If you wait until you're ready to sell to find out what your agency is worth, you’re locked into that valuation—with no time to make improvements. The best approach is to get a valuation well in advance, giving you the opportunity to strengthen your agency before a sale. Not every agency has the gift of time when it comes to these things. We’ve rounded up some of the most common plans agency owners wish they had made earlier.
Your perpetuation plan serves as the roadmap for what will happen to the agency if one of the current owners becomes unable to carry on their roles and responsibilities.
In the event that an successor or business partner has to take over your duties, they need to know what those duties are and how to do them.
The absence of a plan can (and likely will) impact the agency’s value if those successor/partners decide to sell, because an acquirer needs to know how to perform those duties as well, and probably won’t be willing to pay as much for an agency if it is in the midst of turmoil due to insufficient documentation of a prior owners’ duties. Would you pay full price for a television if it didn’t have the remote to control it?
In the age of technology, keeping accurate and detailed records is expected. One of the biggest issues that owners encounter is that they have multiple employees entering records, and they haven’t created standardized guidelines on how to enter data into the agency’s system.
This is especially true when it comes to Agency Management Systems (AMS) and Customer Relationship Management (CRM) systems. When it comes time to sell, the agency’s AMS and CRM records play a key role in determining the agency’s value, and if these records are not accurate and consistent, it may be difficult or impossible to accurately assess the agency’s risk.
One of the most devastating blows to an agency we’ve seen is when a producer or other employee decides to leave the agency and attempts to take their clients with them. While this can’t always be prevented, having non-solicitation and non-compete agreements in place can help. In fact, not having salient agreements with your employees poses such a risk to the agency that it can (and often will) reduce an agency’s value directly.
A common trend we see among new agencies is incentivizing production by offering highly favorable commission rates to new producers. Although this can be a good growth strategy, there are two pitfalls with this strategy.
Many owners have come to us for help in determining how to transition out of an unfavorable compensation structure. It is essential to get ahead of this, as it can be a serious stopgap when it comes to an agency’s growth.
Financial statements are a key part of any valuation. These financial statements, even if compiled by an experienced professional, can still be inaccurate if the agency does not maintain good bookkeeping practices, or if the accountant does not have knowledge of the intricacies of independent insurance agencies.
The most common issue we see occurs when agency owners (or their bookkeepers) record expenses that are not directly related to the agency’s operations. For example, the lease of a luxury automobile. Although owners and employees may need transportation to perform their duties, it is not typically necessary to lease a luxury automobile.
If there are any non-recurring or discretionary expenses, it is important to keep track of these, because when it comes time to value the agency, these expenses must be removed to arrive at an accurate valuation.
You may have heard the term diversification used in the context of the stock market, where it is recommended to not invest too heavily in one particular stock or industry.
In the context of independent insurance agencies it means not relying heavily on any single carrier, industry, or producer. A heavy reliance on any specific source of revenue increases an agency’s risk significantly. For example, if the agency writes most of its business through one carrier, what will happen if that carrier decides to change how it determines contingency?
Every agency owner has a few regrets when it comes time to sell. What is most important is identifying these risks and addressing them proactively. If these risks can be addressed and mitigated before the agency is sold, they will have less of an impact on the agency’s price.
Identifying these risks can be challenging enough, and addressing them tends to be even more complicated. Enlisting the help of an AgencyFocus consultant means drawing on the experience and knowledge of a team that deals with these issues on a regular basis. To learn more about how AgencyFocus can help you identify and address risk, schedule your free introductory meeting today!