Human nature tends to create reality barriers when it comes to dealing with business and personal mortality. However, I do know, and can comment with ontological certitude, that agency principals have left thousands to hundreds of thousands—and in some case millions—of dollars on the table by failing to properly prepare to exit their businesses.
Agency principals have but two options when it comes to monetizing the value of their equity interests as they exit: They can sell the agency internally to key staff or they can sell it externally to competitors, large brokers or other third parties. The value of the owners' equities at exit time will be based on one key and very fundamental factor: the future sustainable earnings capacity of the agency.
Earnings and cash flow will provide an internal buyer with the necessary funds to successfully complete the transaction. In the case of third-party buyers, earnings and cash flow are fundamental because these buyers know that the best predictor of an agency's future performance is its past performance. To maximize value, then, agency owners should focus daily on enhancing the earnings capacity of the agency well in advance of their exit. A word of caution, however: This focus should not be so narrow that it negatively impacts earnings by obtaining short-term gain to the detriment of long-term growth and sustainability. You must continue to invest in people and infrastructure.
To deal effectively with business mortality, agency principals must think about and plan for their exits from the business at least 10 years before implementation. One of the more disheartening things I hear is that an agency principal wants help with an imminent perpetuation plan or sale when there has been no preparation. In these cases, meaningful value is always left on the table.
To avoid this unnecessary financial loss, principals who want to maximize their values should run their agencies like businesses and position them to be sold tomorrow. The agency's financial statements need to be kept in order. The balance sheet should always be as clean as possible. Adjustments to the income statement and changes in operations under someone else's ownership should also be few in number and logical so as to clearly demonstrate and create a sustainable pro forma earnings base.
Thus, whether your exit from the agency is internal or external, you'll want to prepare that exit well in advance to maximize value and build the best possible scenario for you and your eventual buyer.
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