Selling a business is one of the greatest challenges and, potentially, one of the greatest rewards any business owner will ever realize. Like marriage, career changes and other major endeavors, it is not something that should be taken lightly. Serious contemplation of the risk versus reward must be well thought out.

If there are business partners, their concurrence and support are, no doubt, essential. If you have family members directly involved in the business, their welfare and ongoing contributions must also be evaluated and taken into account. Selling your agency is a decision that requires careful deliberation and, potentially, collaboration among close associates, family members and partners.

One of the biggest questions you will face is whether the time to do so is right. Many dynamics dictate whether the timing is appropriate. Generally, the goal is to sell when the business is peaking on its trend of revenues and earnings. The old adage of selling high certainly applies here.

The trick, more often than not, is staying ahead of the market curve, timing everything just right so that you can sell out just at the peak of the trend.

Selling a business usually takes between four- and 12 months, assuming everything falls into place. The risk to the agency owner, quite frankly, is that the acquiring entities are so tuned into industry trends that by the time the market begins signaling price compression, the acquirers are packing their bags, or at the very least, lowering their multiples.

The valuation methodologies run concurrently with demand. If product demand or rate of return on revenue declines through market softening, the value of the distribution channel certainly will decline by relative proportions.

Sometimes the sale of a business is used as a succession-planning vehicle where the owner can easily liquidate his ownership interests in the business without disrupting the ongoing viability of the operations. This requires a careful fit between the buyer and the existing business. Most often, timing and market conditions are not as important; rather, it is up to the owners discretion as to whether it is right.

Often, agency owners face limited growth opportunities for their business due to the lack of capital. The desire to grow bigger is there but the capital is tied up in the business. By selling the agency interests to a larger, national company, this can release the liquidity from the company and allow the business owner to continue to manage it as a platform. Although being part of a larger organization brings new challenges, it also often represents a new opportunity for entrepreneurs to flourish.

All this being said, market conditions, as well as personal and financial objectives all have to be carefully evaluated prior to making the commitment to sell.

#2. Consult with a business advisor and M&A lawyer.

This is an important, but often overlooked, consideration. Once you are determined to sell your business, it may be worthwhile to seek the guidance of a business advisor and an attorney who specializes in mergers and acquisitions.

Many times, business owners depend on their local CPA and corporate attorneys. While these people are important and may have created value for the organization in the past, it may be better to have experienced specialists who can navigate through the acquisition process.

The acquisition course has many components and requires the understanding of the sequential events that generally occur during the process. These events consist of the business valuation, assessment of sellers market opportunities, preparation of offering memorandums, review of the tax implications of a potentially complex transaction, and legal and financial due diligence.

Additionally, there is much drafting, review and negotiation required for the definitive, employment and non-compete agreements, in addition to other representations and disclosures. Arming yourself with these professionals will most likely provide you greater consideration, which should outweigh their costs by a reasonable proportion.

#3. Clearly recognize the value of your business.

A business advisor can guide you here. Although this is not rocket science, it is important to be well-armed with a clear understanding of the value parameters of your business.

Acquirers will sometimes reduce their valuations to an “art form” and will not specifically disclose how they appraise your business. Establish benchmarks for an acceptable selling price that you are willing to tolerate. It is not expensive to obtain a valuation, and well worth the investment when it comes to comparing it with a buyers offer.

#4. Avoid reactive selling.

It is highly recommended that you take the initiative and go to market under your own volition. Typically, this will provide a much greater chance of optimizing your sales proceeds. Being reactive and allowing the buyer to initially approach often puts the seller on the defensive, where you are subject to buyer timelines and pricing methodologies–in other words, they maintain control over the process.

Do not hesitate to take the offensive and find the buyers before they find you. There is an abundance of buyers in the marketplace; therefore, consider shopping among multiple suitors. A business advisor will prove to be helpful here. Depend on your advisor to maintain control of the selling process while vigorously representing your interests.

#5. Present your company properly.

Typically, a business advisor will recommend putting an offering memorandum together after you conclude that selling your business is right for you. An offering memorandum includes historical financial performance, business and market trends, ownership interests and pertinent tax information, forward projections, a narrative overview, and other historical information on the business.

Additionally, it includes certain metric information that is key to the business. The biggest mistake made by entrepreneurs is that they open their books and immediately provide an internally generated, cash basis, financial statement to a prospective buyer.

The primary goal of any small- to mid-sized business owner always should be to minimize their tax liability while maximizing their personal cash flow out of the business. Often, this skews the presentation of the business from a GAAP accounting basis, which really should be the means on which an agency is valued.

A business owner should carefully evaluate and quantify all personal expenses charged to the business and treat these as “add-backs,” which ultimately increases the book income of the agency. Add-backs are adjustments that a purchaser usually makes in “normalizing” the income of a business.

More often than not, many add-backs are overlooked. If a buyer pays a multiple of earnings, the seller faces the prospect of leaving significant sales proceeds on the table.

Did you ever think about how other financial dynamics may misrepresent the performance of your agency? Remember taking Accounting 101 and learning about the matching principle? This states that to fairly present your financial statements, costs should be proportionately matched with revenue as it is earned. Insurance agencies are inherently put at odds with this principle when they present cash-basis financials.

Think in terms of where the preponderance of expense is generated in an agency–creating a sale or placing business. Yet when an insured elects to defer payments to monthly, quarterly or even semi-annual mode, the agency commission income will follow the same payment cycle. The agency has expended a large amount of resources placing the business, yet it may have received only as little as one-twelfth of the actual annual commission due.

To clearly “match” costs with revenues, numerous adjustments such as accounting for deferred commission revenues, or alternatively, deferred acquisition costs, need to be taken into account to properly present the true earnings of the business. Remember, every buyer will value your business based on earnings. It is extremely important that you include all details that will assist in optimizing your agencys earnings.

One final and equally critical component of the offering memorandum is its ability to accentuate value creation for the buyer. In other words, to bring to the surface certain intangibles or revenue components that can and may create exceptional value for a prospective buyer.

Recurring revenue is something that makes all buyers salivate. If the selling agency has a seasoned book of business with a robust renewal stream, this is a primary example of economic value creation. This may help to significantly increase the profit margins of the buyer.

Examples of intangibles that may create value are the professional credentials or industry presence of the agency owner(s). If a buyer is looking to create a platform or to have the buyers business play a key role in their operating scheme, the intangible value of a mature, well respected, management team is an intangible that will receive higher consideration.

#6. Evaluate all aspects of the offer in detail.

If you elect to subscribe to the recommendations set forth thus far, the next step is to send the offering memorandum out to prospective buyers.

Generally, buyers will need to perform preliminary due diligence prior to formally presenting an offer. This will occur after receipt of the offering memorandum and prior to the offer. Offers generally are presented in a non-binding letter of intent (LOI), and are generally time sensitive, requiring the agency owners acknowledgement and acceptance of the offer in writing.

The best way to characterize this stage is to compare it to getting engaged. There is intent for the two businesses to formally proceed, but either party can terminate it at any time prior to closing.

A LOI is always contingent upon the buyers satisfactory completion of legal and financial due diligence. Is the LOI negotiable? Absolutely. Again, the value of a business advisor can be enormous during this phase. They can draw upon their experience and recommend items that should be negotiated.

There are numerous components included in a LOI that go well beyond the price offered for the sale of your agency. All of these components are critical and need to be carefully evaluated. Some examples are the long-term value of stock options, employment agreements, non-compete covenants, deferred purchase consideration, hold-back provisions, base compensation and benefits, contingent bonuses or performance incentives, and the tax treatment of the transaction.

Examine how deep the acquiring entity goes in your business to make offers of incentives, employment agreements, stock options, etc. It is important that you evaluate these matters carefully. Remember the importance of your key people in the day-to-day operations of the business and be mindful of how their continued contributions are key to your ongoing success.

Often, a key determining factor behind selecting to sell to a specific buyer is the reputation of the organization in the market. Take not only the economic elements of the offer into consideration, but give considerable weight to the reputation of the buyer.

#7. Negotiate!

If you have made your decision and are about to sign the LOI, do so without any material concessions. You can negotiate for higher consideration such as splitting synergy, which is the revenue or expense benefit gained by the buyer through the combination of the two businesses.

Do not be afraid to counter-propose. It is extremely important to remove any obstacles from an impending transaction before the commencement of legal and financial due diligence. If there are any issues that make you uncomfortable, raise them at this time. This will save you time and money in the long run. Whether the concern is your compensation, consideration or transaction structure, these issues really must be addressed and presented in a revised LOI.

Dont be afraid of the buyer closing down the deal. Rarely will buyers walk if you are within a 10 percent tolerance on offering price. They have opportunity cost tied up in you and do not want to lose the deal.

#8. Get your house in order.

Be prepared for a convergence on your internal business operations. While the next steps of a transaction are usually smooth and relatively painless, they require probably the greatest amount of hands-on effort.

Once you sign the LOI, the buyer will schedule a formal legal and financial due diligence visit to your operation. The primary goal of the buyer is to completely validate everything that has been represented about your company.

This almost always requires a site visit of several days for the buyers team to review systems, contracts, accounting records, articles of incorporation, employment files, payroll records, bank statements, etc. Not only do they want to validate the financial statement representations, but also do risk assessments such as production concentration, personal production levels, any threatening or pending litigation, etc.

Another drill the buyer will perform is an overall assessment of personnel and their related skill sets. This is primarily directed toward the management of the business, but is seen as a critical element of the review. The buyers team must come away with an affirmative view of the managements depth of knowledge, experience level, technical skills, work ethic, stability and commitment to the business.

The due diligence review lists are generally pretty exhaustive and can range from having you prepare information on as few as 40 or up to 150 individual categories. The best tactic to adopt here is to be proactive and to solicit due diligence checklists a few weeks prior to the scheduled visit. This gives your staff enough time to pull all of the materials together.

Once you sign the LOI, the first call you should make is either to the legal counsel or senior finance representative of the acquiring entity to ask them to provide you with the list. If you dont call them, more than likely, they will be the ones calling you to schedule the due diligence visit. A few things to remember are to:

Provide ample time to compile all the requested materials for due diligence.

Communicate with key office staff of the impending events to allow them to get prepared.

Coordinate the due diligence activities with the schedules of your lawyer, business advisor and accountant. While it may not be critical to have them on site for the entire visit, they must be accessible in the event they are needed.

In general, the formal legal and financial site visits last two to three days. The key matter is to be prepared and have all permanent file information readily available. Most buyers are sensitive enough to conduct most of the activities at a neutral location if you are uncomfortable with announcing the visit to the general employee population.

#9. Perform your own due diligence on the acquiring entity.

If you are going to be directly involved, post-transaction, in the acquiring entity, this is a must. While they are kicking your tires, you should be reciprocating. Do not allow the transaction process to go by without satisfying yourself that the buyers operating model is conducive to you and your business culture.

You should visit the buyers headquarters, meet their key people, and ask about their plans for integration. Be certain to ask about any employee casualties that may be a result of any integration activities, and be absolutely sure the buyer has a track record of handling these situations with class and dignity. (Be certain that there will be a grandfathering of tenure for severance purposes.)

Additionally, look at their benefit plans, evaluate their communication methods and review their complete operating cycle. Ask to talk to other former owners of businesses they have acquired. (It is recommended that you obtain the buyers permission to speak to these people before hunting them down.)

Speak to at least two former business owners in a one-on-one format and you will learn more about your prospective employers culture than any brochure could ever convey.

#10. Take it slow.

It is the best and only way to conduct a serious transaction. Carefully evaluate every aspect of the deal along the way.

Generally, companies that acquire on a frequent basis will put the offer out for a few days or weeks, or threaten to walk if there isnt a quick decision. Put this into perspective: They are asking you to make one of the biggest commitments of your life in a matter of days?

This is typically a tactic used to keep the deal momentum going in hopes that there is no seller remorse or slowdown for further contemplation. They own the momentum and you, the seller, really should be the one synchronized with the schedules, not being dragged along without an understanding of what is next in the sequence of events. This puts sellers at an unfair disadvantage.

The secondary reason why deals are generally rushed is because of the fear of other parties coming into the mix with offers, which could potentially raise the stakes. Take it slow, rely on experienced advisors who can bring intermediary experience to your side, and evaluate every single aspect of the transaction, at your own pace.

Selling your agency can and should be a rewarding experience. Trust your instincts and stand firm on your convictions. This is a life-changing endeavor and should be dealt with cautiously.

Steven Wevodau is president of Capital Financial Services Inc., a Mechanicsburg, Pa.-based business advisory firm specializing in mergers and acquisitions for the insurance and financial services industry. He can be reached via e-mail at [email protected].

Reproduced from National Underwriter Property & Casualty/Risk & Benefits Management Edition, July 15, 2002. Copyright 2002 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.