In the venture capital world, where business people see every kind of business plan you can think of, one of the key elements they always look for is an exit strategy. What’s yours?
If you’re like most owners of growing agencies you don’t have one. Haven’t given it much thought. And, when the time comes you will pay a significant price for the neglect of the question. Regardless of how long in the future you think selling is, it’s the wise man who has a plan.
Let me give you just a few things to think about in this regard:
1. Businesses are only worth what they generate in returns to ownership. If you buy stock on an exchange, you pay a multiple of earnings. The same applies to an insurance agency. You can recast your financials when you get ready to sell but why not just operate the business with a goal of maximizing the bottom line? You can pay for your country club and other perks out of profits. They are still deductible – or not – but profitability is enhanced. So is value.
2. If you have a partner(s), have a buy/sell agreement from the beginning that specifies how one, or more, of you can leave. It also should create a formula for valuing the business. This way there are no arguments about the price when the time comes.
3. If you plan to sell to a family member or employee, remember that they are entitled to nothing. What do I mean? I mean that if you pay them to work in the business, and they help build the business, they are getting paid to do so. That doesn’t entitle them to a piece of the equity (unless you arrange it differently). It’s important for people to have a clear understanding about this.
4. If you decide to compensate a family member or employee with stock, put a value on it, take the tax deduction when granted and the person receiving it should declare it as income and pay taxes on it. This makes it compensation and not a gift. This way there is no sense of “entitlement.” Remember employees get paid to build the business. The reward of equity belongs solely to the owner(s).
5. If you plan to sell to employees or family members make them pay market value for the stock. This enhances the subsequent balance sheet when they’ve paid for it, which in their interest. It also maximizes your value in the sale. It’s good for everyone.
6. If you want to help someone (i.e., family member or employee) buy the business, you can in a number of ways. You can allow lower down payments, longer terms, lower interest rates, etc. BUT REMEMBER you are taking a bigger risk when you do this! So be smart and have terms which allow you to get control of the agency back quickly if there is a default. You also should insist on personal guarantees to tie up all the seller’s assets. Just because it’s someone you have a relationship with, there is no reason to risk losing your life’s work.
Selling to an employee or family member may be the most lucrative strategy—or not. But regardless of who you sell to, consider getting professional assistance to help you value the agency. You’re a professional agent, not a professional mergers and acquisitions person. This is likely your biggest asset and you’ll probably only do this once. Don’t screw it up.