Buy, hold, or sell? No, we are not talking about a stock portfolio strategy. We are talking about whether you plan to buy a business, hold onto only a segment of your business, or sell your business. You may be just beginning to build your practice and want to develop it in a way that accommodates future changes, or you may own an established agency but want to modify or transition its focus, or you may be at a point in your career that you want to retire and have someone else take care of your client relationships. While you are an expert in your field, you probably are not an expert in Mergers and Acquisitions. Planning to buy, hold, or sell requires experience and expertise!

Recently, I had the privilege of interviewing Dan Mangus of Senior Marketing Specialists for a National Association of Insurance and Financial Advisors (NAIFA) webinar (see below video). I learned so much about Mergers and Acquisitions and growing your business that following the interview, I asked Dan if he would collaborate on an article and offer additional insights on the topics we had discussed and some we had not had time to discuss.

Dan is vice president of Growth and Development with Senior Marketing Specialists (SMS), an Integrity Marketing Group company. Dan’s role is to help agents and agencies build successful and stable businesses as well as guide them through mergers and acquisitions, whether that succession is to someone in the owner’s current organization, a family member, or purchasing them through the Senior Marketing Specialists’ career division. At SMS, Dan and his team developed Acquisition Pathways which provides an overall view of a seller’s business and the goals of the transition.

Carroll: Dan, you have considerable experience with Mergers and Acquisitions. As we delve into this topic, we will discuss three major pillars of the process; Emotional, Organizational, and Financial. Let’s begin with the emotional side. What have you seen?

Dan: The process usually starts out as a financial transaction. Very soon into the process, emotions start to surface since the owner has invested so much into the building of the business; it’s tied to their personal identity.

Carroll: Going into this type of transaction, you are going to have to disclose everything about the business—a total look under the hood—the good and the not-so-good. The exposure touches the owner, his/her clients and staff. Understandably, this will exacerbate the flood of emotions. What advice can you offer readers who find they are dealing with what I imagine is a roller coaster of emotions? Do you ask clients the “Why” question? Why am I preparing to sell my business?

Dan: Yes, I do. It’s important for owners to do some self-examination. It’s helpful to acknowledge that it’s going to be a very emotional time. But there are many positives to selling all or part of your business. Let’s say you are holding onto your ownership but there is a block of business that is distracting you from the business on which you want to focus. Then it’s smart to feel good about having someone else step in and take that piece over. If you are transitioning out of work, say you’re retiring, then you need a good plan that encompasses everyone you have taken into your business circle over the years; you, your family, your staff, your business relationships, and your clients.

Realize that you are just like your clients because you, too, can get sick, become disabled, or die. That may sound harsh, but if you are in business, you have to face harsh realities head-on and prepare for them.

Another helpful tip is to think about what happens after the sale. You want to avoid both buyers and seller’s remorse. Can you live with the non-compete that you sign? The best way to deal with that is by carefully matching up buyers and sellers.

If you are building a business, it is smart to look for ways to incorporate the future into your business model. Create a plan that recognizes that even though you may be taking care of business now, someone else may/could step in and take the reins.

Carroll: It sounds as if the first meeting owners need to have is with themselves. The insurance industry works with clients to minimize the negative consequences that result in not planning for risks or possible future transitions. Just like our clients, owners face risks and unforeseeable life changes. Tell us a little about how you advise owners/sellers to build a practice that includes preparing for sudden or planned transitions?

Dan: If you’re a buyer, think like a seller. Think about what the other side is looking at. Owners are naturally very passionate about their business. I encourage both parties, as they begin discussions, to consider the other’s point of view. The seller must understand the need for details that the buyer will require if they are going to purchase and hopefully service the policyholders of the seller. The buyer must understand the importance of confidentiality and the relationships the seller is responsible for protecting. So we always suggest that a non-disclosure agreement is put in place so that both parties can openly share the confidential information needed for good decision making.

Carroll: Can you offer us some examples of questions that a seller should expect to be asked?

Dan: A seller can expect a lot of questions, but here’s a short list:

How many clients do you have?

• What geographic area are the clients in?
• What carriers are your clients with?
• How many clients are with each carrier?

What is the mix of business by product type?

• Do you have your client data organized or in a CRM?
• What is the status of your carrier contracts, including commission schedules, uplines, and downlines?
• How often and where do you meet with your clients, at home, or the office?

Our team at SMS will be happy to share some additional questions that owners will likely receive.

Carroll: Before we move onto the next pillar, you mentioned staff as an important business element. What advice can you share about preparing staff for a transition?

Dan: Overall, building your company to continue to be successful after you have exited will give your team security in knowing that you are looking at the bigger picture including their future security with your company.

Carroll: Moving onto the operational processes, what are some key items to consider?

Dan: Let’s start with staff since we just mentioned it from an emotional perspective. Operationally, buyers want to know that you are properly prepared in the event that a staff member or downline agent leaves your agency. Data must remain confidential, so use programs and software that allow for the immediate termination of access. If you have downline agents, be sure to have a non-compete agreement to avoid misunderstandings regarding their future activity in the insurance business concerning your clients. If your downline agents or staff are going to be working for or with the new owner, the buyer will need to understand any compensation agreements you have in place that they will be assuming.

Another important issue in growing or transitioning your business is its structure. Being incorporated allows for an easy principal change should you need to step away. It also can provide favorable tax and liability protection. Incorporating takes time, so doing it preemptively will alleviate stress if ownership needs to be transferred quickly. At SMS, we often look to see if the corporate structure in place accommodates growth and transition, or if we need to help you create the right structure for your business.

One of the critical areas that we often see mishandled is client data management. Knowing who your clients are, what products they currently have, what key dates they have coming up, and their current contact information are just a few items that an effective CRM can manage. This is important since your client data must be kept up to date and orderly so someone completely unaware of your day-to-day interactions with your clients can step in and pick up where you left off. The information is essential for accurate valuation.

Carroll: Are there other considerations that you want to mention?

Dan: At SMS we review everything that a business can do to become successful now and in the future. In my experience of helping an insurance practice become equipped and ready for potential transitions, below is a sample of a few essential items we review:

• Is your corporate structure in place to accommodate growth and tax advantages?
• Are you set up as the principal on your carrier contracts?
• Have you carefully selected a complete product portfolio to comprehensively address your clients’ needs?
• Have you identified ways to track your client acquisition costs?
• Have you set up and use a customer relationship management (CRM) program for managing client data?
• Are you regularly dedicating time and energy to stay current on industry and carrier changes?
• Are you including enough information in your CRM to allow someone new to understand your client’s individual needs and circumstances?
• Are you regularly dedicating time and energy to stay current on industry and carrier best practices for enrollment and compliance?

Carroll: Please offer us more information about the importance of being set up as the principal on carrier contracts.

Dan: Remember that even though you may have an office set up with established office roles/chain of command—none of that matters in the eyes of the carrier. A contract with a carrier is a contract to sell a specific product and that is it. The carrier does not care who the CEO is versus an administrative staffer. They are going to look at the name that is on the contract. If you are the agency owner and allow someone else to sign an agency contract, in the eyes of the carrier, the person who signed the contract oversees that block of agency business. For example, this often occurs because the true owner of the agency does not focus on Medicare business, or doesn’t want to deal with certifications. While it may be considered by some to be an inconvenience to have to do certifications, you are giving up any rights to that business. Relationships between you and your staff might be good now, but if you have a falling out with that person they could truly walk away with that block of business. If you insist on having someone sign contracts on behalf of the agency, make sure that you have the proper legal documents in place to ensure that if they ever leave, they will sign that business back over to you. We always suggest that you also have the documentation reviewed by an attorney.

Carroll: A potential buyer, family or otherwise, recognizes that long-range profitably will depend on running the business in a cost effective manner. What other operational systems would they examine in an assessment?

Dan: Your systems need to be carefully outlined and maintained. Many systems touch every aspect of your agency, including marketing, sales, business processing, commission processing, office procedures, etc. The breakdown of one part can inhibit performance or stop it completely. Take the time to examine each for its effectiveness and ability to survive any transition that may be needed.

Carroll: Before moving on to some details about the third pillar—the financial aspects involved in transitioning a business—please offer us a brief summary of the documentation path a seller would follow.

Dan: Here is a list of some of the documents that would be involved as the sale progresses:

• Non-Disclosure Agreement (NDA) which is the legal document that binds each party to confidentiality.
• Acquisition Pathways Agency Overview Questionnaire—This planning tool allows Acquisition Pathways to have an overall view of a seller’s business and the goals of the transition.
• Income Statement—An income statement shows an agents/agencies revenues, expenses and profitability over a period of time.
• Commission Statements—The monthly report received by an agent showing the policyholder, policy number and commission amount being paid to the agent.
• Purchase Offer—This document shows the buyer’s financial offer and the specific policies involved in the purchase. Once the seller approves this document, it triggers the creation of the purchase agreement.
• Purchase Agreement—This document will detail the details of the purchase as well as the compensation structure for payment to the seller from the buyer.
• Assignment of Commissions (AOC)—An AOC transfers the commission being received by the seller over to the buyer. After being signed by both the seller and the buyer, this document is sent to the carrier for processing. AOCs may take several weeks for a carrier to process.
• Agent of Record (AOR)—The agent of record within a carrier which assigns who will be able to service a client within the carrier.

Let me offer some color to the process by starting with a specific tip. Be mindful of the time of year that you plan for transitioning a business. The value of your business can be very different at different times of the year. For example, it isn’t advisable to plan to transition a Medicare business just prior to the annual enrollment period (AEP). The best time to discuss transitioning a Medicare business comes at the first of the year—right after the AEP. At that point, you have commission statements for after the AEP that show exactly what business stayed on the books.

Now, let me add a general tip. Any transition is going to take time. You are not selling a single agency; you are selling 50 contracts or as many different carrier contracts you engaged in over the years with different plans, etc. As part of the purchase agreement, you will move those contracts over which involves the assignment of commissions. Those assignments have to go to the carriers who have to process them.

Carroll: Let’s move to profitability and valuation. I guess it’s fair to say that each party to the transaction probably assesses the value of his business from his/her own vantage point. Based on your experience, what insights can you offer us?

Dan: A buyer is looking at the future…what’s the multiple of the future projected profits? A seller may be looking at the past…the multiple of his gross income. Especially in the senior market, many products have different types of values or methods of valuations. Including the age of the client, age of the policy, policy type, geographic location of the policyholder and cost of maintaining the client relationship. Once a seller weighs out all those factors, they will bump that up against expenses. This gives them an idea of what it will cost them to run the business and keep a continuity of profitability. After compiling the data, a professional valuation company will typically review the information. This is important to the owner because, if other interested parties or family members question the valuation, it needs to be able to stand up in a court of law as accurate and fair.

Carroll: As we mentioned at the beginning of this article, planning for the current and future success of your business is smart. Many of us would not have thought to work with an expert in Mergers and Acquisitions to help create a successful growth or transition path. One of the most important things to keep in mind is the time frame to prepare your business for expected and unexpected transitions. It is never too early to prepare but can be devastating if you wait too long. Thank you, Dan, for sharing your insights and organizing so much important information.