What would you do differently if you knew you were going to sell or merge your business with another agency in the next 10 years? This year appears to be a banner year in the employee benefits M&A world it may even surpass the 2012 record year.
There are lessons to be learned from those who have gone before us. In speaking with a number of recently acquired agencies (the past two years), they have offered insights that might benefit all of us. They indicated its not only the purchase price that matters, but also the net after-tax value.
The appropriate business structure is critical to maximizing the net value. A C corporation is usually the least desirable structure because of the potential double taxation of the proceeds. Converting from a C to an S, under current tax law, requires 10 years before the majority of the proceeds would be taxed as capital gains versus ordinary income. It was suggested that an appraisal be done at the time of conversion to characterize the ordinary versus capital gain amounts.
They also discussed converting from a lifestyle to a real business. This could include more rigorous financial analysis, budgets and understanding the profitability of your various business segments and focusing on those that have the greatest margins.
They discussed the importance of having the right people in the right position. This speaks to having a rigorous hiring process which will improve retention and profitability. There is nothing more expensive then high turnover, which reduces profitability, and thus reduces your valuation. They discussed the importance of being a generalist or having a target market.
There was no clear consensus of this point, but all agreed that larger clients (100+) had more value than small groups and more seasoned clients had a positive effect on valuations. So, ultimately, what drives value is your profitability, stability, markets, people and business acumen. These tenets, coupled with the appropriate business structure, will maximize your value.
There will come a time, when due to health, finances or the continuing changing market landscape causes you to consider selling. Dont you think you should prepare for that contingency?
Torelli is an EBA Advisory Board member and president of e3financial in Newport Beach, Calif. Reach him at email@example.com.
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