Preparing an Insurance Agency for Sale

There are basically three factors that influence the perceived value of insurance agencies: 1) pro forma earnings 2) risk associated with future earnings and 3) market conditions . Not so incidentally, they are also the same factors that affect the value of an investment. The intention of this article is to delve into each of these aspects in order to better understand the agency owners the best way to prepare for the sale of insurance agency.

"pro forma earnings" and the Buyer's return on investment
Pro forma earnings are what the customer is looking to determine their projected return on investment (ROI), and debt coverage in any funding. . Pro forma earnings are calculated from a formula adjusted EBITDA ("Earnings before interest, taxes, depreciation and amortization), which is a measure of actual cash flow buyer should expect from the agency Mathematically this:

= Agency Adjusted EBITDA net income + interest on debt + tax gain recognized (usually the C Corp) + Depreciation (non-cash expenses) + owner's salary and benefits + non-recurring or non-essential operating costs of + / - Planned adaptation for rent, employee compensation and management costs such as retention / replacement of the owner (some of these adjustments will be determined by the buyer ).

pro forma recasted EBITDA is determined by adjustments to historical financial izvještaja.Pro form forecasted EBITDA is based on future projections, which will be created by the customer and include their own internal adjustments.

agency profitability is highly dependent on the operating model and market segment služio.Agencija with a strong sales force, as well as many commercial lines P & C and benefits brokerage firms, usually will have an EBITDA of 30-40% of revenues. Agencies with more marketing-driven sales, such as personal lines P & C and certain specialized agencies, typically operate at a higher EBITDA margin of 35-45%. There are very few industries where profitability as well as large companies can vary so significantly as in the insurance industry. One agency may be running at an annual loss, and a similar size to the 50% or greater profitability. Cost control is critically important, especially leading to the sales agency.

The customer is the return on investment from the acquisition of inversion EBITDA multiple paid for the agency (eg, value of 5 x EBITDA = 20% ROI). All customers have certain expectations about the return of their investment in the acquisition, which will be driven by the customer's financial capabilities, synergies and risk perception agencies

A large strategic buyers, such as national banks and brokerages can afford to lower initial returns (eg 12-18% or 6-8 x EBITDA), a time and often pay the highest price. Many can get synergies unavailable to smaller customers, such as higher commission rates and better opportunities for growth through leverage existing relationships. Many also have large cash reserves and to actively seek acquisition opportunities for growth and investment returns. Most large agencies look for strategic buyers give EBITDA greater than $ 500K, but will consider smaller agencies, if they can assemble into an existing operation. Generally, they are looking for larger, professionally run agencies that have a lower risk investment.

Smaller regional strategic buyers usually want 20% or better return on investment. These are usually the owners or agencies that wish to gain greater market share or enter new markets. Non-agency owner customers typically want 30% or better ROI because the Agency needs to produce income for them to live. Individual customers, as mentioned above, also typically require financing from a third party to acquire, so that the cost of equity and debt will be a factor in the determination of their value. Most individual buyers lack the funds for the acquisition agency worth more than $ 2-3M, for locating funding from third parties for the sale of this size is much more complex.

perceived risk, cost and terms of sale
Perceived risk of future earnings will affect the price and terms of sale that the buyer will ponuditi.Kupac due diligence process includes a laundry list of questions about the book business and labor agencies. Inquiries about the make-up of operations, including carrier contract, the types of policies, account size and class of business are questions about the inherent risk of the book business. Also, questions about the agency's work, including its longevity and reputation, management structure, marketing strategy, sales force, underwriting procedures and retention plans are also questions about the risk.

Some commonly faced with high risk factors include: the decline of revenue / profit trends, concentration of revenues with the carriers / producers / accounts, revenue concentration with non-rated carriers or sub-standard markets, low account keeping or restoring the base fee , employee issues, the high loss ratios, and poor record keeping.

If only certain parts of the agencies are perceived as high risk, as there are several large accounts and several manufacturers of high performance, then the buyer the seller May want to share part of the risk in oblikuzaraditi-out based on the agency maintain certain revenue / profitability data or retention of certain accounts. If the agency itself is inherently carries more risks, such as a specialized agency to market with low retention or renewal fee, then the perceived value in general will be reduced.

One of the last items to discuss before moving on: We often hear stories about customers who are offering no down payment and pay for the renovation. We refer to this as a predatory kupaca.Vlasnik agencies should not sell without the customer to significant skin igri.Prodaja deliver 60-80% of the cost of closing and the remainder is paid or 4-8 years fixed note or 2-4 years earn-out is common. When less money is paid in advance, the seller must negotiate a guaranteed minimum amount, and to personally guarantee the buyer.

The impact of market conditions
As with any investment sales, market conditions and the time of sale properly its impact net income from the sale. Market conditions, such as the economic outlook, the condition of the loan market, the stock market work, the position of the soft market cycle and the capital gains tax rate of all factor in. Many of these considerations really are profits and risks, but since these factors are beyond the control of the Agency owners should be considered separately.

It's hard to find information about these developments, but the information is often available from consulting firms functioning in the industry osiguranja.Godina 2011 and 2012 should be a good market conditions for the sale, because the long-term capital gains rates and interest rates are at 50 years of low premiums in many markets are rising, and shares in many public brokerage houses were jumping from the lows 2009th

Development of sales strategy
Every owner of the agency should develop a strategy for at least 2-3 years in advance sales. In the first stage of the process to determine the current value of the agency and identify outstanding issues as highlighted above. Since the insurance distribution system includes such a wide array of agencies functioning in different market segments, there is no magic formula that will quickly and easily value the agency. Owner Agency should engage mergers and acquisitions advisory firm that it is intimately familiar with their industry and regional markets in order to assist in evaluating the performance of the agency. The process will flush out any problems, and the conversation should follow on how to solve problems, and what impact these decisions have on value.

M & Company can help in the preparation and the owner of a guide in choosing time. Once the agency is ready for sale, M & A advisor to create a sales memorandum which gives an overview of the executive agency for potential buyers, and organize all agency records that will be required for the due diligence phase. The company will also be responsible for identifying and discovering the best customers, maintaining confidentiality, assisting in negotiating offers, and managing due diligence, execution of contracts and closing faze.Vlasnik will need an accountant who understands business insurance agency and competent business attorney who specializes in the purchase / sale contracts, as part of their advisory team as well.

For the majority owner of insurance agencies is their most valuable asset. Understanding the value drivers and market conditions, and using these to develop and execute sales plan, will greatly enhance the return on owners of property agency.

If one reads this any further questions, please feel free to contact me at the phone number listed.