In an earn-out arrangement, the ultimate purchase price is heavily influenced by the selling agency's performance after the agency is sold. So, more accurately, the seller should say, “I may get two-times-revenue for my agency.” That one word, may–it makes all the difference, doesn't it?

What if I told you I'd buy your business for two-times-revenue if you grow it for three years at 15 percent per year and generate a 25 percent margin? If you sold it to me, you'd be on the golf course next week bragging about your deal.

Fast-forward three years, after you delivered three years of 7.5 percent growth and an 18 percent margin and your final earn-out check brings the total purchase price multiple to 1.5-times-revenue. Are you going to bring your agency owner buddies back together to inform them of the “real” multiple you were paid? Probably not. They'll go on kicking themselves that you got the two-multiple and they didn't!

Be very careful before you believe everything you hear about what an agency sold for. Many times, the reality differs from the story told. High-multiple agencies are, in fact, rarer than you might imagine.

There are, however, agencies that actually sell at the huge revenue multiples–north of two-times-revenue, sometimes well north of it. What do these exceptional agencies look like? What do they have going for them that the average agency does not? Is it a good name? A storied history? A prime location? A stellar reputation? What really makes an agency a high-multiple firm?

Simply put, a high-margin, high-growth agency is one that sells for a high multiple of revenues, but that answer is too broad. It's like answering the question, “what does a major league baseball player look like?” by saying it's someone who is “fast, strong and able to hit a curve ball.” We know that. The question is how did he develop those attributes? What were the disciplines and habits that got him to the major leagues? What does his DNA look like?

What does a high-margin, high-growth agency look like, when you really break it down? How does an agency become a high-margin, fast-growing agency? What is the DNA of a high-multiple agency?

We know many agencies that really sold for high multiples and there are, in fact, distinguishing characteristics that define these insurance powerhouses. They generate high margins and grow rapidly because they have many of the following characteristics.

o Superior Leadership:

Superior leadership is perhaps the most common characteristic of the high-multiple agency–and not necessarily for the most obvious reasons. In his book “The Art of the Start: The Time-Tested, Battle-Hardened Guide for Anyone Starting Anything,” Guy Kawasaki (the former Apple Computer visionary) describes a highly undesirable (and very common) organizational phenomenon called a “Bozo Explosion.”

A Bozo Explosion occurs when a “B-level” leader recruits and hires “C-level” players–who, in turn, recruit and hire “D-level” players, and so on and so on. Mr. Kawasaki's premise is that sub-A players tend to hire individuals less talented than they are. Before you know it, you have an organization filled with Bozos!

Mr. Kawasaki states that “B-level” (or lower) leaders are largely incapable of recruiting, hiring and retaining “A-level” talent, because “A-level” talent generally refuses to work for anyone who is not also an “A” player.

A Bozo Explosion is avoided when an “A-level” leader recruits and hires other “A-level” employees, who, in turn, do the same. High-multiple agencies often have “A-players” as leaders that are capable of recruiting and hiring other A-players throughout the organization.

Ours is a people business–attract the best people and you are likely to become the best agency, a high-multiple agency.

o Young Talent:

We recently represented a high-multiple agency in a sale in which the average producer's age was 35. For a buyer, this type of youth pool is a highly desirable characteristic of an acquisition target. An agency in which the buyer will have to “reload” the talent base shortly after the sale is not a high-multiple agency.

Buyers will necessarily account for the future “people” investment required when pricing a deal on an agency with too few young employees. High-multiple agencies invest continually and heavily in young talent.

o Creative & Innovative:

High-multiple agencies beat the competition by being more creative and innovative in the way they do business. One such agency literally transformed its entire market area by offering a significantly enhanced service experience–at no additional cost to the buyer. How would you like to compete with someone selling a vastly superior product at the same price?

This agency personified an “outside the box” attitude through its creative and innovative commitment to continually improving its services. It did what its competitors said could not be done. This agency's growth rates averaged over 30 percent annually in the years leading up to its sale.

Another high-multiple agency makes a practice of regularly working with its key markets to identify and exploit new niche opportunities. These efforts sometimes result in exclusive programs that greatly enhance the agency's competitive position. High-multiple agencies can generally offer solutions lower-multiple agencies cannot.

o Geographically Lucky:

Remember the old saying regarding the three most important factors in real estate–location, location and location? The same holds true for many high-multiple agencies. Such a firm may be simply a very good agency that finds itself in the right place and the right time.

Simply put, certain communities are more desirable to buyers than others. If you find yourself in a high-growth community underrepresented by bank-owned insurance agencies or national brokers, you may find yourself in a very fortunate position as a seller. To get the right agency and the right people in the right community, a highly motivated buyer may be willing to pay a “strategic” price that exceeds the actual economic value of an agency.

o A Sales Culture:

Excellent service is the cost of admission to the insurance business. But excellent service is rarely a defining characteristic of an agency–without it, any agency would be hard pressed to remain in business very long. More often, agencies distinguish themselves by their exceptional sales cultures, and this is almost always true of the high-multiple agency.

An exceptional sales culture is one populated by exceptional producers. High-multiple agency producers tend to be well trained, specialists (rather than generalists), highly accountable for results, highly selective about the business they target, well supported (and thus free to sell, rather than service), hard workers and disciplined.

o Attractive Customer Base/Lines of Insurance:

It's been said that you are known by the company you keep, and agencies are no different. High-multiple agencies are generally very focused on writing desirable lines of insurance with the right customers. Generalist agencies that strive to be all things to all people are rarely high-multiple agencies–which tend to focus on profitable, low-turnover business with affluent and loyal customers.

One high-multiple agency we know is, surprisingly, a 100 percent personal lines firm. With annual growth of 15-to-20 percent in a coastal resort community, this agency wrote high-ticket vacation and retirement homes. By focusing exclusively on this highly profitable niche, the agency quickly developed a reputation as a premier provider of high-end personal lines business.

When asked why his competitors hesitated to focus on this business, this agency's owner responded, “They think there's more money to be made writing all kinds of insurance for all kinds of people.” This high-multiple agency sold to a local bank for a multiple well above two-times-revenue.

If and when it's time to sell your business, you no doubt hope to negotiate a high-multiple sales price. By focusing your time and attention on what real high-multiple agencies look like, you may get just what you hope for.

Tom Doran is a senior vice president and principal of Reagan Consulting Inc., an Atlanta-based management consulting firm that developed and produces the “Independent Insurance Agents & Brokers of America Best Practices Study.” The study may be accessed free of charge at www.reaganconsulting.com. Mr. Doran may be reached at (404) 869-2534 or by e-mail at [email protected].

Caption for clown shot:

A “Bozo Explosion”–in which mediocre leaders tolerate poor-performing subordinates–devalues an agency. Those getting a top sales price employ “A-level” managers who attract top talent, not clowns who hire incompetent staff.

Quotebox, With Doran mug:

“Be very careful before you believe everything you hear about what an agency sold for. Many times, the reality differs from the story told. High-multiple agencies are, in fact, rarer than you might imagine.”

Tom Doran