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This Title Is About How You can Plan For Succession Ever

12th September 2018

6 min read   

Are you an emotional person or the calmest one in the room when it comes to business? Either way, when the time comes to value your practice for a sale, there will probably be biases to grapple with when coming to a reasonable conclusion about what your years of hard work are worth.

The sweat equity you’ve built up over time is worth more than ledger numbers might suggest. Still, spreadsheets have the most clout with business valuators and your prospective buyers. Making interested parties see beyond the numbers to understand what your investment is truly worth requires some deft presentation ideas. Ultimately too, many sellers will need to come to grips with certain facts: that is, oftentimes the elements of business you are most proud of or attached to emotionally, might not be the same factors which move the needle in a meaningful way come valuation time.

Quantitative measures – historical financial statements, forecasts, revenues, cash flows and trends – are obvious measures of a business’ value. Qualitative factors, the softer aspects of business, are also taken into consideration. These measures include a business’ reputation.

Presenting your business to buyers

To make prospective buyers appreciate your hard work, beyond what the spreadsheets show, chartered business valuator, certified exit planning advisor and co-founder of Valuation Support Partners, Ltd., Jason Kwiatkowski recommends sellers use their time leading up to retirement to prepare a pre-sale, due diligence binder which contains answers to questions that potential buyers will ask during the due diligence process. These can include:

  • A brief history and company overview.
  • Strategic plans, including financial projections.
  • Client base details – revenues by customer, information to show how many customers you have, recurring revenues and commissions, customer dependence and attrition, etc.
  • Key employees and reasons why each would remain with the company after a sale.
  • Customer and employee testimonials.
  • Details regarding information technology, computer systems and employee policies/procedures.

Value drivers which make one company worth more than the next include profit margins, a recurring and transferable client base, company culture, brand recognition, business reputation, customer and employee loyalty, systems, a trained and efficient workforce and a sales team.  These are ultimately worth more than a company where the owner brings in clients and maintains most personal relationships. Too much control by the owner and over-dependence on one or two key customers or employees can detract from business value.

“Think about what would be important to you if you were going to buy the business,” he says. “Try to put the emotion aside, if you can. If you get too emotional, chances are when the time comes to sell your business, you won’t be willing to let go for the offers you get.”

Marketplace opportunity and future earnings potential, for example, is often where business owners tend to be overly optimistic about value. Kwiatkowski says opportunity for growth in the future is not always something prospective buyers are willing to pay for.

“An investor or purchaser doesn’t necessarily want to pay for what the business will be able to do five years from now. If there’s potential for growth, they’ll take that into account, but they won’t place a lot of emphasis on future opportunity. It’s an emotional issue I see quite a bit with business owners – being overly optimistic about growth and expecting a potential purchaser is going to pay for that.”

Goodwill – that is, the difference between personal goodwill and goodwill that accrues to the business, is another area where the emotionally biased owner might overestimate business value.

Speaking generally, Kwiatkowski says the more transferable a client base is to new owners, the more a buyer might be willing to pay for goodwill. Goodwill accrues to a business by virtue of the business’ location and products and services offered – features that are not dependent on or particular to individual employees or the business owner.

Personal goodwill, on the other hand, is goodwill that accrues to the person by virtue of his or her personal characteristics, good name and reputation. Generally this cannot be transferred to new owners by contract or otherwise. “Personal goodwill, therefore, is non-transferable in nature, and cannot be included in the definition of fair market value.”

So what’s it worth?

Realistically, Kwiatkowski says insurance brokerage companies generally trade between one and three times revenue, depending on business quality, location, carrier contracts, lines of business, client demographics, non-commission based income, length of time in business, reputation and cross-selling opportunities.   Other financial services businesses which do not have a recurring book of business will trade for much lower multiples.

Company size also matters. According to the 2017 Business Reference Guide, published by the Business Brokerage Press, insurance agencies with less than $1-million in annual commissions traded for multiples between 1.25 and 1.75 times annual commissions in 2017. Over $1-million, multiples increase to two times annual commissions. Over $3-million in annual commissions, he says the multiple could go as high as three times annual commissions.

“Generally speaking, smaller companies are less established and more dependent on the owner,” he adds. “As soon as the business is more dependent on the owner, it becomes less valuable. There’s value in building a business to the point where it has its own reputation, policies, procedures and a sales team. That’s a business where the owner can step out of it and the business will still continue to run. It’s more easily transferred to new owners.”