The market is flush with buyers and we are well aware that they are pounding on agency owner’s doors on a daily basis. Being that we are an expert on agency market values, it’s not uncommon for owners to reach out to us once a buyer has made contact with them to get our input on the value of their agency. We convince the prospective seller of the benefits of letting us manage the process most of the time, but there are occasions where we are unsuccessful.
I followed up with such a prospect recently after hearing that he sold his agency. For the purpose of this story, I will call the agency owner “John”. The conversation went like this:
Me: “Hi John. We haven’t talked in a while. How are things going?”
John: “Good. Good, Mike.”
Me: “Have you decided what you want to with the agency?”
John: “Well, I actually sold to ____. As you know, a buddy of mine sold to them. He told me I should talk to them and we worked out a deal.”
Me: “Oh, congrats! How did it go? Did you get the price we projected?”
John: “You know, it went fine. I think I got a fair price. It was close to what we talked about. In all honesty, I probably didn’t do the best job negotiating the terms though. (Pause) In hindsight, I should have let you handle it since you’ve done this before.”
That is pretty much word-for-word what he told me. I know the buyer and I know exactly what he was talking about. His buyer, who is a top acquirer, presents offers that look attractive on the surface, but include terms that are below market and honestly are not that great. The reality is that ‘John’ needs to grow the business to get a fair value due to the buyer’s earn-out structure. He genuinely could have received a better offer if he let us manage the process. And he wouldn’t be second-guessing his deal OR have to stress about hitting his earn-out.
If someone asked me for the #1 thing to do to get the highest price when selling their agency, my response would be simple: “Go to market.”
By that, I mean hire an experienced M&A advisor to represent you, guide you through the sale process and take your agency to market. Here is why it is critical that you go to market when selling your agency:
1. You engage in a professionally managed sale process that ensures a high probability of success.
2. You will receive multiple, competing offers from a diverse group of buyers.
3. You will have peace of mind knowing that you explored options and selected the best offer from the right buyer.
Let me elaborate.
1. The Value of a Professionally Managed Process
Selling a business is a process and it is a process that should be planned and strategized in advance. Failure to do so often leads to failed transactions or poor results, such as an extensively long time to sell or below market sale price and terms. The risks of a failed transaction include: (a) a considerable waste of time and money, (b) confidentiality breaches, (c) loss of focus on the business, and (d) burnout from the process on the part of the agency owner that wants to sell. The last two are the most dangerous because they either cause a loss in value due to a decline in the business or the owner becomes too emotionally drained to restart the process so they end up postponing their goal of selling the business.
Those risks are often the outcome when an agency owner does not engage a professional M&A advisor. The reason is because most agency owners do not initiate a sale with a plan, are unfamiliar with the marketplace and process, and have their hands full running a business.
Our team has been involved in over 200 agency sales. We run our clients through a very well refined process that creates the best financial outcome for them with the least amount of stress and disruption. Our process looks like this:
There are a lot of steps but the bottom line is that we hold our client’s hand through the process from start to finish and give them guidance at every stage. Not only does our process greatly increase the probability of achieving a successful transaction close, but it also delivers significant value to our clients. Let me back that claim up.
We’re involved in dozens of deals each year as a valuation or due diligence advisor to either a buyer or a lender. The majority of those deals were instances where the seller sold their agency without an M&A advisor. I recently ran an analysis comparing our average multiple of revenue to the average revenue multiple from deals that we didn’t represent the seller and our average purchase price multiple was an astounding 36.8% higher. That is a substantial, quantifiable value to our service!
2. The Value of Offer Competition
Let’s go back to John. In his case, he only negotiated with one buyer. As a result, he had no idea what other buyers might offer. He had nothing to compare that offer to in order to gauge if it was a good one. It’s like trying to determine if you scored a touchdown with no goal markers on the field. His only benchmark was that his buddy sold to that buyer.
What he should have done is hired us to take him to market. We would have prepared a “Confidential Information Memorandum” or “CIM” before going to market. The CIM is a pitch book that discusses the key elements of the agency’s operations, book of business and financial performance. Without this tool, it is near impossible to bring multiple buyers into the mix and our CIMs are the best in market, as recently stated by the CFO of a top acquirer. Once the CIM was created for John’s agency, then we would have disclosed a variety of the best buyers (defined as those with capital, deal experience and synergies with his agency) to solicit multiple, competing offers. Something magical things happen when you sell your agency in this manner:
(a) The deal moves forward quickly;
(b) You receive offers from a diverse group of buyers and get a real sense of the market value;
(c) Buyers put forth their best offer because they know there is competition;
(d) You have options; and
(e) Your odds of actually closing a sale increase dramatically.
Now John got his deal done, although we don’t know how long it took. His real mistake though was not seeking additional offers and ignoring the psychological value of creating competition. Those mistakes caused him to leave money on the table and probably a lot of it.
3. The Value of Peace of Mind
We have a saying in the M&A business – “You only get one chance to sell your business.” There are no do-overs. You get one shot to get it right and, when talking about selling your business, mistakes are costly. If I had to guess, I would wager that John’s choice to only engage with one buyer was based on the assumptions that: (1) his buddy sold to them and they buy lots of agencies, therefore they must be a good buyer and (2) if he only negotiates with them then he has a better shot at building rapport. Given how quickly he vocalized his regrets and admitted his mistake, I would say that he would agree that those were incorrect assumptions. He was probably also not aware that his buddy was being paid by the buyer to get him on the hook; in other words, John’s buddy wasn’t looking out for John’s best interests.
Contrast my conversation with John to one I discussed previously with a former client that I’ll call “Bill”. The summary of that conversation was that Bill, who followed our process, received nearly double what he was trying to sell his agency for. We met early, discussed the process, went through a valuation, talked about expectations, prepared for the sale process and then went to market and negotiated with numerous strategic buyers to land Bill a deal way above his goal. As Bill has vocalized to me every time I talk to him, which is years after the deal, he has zero regrets and said that calling us was the best decision he ever made (that was a highly appreciated comment from someone I deeply respect and admire).
Maybe I failed in convincing John of the benefits of following our process, but I gave him the same market and process insight that I gave Bill. John didn’t listen and has regrets. Bill listened and has no regrets. Who made the right decision?
The Bottom Line
The point of this story is not to draw attention to one person’s error but to highlight that there really is a right and wrong way to sell your agency. The right way yields a higher success rate, highest market value for the business and peace of mind that you explored all options and made the right decision. Be like Bill and call us. You’ll sleep better and have more money in your bank account.
Posted by: Michael Mensch, CBI, M&AMI and Managing Partner
Direct: (321) 255-1309