What The Financing Options for My Agency
You’ve sold your business, the question now is how will the financing options work? In the end, most perpetuations must be financed in one way, shape or form. For many agency owners, they do not plan and structure themselves both personally and professionally for the transfer; which can lead to less than optimal results in terms of sale price and/or tax liability. There are many ways to finance a sale and most use a combination of methods.
Working With Traditional Banks
In recent years it has been popular for sellers to demand (and usually get) the majority if not all of the payment in cash at closing. When it comes to a sizable agency/book, for most buyers this means the use of a loan. Traditional banks require collateral, financial strength, other assets, revenue, etc., but most importantly accurate financials. This is where the seller can make his or her life a lot simpler if they segregate their non-business expenses from the true business expenses. By being able to provide a buyer with accurate and CLEAN financials, their lender can then more cleanly analyze and underwrite the loan.
Many lenders who use traditional banks will use the Small Business Administration (SBA) program to do so. There are rumors and misconceptions that SBA loans take excessive amounts of time to get approved, and even longer to close. This is not necessarily the case; rather it depends on the quality of information provided by the seller and the credit worthiness of both the buyer, their existing firm (if they have one), and the post-close proforma financials of the sale.
It is recommended that the buyer be prequalified through their lender prior to entering into a letter of intent or other terms of transfer.
What About Owner Financing (Seller Carryback Notes)
Many times the seller will “carry paper” as part of the transaction. This means that the seller will not receive the full cash at closing, but rather accept payment terms similar to a bank. The seller is recommended to collateralize the agency and/or book of business for the term of the Carryback Note.
Seller Notes are used both as the primary financing mechanism, or as a supplement to either a Cash or Bank financed transaction.
How Do Earnouts Work?
Earnouts are one of the most popular forms of financing a sale of an agency and/or book of business form the viewpoint of the buyer. There are pros and cons for the seller when using an earnout. First, if the agency is a running organization with a strong growth rate, then the seller may want to benefit from some of the additional growth by taking payments on an “Earnout” basis (similar to a royalty) as a percentage of revenues. However, the opposite is true for many sellers who are only selling a book of business or a one-person shop where the departure of the seller as a part of the day-to-day operation may impact the value of future payments.
It is important to keep in mind that the more dependent the agency and/or book of business is on the day-to-day involvement of the seller, the more likely the buyer will request to have the seller either stay on board following the sale or to be tied to the renewals via an Earnout.
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Maximize Your Return on Investment
Agencies are typically one of largest, if not THE largest asset that an agency owner controls, so the emphasis during the consideration of selling should be on the Net Dollars to be received from the sale as compared to the Gross Sale amount. Meaning that sometimes a slightly lower Gross Sale price may equate to a higher amount of total dollars kept after paying taxes.
It is important to consider the terms of how you’re to be paid as they can either remove or add risk to your investment – and YES, the agency is still an investment until you are fully paid for the sale.
Work with a Professional
GDI Insurance Agency, Inc. has been in business for nearly 30 years and have bought, sold and merged with various entities for over 20 years. We pride ourselves on providing accurate and honest opinions to our friends and partners and invite anyone looking to sell in the states of California, Arizona, Nevada, and Oregon to reach out to us for a consultation.
For a Confidential and Professional Conversation
Contact Matthew Davis to discuss Agency Perpetuation in detail.
Matthew Davis, MBA, CPCU, AAI