Insurance agencies are generally valued on a “going concern” basis, meaning that the business will continue to operate for the foreseeable future. When buying a “going concern” business, what you are actually purchasing is a stream of future cash flows earned by the business. Since future earnings are often hard to predict, buyers will typically look at the historical earnings of the business as an indicator of what the business will earn in the future. This means they will only be confident in buying your business if your financial statements accurately reflect the earnings potential of your business. So, review your insurance agency’s finances early on when preparing to sell in order to avoid unwanted surprises later on in the due diligence stage. Be sure they accurately reflect your operations and are up-to-date.
There are some common questions a buyer will ask, and now is the time to prepare answers that will satisfy the buyer and reaffirm their interest in your business.
Here are some tips for preparing for the sale of your business:
- Understand and know your profit margins on each revenue segment of the business.
- Know the breakdown of sales and profitability by location, if applicable.
- Ensure you have a good understanding of your customer base. Do you have any significant customer concentration? What is the percentage of total revenue that each of your customers generate year by year? What industries do you serve? What geographical area do you serve? Are your customers mostly local, regional, international?
- Do customers generally pay on time? If your customers have a history of cash flow issues, this may deter potential buyers and should be something that is dealt with before selling your business.
- Regularly examine your costs. Are they in line with your industry? If not, there may be room to cut.
- Are accounts payable paid on time? Do you take advantage of cash discounts? Paying interest and fees on overdue accounts regularly can lead to decreased profits over time and a lower business value.
- Identify any extraordinary expenses that were incurred in the past as these will not occur again and should be adjusted for when calculating the earnings potential of your business.
- Compare each year’s performance to the prior years. Start a report that compares your financial performance each year. When necessary, explain the reasons for any variances. Doing this each year ensures you will be well prepared to answer any questions a potential buyer has about the historical performance of your insurance agency.
- Regularly compare your agency’s performance to industry benchmarks.
By following these tips, you will be better prepared to sell your insurance agency when the time is right. The process of selling your business can take time, and preparation for a sale should occur well before you intend to exit. If you have any questions about selling your insurance agency, contact one of our trusted business advisors today.