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Why Are You Selling Your Agency?

Thursday, March 3, 2016
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The following is the third in a series of articles focused on the selling of an agency. The other two articles The Realities of Selling Your Agency to a Large Organization and On the Flipside, The Benefits of Selling Our Agency to the Right Organization appeared in the November and December issues respectively.

Why Are You Selling at All?

 Often, I find agency owners tell me they are selling for the benefit of their employees and clients. I question this. Is that what is driving the unprecedented level of sales and consolidation in our business? Perhaps, but isn’t it actually a historical convergence of aging owners, agencies unprepared for future leadership or business development and, most of all, a great price driven by cheap and easy money?

I believe most agency owners do care about their employees and clients. However, what I do find is that in the end, the money wins out. As I will discuss later, most end up selling into business models that are not driven
by adding value to clients, but instead are dependent on lowering expenses. In our business approximately two thirds of expenses are PEOPLE.

You need to run a great agency if you really care about your clients and people. This means:

  • investing in the future rather than taking all the earnings home
  • developing future leaders and producers who can buy the agency at a reasonable price
  • lots of things that are often challenging and involve short term sacrifice

What is Different?

There are a few key differences in the business model of a great, independent, privately-held and internally perpetuated agency and the typical consolidator of insurance brokers. If you understand these differences, you can better understand the implications and probable long term outcomes of a sale.

The most fundamental difference is simple, but it is driven in an alternative direction, giving it an entirely different outlook and future. Before you sell, your agency is likely owned entirely or substantially by people who work in the business. If you sell to a consolidator, those agencies are likely owned entirely or substantially by outside investors who don’t work in the business.

The priority of most good independent agencies is the interests of their employed owners, clients and employees. On the other hand, the priority of outside investors is a return on investment. While the two are never mutually exclusive, common sense suggests that one’s priority will dictate what they make important.

The Business Model

 Most great agencies I have observed are obsessively focused on always getting better. Their long term business model is to get better by becoming more valuable to clients and better for their employees. Doing this drives good organic growth. They figure out the best way to get better and believe financial rewards will follow as a result.

Contrast this to the typical consolidator model. This business seems to be driven to create value for owners by doing acquisitions and cutting expenses— often with very high levels of debt. This model is driven by demographics, record values fueled by a record supply of cheap money and high stock prices. It has proven to be a very lucrative model for at least the past ten years.

But before selling into this model have you really thought through the implications? Will the model really drive the creation of better value for your clients and a better place to work for your employees?  Even if this seems possible in the short term, will it best prepare your agency for an uncertain future?

If Nothing is Going to Change, Why   Sell?

Following the sale of an agency, it’s common to hear   or read, some version of “one of the reasons I sold to X, was they promised nothing or very little would change.” If this is the case, why are you selling? If nothing needs to change, it suggests a strong, growing and successful business.

Someone once told me, “your business will generally sell when someone can run it better than you.” If we look deep and objectively, this is probably true. Most agencies sell because they need to change and someone else is better prepared to do so than the current owners. It is hard to find the logic in “we sold because we want to get better and this way we don’t have to change.”

Just Because Nothing is Changing Today, How Long Do You Really Believe It Can Stay That  Way?

Can anyone deny many acquisitions today are driven by high stock prices for public companies and high levels of cheap debt, while also driving lots of competition among buyers? Doesn’t anyone remember the effects viewing debt this way had on the economy in 2008-2009? It seems we are going back to the same place less than ten years later.

I think we have all seen how economics driven by high debt levels can end. What makes us think the end will be different this time? Some may say the end is starting. It is my understanding the high risk corporate credit market (a/k/a junk bonds) has already started to turn just in the past couple of months. The stock market has already declined substantially since the beginning of   2016.

A change in the financial metrics will also drive a change in the values the next buyer will pay. Many consolidators plan and depend on a future sale to a buyer at an even higher value. What happens when there is no buyer or at least no buyer willing to pay an even higher multiple?

Even if you have your money and are not worried about the buyer’s return, this may be the catalyst which drives the change you didn’t expect would happen. You were paid lots of money and those investors expect a return. If the return is threatened because the financial metrics change, it will have to come from operations. This means things which will directly affect your clients and employees.

Many sellers are still attracted to this option because they will continue to own a small piece of equity. They look at the former sellers who are current equity owners and see a model which has produced great returns in the past. If the stock and credit markets are changing, the future may look very different than the past. When you keep some
“chips in the game,” make sure you have checked whether you get paid before those CCC rated bonds issued by the buyer.

Sure Prices Are High, But What Are You Going to do With the Money?

 So you can get a lot of money for your agency. What are you going to do with it?

Ours is a great business and most well run agencies can count on a nice long term increase in value. Most agency owners are not good passive investors and will have to depend on an investment professional. Yes, it is possible you will place your cash in some investments with less long term risk than the agency, but today, what is a less risky place to invest?

I once saw an interview with one of the best investors in the world, Warren Buffet. He made the point that the best place for most people to invest is in themselves or what they did well. It is well known that the investment with the best track record of building wealth is a good small business, not a passive investment.

Don’t just think of the money; think about where your money will end up in ten or twenty years.

Is There an Alternative to Selling?

Yes, there are at least two.

The first, do what you need to do to build a good business, develop a good organic growth culture, invest in people and build real value for your clients.

Second, find a partner committed to building a great employee owned business and merge with them. Especially if you expect to be working another ten or twenty years, the long term financial returns and quality of life can be a great alternative to selling.

Glenn Horton is the CEO of The Horton Group. The Horton Group is one of the largest privately-owned insurance brokers in Illinois and one of the top 60 brokers in the United States. Ge can be reached at glenn.horton@thehortongroup.com.

 

Material posted on this website is for informational purposes only and does not constitute a legal opinion or medical advice. Contact your legal representative or medical professional for information specific to your legal or medical needs.

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