Brokers Facing Exit Signs

Why is it important to plan an exit strategy now, given the other day-to-day issues you are facing? One reason is that you do not know for sure when you will be facing that “exit sign”. If you were to pass away suddenly, would the people you care about such as your family and your employees be in a position to carry on the business? If you were incapacitated due to illness or accident, would your needs and those of your family continue to be met through the business?

Also, you may find yourself facing an attractive offer from someone wanting to buy the business, and you need to have the ability to hand over the reins quickly. This may be because of the economic cycle – it is much easier to sell at the top of the cycle when buyers are plentiful and you will receive top dollar, than at the cycle’s bottom. In some cases, you will want to make your exit from the business gradual, and this too takes planning. A third reason to prepare now is that any effective exit strategy takes time. You do not want to find yourself with an urgent need to sell, particularly in a bad market, because potential buyers will see your need and keep their offers low.

Despite these reasons, many agency or brokerage owners are reluctant to consider their eventual exit. For many, their company is their “baby,” something that they have worked hard to raise for several decades. They have built up strong relationships with clients and carriers alike. It is not easy to let go, to think that anyone else could do as good a job, or to imagine one’s lifetime of work in the hands of someone else.

In one case in which we were involved, a business owner planned the sale of his business and received a good offer in cash or bona fides from a potential buyer, only to back away from the deal at the last minute largely because he did not like the prospect of leaving. The prospective buyer in this case wound up buying the competition instead. The owner may be accustomed to a position of authority and respect and does not want to lose this. Sometimes, a reason for the reluctance is that selling raises issues in the owner’s mind about her or his mortality. One of the most powerful factors, however, is that life post-exit often looks hazy and not particularly attractive.

DETERMINING PURPOSE

One of the first steps should be to determine the desired results to achieve through an exit strategy, so the business owner will have a clear idea of what life will be like after the transition. If it is a family business, the objective may be to provide continued employment and prosperity for the next generation.

Or, the owner may simply want a comfortable lifestyle in retirement – time to relax, travel, pursue hobbies, or do volunteer work. Alternatively, the owner may want the opportunity – and the cash – to go on to other challenges such as starting a new business, or passive investment in others’ companies. It is best to talk this over with other people affected by the decision, including a spouse or partner, to determine the best course.

PRO-ACTIVE, NOT REACTIVE

It is important to take the initiative to make the future happen, and to not allow events to happen to you. Otherwise, you may find yourself needing urgently to move on from the business – possibly due to sudden illness – and not prepared to do so.

It is important to have a plan, with a timeline attached. In the same way business owners consider the future they want to have post-exit, they need to determine what kind of individual or company they want to have take the reins. There are several possibilities:

Family member. Possibly a child, or a nephew or a niece may be in a position to buy or take over the business. In such a case, the business owner’s plans should be discussed with this person and others in the family, to be sure that the plan works for all the others involved. Then this successor will likely need to be groomed to take over the business, through exposing her or him to many different facets of the operation. Relationships with customers, adjusters, carriers and others will need to be considered and transferred. Another consideration is whether you want to sell the business and live off the proceeds – in which case a successor will likely need help developing a financing proposition that works for all.

Management buyout. Some business owners want to pass the company on to hired management. These people know the operation and may be in the best possible position to operate it profitably. In our experience, management buyouts work particularly well if you have set in place an Employee Share Ownership Plan (ESOP), in which employees are encouraged to buy shares in the company. This not only encourages employees to take more of an interest in their work as they are part-owners of the business, but it helps set a value on the business.

Outside person/business. Another individual or business may be interested in buying your agency or brokerage. Be aware that, while there may be some “tire-kickers”, most of them will not want to go ahead with the deal after they have looked at it closely. Another option may be to sell out to a company that wants to grow its volume through acquisition – it simply wants more policies, and buying an existing client base is the best way to do it. Be aware that such a company is likely highly experienced in making acquisitions, so make sure that your own advisors have an equal level of experience to ensure a fair outcome.

A good bet may well be to find a company that for strategic reasons wants to absorb your company. It could be another brokerage or agency that is looking to build its business in the same geographic area.

Institutions. There is strong growth in sophisticated funds that are geared to buying businesses for succession purposes. These funds will extend the money to buy a business when the owner is ready to cash out.

MORE THAN A COAT

Exiting a business is more than just calling in receivables and putting on a rush to sell a few more services. It means issues such as having financial statements that are verifiable and clear, with liabilities such as tax owed clearly stated. It means having a management team groomed and ready to take over after the departure. It means having good relationships with others in the business, including competing brokerages, carriers, adjusters and others.

This is an opportunity to be sure that all marketing collateral is up to date, the office is tidy, the claims management process is working well, and the business has not taken any unusually aggressive income-tax filings that may cause a potential buyer to consider the business too much of a risk. They will be looking for signs of a strong, viable, ongoing concern.

SETTING VALUE

Valuing a business is partly an art as well as a science. There are many different approaches to setting a value on a business, and this is an area where expert assistance can be a tremendous asset. A potential buyer will be more willing to consider the valuation of an outside professional than to consider whatever price tag the business owner wants to attach.

Valuation depends very much on the market. If there is a demand for brokerages in the geographic area, you will receive substantially more than if there is not. This is a major reason why it is important to have the business “exit-ready” at any time, so the business owner can jump quickly to take advantage of a good market. Otherwise, it may be several months before you are able to respond, and by that time the market may have slowed again.

Succession issues, of course, do not apply to just businesses in this sector. Many agents and brokers have become trusted friends and advisors to their business clients, and as such are often called upon to offer advice not related to insurance. It may be in the clients’ interests for a broker to urge them to develop a solid exit strategy. This helps ensure that the client remains in business, and the broker is able to continue the relationship.

Exiting a business is never easy. It can be hard to leave it behind and allow someone else to put their mark on it. However, developing an exit strategy is a good opportunity to think over what is important to you, so that the next stage in your life can be just as rewarding.