What to Know Before Selling Your Agency

Today is a great time to be an agent. You should be congratulated for successfully navigating a tumultuous and fast-changing industry over the last 10 years. Your agency has probably progressed from delivering products to dealers to providing training, reinsurance solutions, technology and other value-adds such as compliance monitoring, recruiting and even dealer retention apps.

At the same time, competition is fiercer than ever. The auto market peaked last year, which likely means lowered profits for you this year while a few deep-pocket companies are providing larger dealer advances. Plus, your dealers are constantly being bombarded by other companies — from factory to institutional providers — that have their own sales forces. These are just some of the challenges agents I’ve spoken with are facing as standalone independent agencies in today’s market.

While you fend off all these factors tugging at your dealers, you are probably spending your windshield time contemplating the future of your agency. What do you need to know before selling your agency or partnering with someone to build a bigger one, and how can you maximize that information to get the best value?

Here are some thoughts:

Stability: The acquiring company, whether an administrator, private equity company or another agency, is looking for some very specific signs. The stability of your book of business is very important. Have you had most of your dealers for a long period of time? Is your book of business spread over a large base of dealerships or is it focused on one or two large groups? Acquirers would rather you produce 25 contracts per month from 20 dealers than 100 contracts per month from five dealers.

Relationship Strength: Does your agency have strong relationships that will endure beyond the time you are the focal point of the agency? What is the risk of dealers leaving your agency after the sale? If the dealer is only doing business with your agency because of you, it will be important to build the dealership’s trust with the rest of your team in case you ever step back from your role in the agency.

What products are being sold? A strong book of VSC or GAP production is much more attractive than just ancillary products. What other value-add types of things do you provide for your dealers beyond just products? Do you offer such extras as F&I and sales training, compliance and service retention programs that make your agency integral to the dealership? Do they think of you as consultants and an extension of their dealership team, or just a product provider?

Solid EBITDA: From a financial side, it is critical to understand some of the numbers that the acquiring companies find most important. The buyers of your agency will look at EBITDA. That stands for “earning before interest, taxes, depreciation and amortization. For most agencies, that is roughly your commissions less your expenses.

For years, many agents have loaded up their expenses to reduce their taxable income. Now, they will not want all those deductions in order to show a higher EBITDA. A good and fair evaluation will add those deductions back into the EBITDA to pay you the fair value that your agency is driving. From a net profitability standpoint, you will also want to understand your cancellations or chargebacks and whether or not they are in a reasonable range.

Remember, you know there is a big liability that you are funding out of current production, but very few — if any — agencies have set money aside for this liability. Lastly, what will you need to be paid to continue to run the agency? That has to be deducted from the final EBITDA number.

Your Motivation: What motivates you to get out of bed every day? Will you still be motivated after the acquisition? Some agents pay themselves a salary and then take out the excess profits at the end of the year. Others use the agency as their ATM and take money out for their personal expenses. When an agency has sold, it is great to have the proceeds in the bank providing financial stability — and no one will take that away from you. However, there will always be adjustments, like learning to live on a salary.

It may also be a new experience reporting to someone else after all those years of independence. It is important to learn what type of growth expectations and day-to-day interaction the acquirer will have with you, and what incentives they will give you to grow and earn extra money. In my experience, agency acquisitions result in highly motivated team members, with even more opportunities for the agency and their dealers.

Realistic Expectations: It is important to know your EBITDA within a relative range. Many agents talk about the number of contracts they sell. Usually, that number comes from their most successful month, and they round up very liberally from that! Exaggerated production is okay to use in conversations at agency events and cocktail parties, but during due diligence the actual production is verified.

By overinflating your numbers during initial discussions, you overinflate your own expectations for the purchase price, and you will be disappointed once due diligence is completed. The numbers are what the numbers are. In the end, the reputable buyer will pay the agreed fair value after due diligence.

Intangibles: If possible, look at factors beyond the financials. For example, have good people in your agency that will survive after you are gone – whether that is three years, five years, or 15 years, as one agent principal has done in a recently completed deal. That stability is huge for the acquirer, along with the knowledge that the agency identity and roots will continue for years to come.

In addition, look at your agency’s agreements with your current providers. If the agreement calls for their consent, they cannot lawfully withhold that consent, but it is worth understanding the notification terms and how they apply in your agreements with your providers. Think about synergies. An administrator will get the value of your agency, but they also benefit from the business you will do with them. This means they will be able to pay more for your agency.

Finally, as with any investment, don’t become too emotionally attached and hold on too long. If you are waiting for that one big dealer group, you may lose a dealer somewhere else because of the fierce competition. A dip in car sales for the next three years may hurt the value of your agency by 15% compared to what it is worth right now. Look for a partner that brings value to the table and will help you grow, pay you for the growth, and allow you to stay on as long as you want.

There is a lot of emotion in selling your agency, and every single agent has asked me, “What if I am not ready to be done?” There is relief and satisfaction knowing you have cashed in on your investment, but it is another thing to think of sitting at home and not being in the game. Find a partner that allows you to stay in the business until you are ready to leave. Also, whether you look to capitalize now or in the future, strategic alignment early with the right administrator is key. Knowing the information shared here can help you plan in advance and maximize the value you get from your agency.