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The Rough Notes Company Inc.



September 06
09:16 2019

Agency Financial Management

By Rick Dennen


Plan to run your business every day as if it will be sold tomorrow

Succession for your agency may seem a long way down the road, but it is never too early to begin planning for your eventual departure since it can take years to enhance the value of your business for a future sale.

Thinking that you will want to retire in 10 years’ time? You’re in luck. That’s how long it may take for a well-crafted perpetuation plan to come together. This transition period allows time for the new owners (sometimes existing employees) to make mistakes, learn, transfer relationships, develop new relationships, and grow with a safety net in place. It will also provide you time to determine if you really want to retire.

While this is an ideal scenario, life circumstances can change quickly, and selling may occur sooner than you think. My best advice: Run your business every day as if it will be sold tomorrow.

I have first-hand experience with Oak Street Funding®, which I founded in 2003. Oak Street has been sold three times, with the shortest time frame being 30 days. Each time we sold—three times in 12 years—it was like starting a new company—new capital, new board, new objectives, new strategy, and so on. And while each sale had different circumstances, each resulted in positive outcomes for the shareholders.

No matter who will acquire your business, profitability, risk, and people are three important areas you will want to focus on as you are planning for succession.

How was this possible? It was because we managed the business so it was ready to be sold at a moment’s notice. This required me to know the true value of the business—not one that was tied to my personal opinion or emotional attachments. The business was institutionalized, meaning that multiple employees can handle well-thought-out policies and procedures.

Valuing your business

It is important to be deliberate in enhancing your business as you move through the stages of ownership from startup to growth to maturity to your eventual exit, since the value of your business is established well before the point of sale.

Drivers of business value include growth (organic, by acquisition, or by adding new product lines), margins, profitability, efficiency, capital structure, technology, your management team and brand equity, your fit with the acquirer’s business, and other synergies, such as financing availability, capacity, and timing.

Valuation methods include discounted cash flow, multiples of revenue or EBITDA, and/or book value. Typically, several methods are used in any one transaction and can be averaged or weighted. Work with your accountant or financial advisor to determine which method(s) make the most sense for valuing your business.

Who do you want to acquire your business?

There are three main methods of perpetuation:

  • Employees, children, or other family members take over
  • Other principals buy all or part of the current principal’s interest
  • An outside party or organization buys out the current principal’s interest; this could be a financial buyer (like private equity) or a strategic buyer (like a competitor).

If you envision an outside party or organization acquiring your business, you will need to identify the kind of individual or company to whom you would be comfortable selling the business.

Your preference will influence where you put your focus in preparing the business for succession since there are many variables within an agency: operations, marketing, planning, profitability, growth, technology, risk management, retention, and people. Choosing how to focus resources on these different variables will be influenced by what will make the business attractive to your desired kind of buyer.

For example, investing in marketing or technology may not make sense if you are being acquired by a large firm, because it may already have these structures in place and is more interested in operational efficiencies, profitability, and retention. Likewise, marketing and technology, brand, community involvement, and referral programs may be good areas to invest in if you are looking for an individual acquirer.

No matter who or what company will acquire your business, profitability, risk, and people are three important areas you will want to focus on as you are planning for succession.

With regard to profitability, take a look at how your business’s performance compares to that of your peers. For example, analyze data such as average premium per policy, breakdown by line of business, location of accounts, accounts by premium size and revenue size, and largest clients. Gather supporting documentation from carriers such as loss ratio reports, commission statements, and schedules.

As an insurance professional, you have a keen appreciation for the dynamics of risk. For a prospective buyer, understanding the inherent risk in a purchase is critical. Among the risk factors today’s buyers may consider are declining revenue or earnings; revenue concentrated in a few carriers, producers, or accounts; revenue concentrated with substandard markets; low retention; high loss ratios; poor recordkeeping, and/or employee issues.

Which brings us to people. Bar none—your people are your greatest asset. I cannot emphasize enough that your employees should be the number one focus of your energy to create the most value for your business. Having a distinctive culture that includes an open door policy and transparency can add value to your business, aid in the retention of employees through the transition, and create an atmosphere of collaboration among departments.

There are many considerations to take into account as you plan for succession: financial position, market conditions, competition, and more. While some are purely sales driven, others are based on emotions. And, since cooler heads tend to prevail, you will want to set goals and create an exit strategy. Take time now to understand both the current market value of your business and also how you can enhance the value based on who you want to acquire your business. Assemble an expert team that includes an accountant, lawyer, financial advisor and, most important, an investment banker. Let them help you become knowledgeable about and comfortable with the sales process. Be sure to stay the course as you mentally prepare for retirement or your next endeavor.

Financing options

Finally, numerous financing options are available when your business is being acquired. A leveraged buyout/recapitalization is one option. As a lender, I like this approach because it does not have as many moving parts as an outright acquisition. With recapitalizing, be careful not to take too much equity out of the business as you may end up over-leveraged. With regard to deal structure, I love the alignment of the earn-out and/or seller-assisted financing.

These options create the best structure for a successful transaction and bridge the gap between buyers and sellers. Once you have assessed your options, look to a cash flow lender for an infusion of working capital that can be used for activities that will positively affect the value of your business.

The author

Rick Dennen is the founder, president and chief executive officer of Oak Street Funding, a specialty lending company that provides commission-based lending for insurance businesses. Since he founded founding Oak Street in 2003, the business has experienced exponential growth and has a portfolio whose value exceeds $1 billion.

Dennen is a licensed agent for life, accident and health products in Indiana and holds one or more of these licenses in 45 other states. In addition, he holds an MBA in finance and is an instructor of venture capital and entrepreneurial finance at the Indiana University Kelley School of Business. For more information, Rick can be reached at

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