What's your agency worth? Valuing a life/health agency requires a holistic approach.

Kate Kinkade began selling life insurance in 1977 and built an agency that had about 100 employees in 2005 She had started in retail but her agency, Time Financial, evolved into providing sales people and a sales-support platform to financial services firms whose clients needed life insurance. Clients of these firms each had a net worth ranging from $5 million to $50 million.

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By the end of 2005, Kinkade understood her company had a tiger by the tail. "We had literally more opportunity than we could take advantage of," she said. "And the only way for us to pursue it was to increase our debt."

That's when Kinkade realized there was another way: She needed a partner with capital, not only to grow her Woodland Hills, Calif.-based agency but to provide her with a long-term exit strategy. In 2006, she negotiated a deal with insurance wholesaler Bisys in which it provided the resources for Time to take advantage of its growth opportunities. Kinkade, continuing as Time's president, would continue to provide her leadership. (Bisys subsequently became part of the Crump Group, headquartered in Roseland, N.J.)

This kind of story is likely to play out in coming years as owners of life/health agencies look for a way to either access capital, find a buyer so they can retire, or both. And, oddly enough, many of these owners, who may be so skilled in helping clients develop business succession plans, have not planned for the disposition of their own businesses.

John Howard, president and chief executive officer of Crump Group, said the company regularly evaluates acquisition opportunities and "pretty much always" has some under consideration. "When we look at a business, we need to be comfortable with the principals or the management team, and we need to be very confident about the future prospects for the business," he said.

He added that while Time had been investing in its business, it was not yet at scale. "They thought we were a very attractive partner because we were committed to that segment of the marketplace, committed to their growth, and because we brought other benefits to the table," he said.

The people who build firms such as Time are highly entrepreneurial, but they don't hold MBAs, said Chris Greis, president and founder of Leaders Partners Inc., a marketing company for high-end life producers based in Barrington, Ill. "These are people who come from the trenches and are good idea people," he said. "Often that skill set resides only between the ears of the principals" and without them, the business may not succeed.

Some of these principals are going to work until they drop, and there's no succession plan at all, Greis said. Others look for some young, aggressive producer they'd like to bring on board to transition the business. Both of these "nonplans" are fraught with risk, he said.

"The primary concern is finding a market for your business, particularly if you don't have family involved," said Greis, whose company has experience in valuing and acquiring brokerage firms. "It's not something where you can look at 'comps' in a classified section of the newspaper or an Internet site. Who knows what an agency is worth? Who knows who is there to buy it? That's really a problem. That's the fundamental problem."

Time Passages

Since the sale to Bisys/Crump, Time Financial has grown to 190 employees. Twenty-five were immediately added when Bisys folded a smaller entity in a similar business into Time. And since then, Time has acquired more firms. ("Time" was originally an acronym for The Insurance Marketing Experts; Kinkade legally changed the name to Time Financial in the mid-1980s.)

When the sale occurred, neither Kinkade nor Mike Martini, the business development person at Bisys, knew what Time Financial was worth. Kinkade admitted that she would have had as much trouble being the buyer as the seller.

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"So the two of us had to get on the same side of the table and honestly work through what the value of this thing was going to be and what our growth was going to look like," she said. "And if I hadn't felt he was on the same side of the table as me, we wouldn't have gotten past square one."

A key measure of any business' worth is EBITDA: earnings before interest, taxes, depreciation and amortization. But Greis said EBITDA is hard to apply to life agencies because many of them function as "lifestyle businesses"--S-Corp or C-Corp companies closely held by the principals.

"If the businesses had a great year, if earnings were huge, they would typically inure to the owner or owners group, so that for tax purposes, the company zeroes out or nearly zeroes out every year," he said. "If you don't have a demonstrable history of earnings, how do you price this thing?"

One strategy Greis uses is an adjusted EBITDA that tries to calculate what the business results would look like if the owner "ran this like a real business, not a lifestyle business." That includes adjusting the owner's salary and bonuses. In cases in which most revenue was from the sale of life insurance, Greis said he often calculated value at four- to six-times EBITDA. However, long-termcare insurance and annuities are sold with thinner margins and must be calculated differently, he said.

"You should know I'm not a finance guy," Greis said. "They're quantitative types. I'm a marketing guy, so I look at the mix of business and the nature of the person who runs the firm and what we can do with him after acquisition."

Specifically, Greis said he looks holistically at the quality of the firm's contractual relationships, its market conduct record, its insurance carriers, lines of business and the kinds of retailers and brokers with which it works. He also considers its geographical location and strength of the niche in which it operates.

For example, agencies with a niche in indexed annuities found themselves harder to sell in recent years because regulators tightened sales suitability standards. In addition, the Securities and Exchange Commission adopted Rule 151A, which reclassified indexed annuities as securities and required more fiduciary responsibility.

How payment is structured also affects the price. An all-cash payment might command a lower multiple of EBITDA, for example, than a stock/debt deal or a stream of payments, Greis said. Company stock is probably the most dangerous way of being paid. Greis said his firm typically structures a deal financed by debt that his company issues (seller notes), along with common stock and cash.

A common arrangement is the earn-out, a deal in which the owner stays on to run the business for a few years and is paid based on how well the agency performs. That was a key part of the deal Kinkade struck with her buyer.

"My interest was that I wanted the advantage of the growth I can make happen here so that when I leave, my deal with Crump rewards me for the growth," she said. "I couldn't do that in a year. I knew it was going to take three to five years to make it grow, and I wanted to be here through the growth."

Agency growth was also Crump's interest. "They wouldn't have purchased it if I hadn't made the commitment, and I wouldn't have sold it had that not been the case," Kinkade said. "My compensation for the sale is coming out over time and I wouldn't have risked that had I not been in charge."

Work of a Lifetime

Kinkade and her husband, Patrick Ramsey, co-founded Time in 1979, when they were personal producers selling life insurance. By the mid-1980s, the pair's clientele were primarily high-net-worth.

In 1989, Ramsey left the business to make use of his MBA degree in finance and international business economics.

After his departure, Kinkade began establishing relationships with stockbrokers so that her firm could sell life insurance to their wealthy customers. The new business grew well enough through the 1990s so that in 1999, Kinkade asked her husband to come back and run the operation while she handled sales and the partner relationships.

The result was what she described as "hockey-stick growth" from 2000 to 2005, the kind that portrays a straight line up on a sales chart.

Under the current arrangement, stockbrokers bring in Time specialists to work with clients who need life insurance. The broker age firm receives more than half of the commission. With so much of Time's revenues dependent on the sizable up-front commissions from life insurance sales, what Bisys bought was new-business flow. That is different from property/casualty agencies, which have substantial revenues from annual renewals.

"So what you're buying in our world is the distribution system," Kinkade said. "They (Bisys) were buying a first-year revenue stream as opposed to a renewal stream, and valuation has to do with the profitability of that distribution system moving forward." And with a relatively short record of strong growth--five years--she said a buyer couldn't simply assume the growth would continue.

However, as early as 2002, Time was on Bisys' as well as two other would-be acquirers' radar screens. Kinkade said she wasn't interested in selling at the time. But in 2005, when Bisys called again, she was ready to talk.

"Bottom line, a deal has to be a win/win for it to work," said Crump's Howard. Win/win means that the combined value is greater than the sum of the parts, he said.

"We attach a lot of value to the employees of the selling firm, to the principals and the key associates, because a big part of what you're buying are the relationships they have with their carriers and customers," said Howard. "These are service businesses. They don't make anything. So in a purchase, what you're really buying are relationships. And we think it's important to make sure there's a great cultural fit between our company and businesses that we consider acquiring."

Time had been growing rapidly, but required a lot of investment, said Howard. "And we have continued to invest in that business, so that Time is a much stronger organization today than it had been."

By the Numbers: P/C and LJH Sales Agents In the United States

436,100

Number of jobs held by insurance sales agents in 2006

492,434

Projected agent employment, 2016

12.9%

Projected increase in agent employment, 2006 vs. 2016

Almost 50%

Agents working for agencies and brokerages

23%

Agents working directly for carriers

26%

Self-employed agents

The rest

Agents working for banks and securities brokerages

$43,870

Median annual earnings, May 2006

$24,600 or less

Annual earnings, lowest-paid 10%

$115,090 or more

Annual earnings, highest-paid 10%

Source: U.S. Bureau of Labor Statistics Occupational Outlook Handbook, 2008-09 edition

* The Issue: Owners of life/health agencies who want to retire face tough choices about valuing and selling their businesses.

* The Situation: Many of these owners do not have a succession plan or a way to disengage from their life's work.

* The Next Step: In one scenario, agency principals stay on to maintain relationships while selling the business to a well-capitalized suitor.

Experts' Advice on Selling Your Agency

You've built an agency over decades of work. Now the time has come to sell it. Here are some bits of advice from Kate Kinkade, president and founder of Time Financial; Chris Greis, president and founder of Leaders Partners Inc.; and John Howard, president and chief executive officer of Crump Group Inc.

On the form of payment:

If you're selling an agency for a lump sum up-front, or a guaranteed sum of money, then you are really shopping for the highest bidder. (Kinkade)

"If you're an agency seller, you really need to ensure that your potential acquirer is actually able to close the transaction. In the economic situation we face today, I've seen a number of deals that have fallen apart because weaker purchasers were not able to dose?' (Howard)

On protecting your employees:

Agency owners may have long relationships with employees. One way to protect them when selling is to determine whether the buyer's ethics, principles and standards are the same as yours. This may be even more important if the owner is in an earn-out situation, when the seller serves as manager and is depending on employees to perform just as they are depending on the former owner to perform."Because how much can you be paid to be miserable? You can't be paid enough, right?" Talk to owners of firms the prospective buyer has purchased. (Kinkade)

On whether you are congruent or complementary in your business:

"Congruent" means you're being purchased by somebody that does exactly what you are doing. "Complementary" means you are doing something different than your buyer, but the difference enhances each company's operations in some way. "In my case, we were complementary, but not congruent. Their systems were not set up to do what I do. But because we were so important to them, they were very flexible about figuring out how to make the systems work." (Kinkade)

On tax considerations:

The seller has a lot to think about here. "If it's a typical brokerage firm or a life insurance agency, the owner's cost basis is probably near zero. So many life agencies were started by one guy pounding on his first door and run out of garages and basements. So if the owner is selling his stock, and the basis is zero, it's a big hit. But if you keep some of your stock and have it transferred to your child when you die, it's transferred at a stepped-up basis. That is where life insurance plays a role. If you have it and use it well, it can give income to you ha retirement years without liquidating stock. The use of life insurance here is a terrific tool. (Greis)

On whether agencies and brokerages can survive owner retirements:

"I hate seeing that it is such a gray-haired demographic at both the retail mad brokerage levels. On the other hand, I'm wildly optimistic about the future of our business. We all bemoan the demise of the career system and the fact that there are so few life companies that are building their own retail forces. But there aren't really any significant barriers to entry to people that want to come into the life insurance business, and there are a lot of terribly appearing young people that we are now beginning to work with who come from other disciplines" (Greis)