools they haven’t been able to afford on their own. You might want autonomy, and you might now. Reflect on your reasons for selling, your work habits and your goals. Many owners find it difficult to adjust to being an employee. Make sure you can fit into your new agency’s structure.

3) What’s the Timeframe?

How long is the earn-out, and what do you plan to do afterwards? Will you retire to stay at the new agency? I always advise my clients to align their family and retirement goals with their transaction. Decide how long you want or need to work in order to reach your financial goals. If you sell to an agency and you’re not happy, it will be a challenge for you to stay beyond your earn-out – but if you need to continue earning money, you may not have a choice.

In the right environment, you’ll want to stay on after the earn-out is over. I know an agency owner who got a new lease on life when he was asked to manage a multistate region at the national agency. He got the professional growth that was missing at his small agency, and he loved it. On the other hand, with a bad transaction, you won’t want to stay – but once you sell, you no longer own your book of business, and many owners aren’t in a position to start over from scratch. They decide to stay where they are, even if they’re miserable.

Keep in mind that the acquiring agency bought your agency for a reason. Buyers want an agency that’s successful and a seller who’s willing to continue producing. If you’ve saved during your career, you will generally have more options. You can afford to take a little less money for your agency to get the culture that’s best for you and your team.

You might also consider selling to someone in your family who’s interested in the business. Can you postpone your retirement a little longer to groom a son or daughter to take over the firm? Have you considered an internal buyout?

It’s well worth the time and investment to address these questions with the help of a financial adviser or attorney.

4) How is the Earn-Out Calculated?

Too often, the earn-out period is a wakeup call for owners. It’s then that the realization sinks in: “Why didn’t I pay more attention to this? I’ll never meet these numbers!”

Don’t get so caught up in trying to get the best offer for your agency that you forget about the earn-out. While it may be small relative to the cash you will receive from the sale, you don’t want to leave money on the table simply because you failed to pay attention to the details of the agreement. Make sure you understand how your earn-out will be calculated. Most owners I know watch their cash flow like a hawk, so they get frustrated when they see the acquiring agency’s overhead applied to their profit and loss statement.

For example, suppose you still have a few years left on your lease and the buyer wants to move you to its corporate office. Those costs will most likely be charged to your overhead. Be aware of the expenses that will be applied to your earn-out – they could make a big difference.

The acquiring agency obviously wants to buy a firm that will continue to grow. But how hard will you have to work over the next three years to get your earn-out? Pay attention to the numbers you have to meet and where they come from. Are they a percentage of growth? How are they calculated? Is it a realistic target for you? Can you negotiate a more favorable percentage?

While owners often complain about their earn-out, the true source of their discontent is usually the culture at the acquiring agency and how little control they have. Is getting a few more dollars for the agency worth it if you’re not going to be happy?

At the end of the day, you want to feel good about the future of your agency, see your employees prosper and know your clients will be well taken care of. Not all that glitters is gold. Do your due diligence so that your post-ownership years can be happy and productive.

Article By: Jim King

Source: iamagazine