Episode 196

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I know a lot of agency owners think about selling their shop. But do they think about it strategically? Or soon enough? Do they execute on a plan that will set them up for success 5-10 years before they’re ready to sell?

Usually, the answer to those questions is no. And on the flip side, how many agency owners think about growth through acquisition? Selling is a big part of the conversation but buying should be on the table as well.

In episode #196, I talk with Terry Lammers, who has been buying and selling businesses since he sold his family fuel company. We talk about the monetary and non-monetary aspects of getting the most from your agency or being a smart buyer if you’re on that end of the transaction. Most importantly, we dig into how, why, and when to start planning your exit strategy as an agency owner.

Terry Lammers grew up in a little town of 600 people. His family owned a wholesale fuels and lubricants company and when Terry took over as president of the company, he had some big ideas for growth. Out of that experience developed a fascination with the process of buying and selling businesses.

Since then, Terry has formed a business brokerage that helps people who want to buy and sell businesses. He also has his designation as a certified valuation analyst, accreditation through the National Association of Certified Valuators and Analysts. He is the author of You Don’t Know What You Don’t Know: Everything You Need to Know to Buy and Sell a Business.

What You Will Learn in this Episode:

  • Why it’s never too early to plan your exit strategy
  • How to value a business (like an agency) with little regular recurring revenue
  • Who to have around the table to plan your exit strategy
  • Nonfinancial elements of your agency that add or subtract the value
  • Why culture is so important and why blending two company cultures is so difficult
  • How agency owners can start thinking about the acquisition as a growth strategy
“If you are the hub of your business and you have no leadership team around you, that negatively affects the value of your agency.” – @terry_lammers Click To Tweet “If you allow your clients to pay you late, it's very problematic for the potential buyer of your agency.” – @terry_lammers Click To Tweet “When it comes to your exit strategy, the further ahead of time you plan, the more opportunities you're going to have to find a perfect fit.” – @terry_lammers Click To Tweet “When you start planning to sell your agency, you have to have the right people at the table. You want experts, not generalists.” – @terry_lammers Click To Tweet “You’ve got to have the awkward conversations sooner rather than later, so you know the true value of your agency, and what you need to do to increase that value.” – @terry_lammers Click To Tweet

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Speaker 1:

Are you tired of feeling like the lonely lighthouse keeper as you run your agency? Welcome to the Agency Management Institute community, where you’ll learn how to grow and scale your business, attract and retain the best talent, make more money, and keep more of what you make. The Build a Better Agency Podcast is now in our third year of sharing insights, and how small to midsize agencies survive and thrive in today’s market. Bringing his 25-plus years of experience as both an agency owner and agency consultant, please welcome your host, Drew McLellan.

Drew McLellan:

Hey everybody. Drew McLellan here with another episode of Build a Better Agency. Before I tell you about our guest and our topic for this week’s episode, I just want to remind you that we have built an assessment tool that will help you sort of weigh the health of … or measure perhaps, the health of your agency in five key areas, account service, finance, biz dev, staff management, and agency owner happiness. And what we are doing is we will … If you take the assessment, you’ll immediately get the results of your test, and then we will also email you those results. But on top of that, what we’re doing is we’re aggregating a large number of agency owner participants, so that we can come back to you this summer with sort of a comparative analysis of where agencies ranked on these issues and so you can compare your rankings with other agencies.

And so I think that’s going to be very interesting to see the data around that, and all you need to do to take the assessment is go to agencymanagementinstitute.com/assessment. So again, agencymanagementinstitute.com/assessment, and the assessment will take you probably five or six minutes to do, and you’ll immediately get the results, and then we will also follow up with an email, and then later this summer, I will be letting you know that we’re going to do a webinar where we will walk you through the results and you can compare yourself to everybody else and see how you’re doing. All right? So today’s topic is one that comes up quite a bit when I talk to agency owners. It comes up in our owner peer groups. It comes up in some coaching calls, but oftentimes it comes up in a superficial, down the road, one of these days, in the future sort of way, and it rarely comes up in a, “Boy, you know what? I better do my homework. I had better think about this with clarity, with facts, by talking to subject matter experts.”

And of course the topic is your exit strategy, particularly if your plan is to sell your agency. Even less often do I talk to an agency owner who has an acquisition strategy. Certainly there are some inside the AMI family that have grown by buying other agencies, but it’s not all that common. And again, many people who maybe have a hankering to do that, don’t really have a strategy in play. They’re not really thinking about their agency in terms of what is it about my agency that would make it sellable? What is it that would be a value adder or a value driver inside my agency? What are the things that would make it be worth more money?

And on the flip side, what are some of the things, what are some of the realities of my agency that might make my sales price, if I decided to sell it, not as great as I would want it to be? What are some of the detractors of value inside my agency? And some of those may be inherent in our business, and some of them may be just inherent in your agency, but oftentimes we’re not really thinking about that. And one of the conversations I’m often having with agency owners is, even if you think you’re 10 or 20 years away, having some sense of what the plan is, and doing a little bit of early homework to sort of think that through is critical, because oftentimes your agency today may not be worth what you want to get out of it.

But if you had a 10-year runway, you could fix a lot of the things that reduce the value of your agency or enhance some of the things that add value. And you’d have plenty of time to do that. If you want to sell your agency in a year, that runway is much shorter. And so it’s not going to give you anywhere near as much time. So today’s guest is a subject matter expert on the idea of buying and selling companies. So Terry Lammers actually grew up in a family business, and when he inherited the business or took over, I think his folks were still around, but when he took over as president of the company, he had a big acquisition strategy. And so he bought several businesses, and I’ll let him tell you the whole story. But out of that came a fascination with the whole idea of buying and selling businesses.

And since then, Terry has formed a business that serves other businesses and business owners who want to buy and sell businesses. He also has his designation as a certified valuation analyst, which is an accreditation through the National Association of Certified Valuation Analysts. And so he’s got a lot of both practical experience and also some book learning if you will. He’s got some credentials. He’s also written a book called You Don’t Know What You Don’t Know: Everything You Need to Know to Buy or Sell a Business. And so in that book, he really walks you through in-depth explanations about lots of different things, lots of stages that you need to be thinking about, and the questions you need to be asking at each stage.

So I knew I wanted to have him come on the show. I wanted to get him thinking about what it might be like to buy or sell an agency even though I know that’s not the core focus of his background, and I want to pick his brain about how we can add value to our agency if it is something that we want to do if we want to sell it, and also how to evaluate other agencies, if we are on the buying side of the equation. So with that, let’s jump right into the conversation. Terry, welcome to the podcast.

Terry Lammers:

Thanks for having me, Drew.

Drew McLellan:

You bet. So just give folks a little bit of background. I did a little bit of setup as you know in the intro, but give folks a little bit of background about how you came to have expertise in buying and selling businesses.

Terry Lammers:

Sure. I grew up in a little town of 600 people. Family owned a wholesale fuel and lubricants company, kind of grew up with that business, worked outside of the company for a little bit. When I got older, came back in 1991, because we had an opportunity to buy another company. Things weren’t that rosy back in those days. And then when I came back, I jokingly tell people that it was me, my mom and dad, we had two trucks and it was a good day if they both started.

Drew McLellan:

Yeah.

Terry Lammers:

So I bought my first company in 1991 and kind of took the company over at that time. And over the course of the next 18, 20 years had the opportunity to buy 11 other companies. Grew the company from $750,000 a year in sales our first year, to up over $42 million a year in sales when I sold it in 2010. The company that bought me was Growmark. So they’re a large farm cooperative located in Bloomington, Illinois. So Growmark bought my lubricants division, and eight of their FS member companies bought the fuel division that I had. So we covered about 14 counties in Southern Illinois in the St. Louis metropolitan area. So that’s where I kind of got my M&A experience and learned a lot from growing a company from that small to over 25 employees and 40-plus million dollars a year in sales. So got done with that. And it was kind of funny. My wife told me I needed to get a job-

Drew McLellan:

Sure.

Terry Lammers:

… because apparently hanging around the house all day long wasn’t … I jokingly say our house is a marital asset that I’m not allowed to be at during the day.

Drew McLellan:

Seems reasonable.

Terry Lammers:

Yeah. So I did banking for three and a half years, which was painful, but I learned a lot. I’ve always been kind of a finance guy. It was interesting to be on the other side of the fence so to speak, and get what’s going through their mind when you’re asking for loans and why. So it was very fruitful to do that for three and a half years. But during that time, I kind of got my entrepreneurial spirit back you might say, and had a chance to reflect on what I enjoyed doing in life. And I really enjoyed mergers and acquisitions. So in July of 2014, we started Innovative Business Advisors and we basically do three things. We help people buy and sell businesses. We prefer to work with people, companies that have a value between one and 15 million and I’m a CVA, a Certified Valuation Analyst. So we do a lot of business valuations and we also do some coaching and exit planning and stuff like that. There’s about nine of us altogether.

Drew McLellan:

So as you bought and sold businesses, as you were building up the company before you sold it ultimately, what was the thing that surprised you the most? Where was the sort of biggest life lesson in all of that?

Terry Lammers:

You know, probably the lack of planning on people’s part. We was typically buying companies that were literally on the verge of closing. They, somewhere along the line, they had lost one of their big customers, so the company still remains profitable, but they’re not updating any equipment. And by the time that we got around to buying it, most of their equipment was shot. And it was really just left with a customer, a base of customers. But since our business has good recurring revenue in that people are going to use people one way or the other, farmers are going to farm, municipalities are going to run fire trucks and car … police vehicles, you do get some fluctuation with the amount of the economy, but people have to use fuel whether … they may complain about the price, but you’re going to use gasoline and diesel fuel. So that base of customers was always good for us. And it helped us grow geographically as well as a couple of times picking up different products and things like that.

Drew McLellan:

Yeah, so that’s complete opposite of everybody who’s listening to us right now. Nobody has to advertise. Nobody has to market their business. We all think they should, but they all see it as a optional expense. And so part of I think what agency owners struggle with is they think about, A, growing their business, B, sustaining their business and certainly really think down the road of, “What asset am I building and can I sell it?” is that we have none of that predictability of income. And I see the financials of over 250 agencies a year and there’s an ebb and a flow. I don’t care how well they’re run. I don’t care how big they are. I don’t care what part of the world they’re in.

There is an unpredictability to our business that makes I think planning a … to your point, even more important, because you’ve got to be able to weather the ebbs and flows, but B, it makes it more difficult because there is no way … I know we’re going to sell at least this many gallons of fuel or whatever, because we literally can shrink in size by half or double in size half again as much in a year all based on the demand. And so much of that is depending on the economy and other things that are happening, many of which are outside of our control.

Terry Lammers:

You know, and that’s tough, but you look at any company, and I think the key to what you said there is you’re looking at the EBIDTA flow. And if you can recognize that EBITDA is really the basis of the value of your company and you can concentrate on it, I think it will help your situation. Then it is so important, every company is going to have an exit. I mean, whether you’re going to go out boots up or plan something.

Drew McLellan:

I think you’re right. I think the planning is critical and in our industry even more critical, because we don’t have recurring revenue, because we don’t have any sort of reassurance. One of the things that’s fascinating … so I’ve owned my own agency for almost 25 years, and we always have made money. And sometimes we make a lot of money and sometimes we barely make money. But if you asked me where we’re going to make money in 2020, I can tell you the clients that I have on our list. And I can tell you who I think is going to stick around, but there’s no promise of that, right? So we are constantly refilling the sales funnel and the pipeline and customers, and many agencies have clients that have been with them for 20-some years. But that doesn’t mean they won’t pull the plug tomorrow.

Terry Lammers:

That’s always a tricky situation. I think the one thing you said earlier is very critical for your clients to understand, is the value of the company is based off the EBITDA, on the cashflow of the company.

Drew McLellan:

Right.

Terry Lammers:

If you have a business that inherently doesn’t have recurring revenue, it doesn’t mean that it’s not sellable. It means you may need to approach your exit in a different way. If you have the size that you can keep a couple of people going, or at least to bring another potential owner in, that you can transition the business over a period of time, I think that’s very advantageous. Or are you talking to another agency that you may be able to work out an arrangement where you two work together for a while, until you do exit. There’s several ways to approach selling your agency or at least trying to get some kind of value for it.

Drew McLellan:

Right.

Terry Lammers:

An insurance business has great recurring revenue just like my fuel business did. If your business doesn’t have recurring revenue, it doesn’t mean that it’s not sellable. It’s just that you need to approach it in a different way. And again, that goes back to the planning.

Drew McLellan:

Right. Well, I think it goes back to sort of beginning with the end in mind. One of the things I’m always talking to agency owners about is, even it’s never going to play out exactly the way you think it’s going to, but you should have an idea of how you want it to play out because you’re going to make different decisions, whether it’s spending decisions, investment decisions, hiring decisions, based on whether or not you’re building it to sell, whether you’re building it to just decide that at the end you’re going to use it like an ATM machine and take all the money out of it every year. And when you’re done, you’re done, you’re going to lock the door and think that was a great run. Whatever the decision is, having some idea of where you’re headed allows you to make better decisions.

Terry Lammers:

You know it’s interesting. It’s bringing to mind, I bought two companies. One, ironically it was the quickest company I ever bought. It all came about in three days. Found out about it on a Wednesday and we closed the deal on Friday.

Drew McLellan:

Wow.

Terry Lammers:

Yeah. So what was it? The company was in distress and we found out on Wednesday that they’re closing their doors on Friday. So here’s the thing. They’re closing their doors. I called them up. They already said they’re telling their customers to go someplace else. And I just said, “Hold the phone. I’ll be right there.” Their place was about 30 miles away. I jumped in the truck and I ran down there and I said, “What are you doing?” Well, the owner passed away, no succession plan. He willed the company to his niece. She ran it for about six months. The employees were taking completely advantage of her and she was just losing money hand over fist. So her brother stepped in and was just going to close the company down.

So we made a deal. And what we agreed to is I paid them 25% of the gross profit of the customers that we kept for one year. And because we had no … at this point we don’t know what we’re going to keep or not, but it worked out very fair for the family because, I don’t know, I think we ended … it was a relatively small deal, but they ended up getting $100,000 and we got a great group of customers.

Drew McLellan:

Yeah.

Terry Lammers:

And that was a heck of a lot better option than just closing the door.

Drew McLellan:

Yeah, absolutely.

Terry Lammers:

And I did that with another company, same way. This company was about 50 miles from where I was at and the owner was going to stay on with me, another distress situation where he was running out of cash, but I did not know the area. I did not know where his customers were. So I was vulnerable in the aspect that if he left me, I didn’t know where these people were at and they had a relationship with him. I imagine just like a lot of your clients-

Drew McLellan:

Absolutely.

Terry Lammers:

They had the relationship with their clients. So we did the same thing, gave him 25% of the gross profit for the first year and it worked out great. And he was working for me when I sold the company and he’s still working for the company that we sold to.

Drew McLellan:

Yeah, I think that’s interesting. So I think one of the things that people forget about is there are lots of ways to get this done and there is no one right way. So in our industry, as you probably know, a lot of times the little guys get bought up by the big guys, but not the little, little guys, not somebody who’s 5 million or less. An agency has to be worth at least 10 million, and this is in adjusted gross income, not in gross profit or not in gross billings, but about 10 million in AGI for one of the larger agencies to see that there’s merit in buying them.

But there are also lots of other ways to structure a deal. And I know one of the things you talk about is making sure you surround yourself with experts who can help you explore all of those options. So if I were thinking, which I’m not, but if I were thinking that I wanted to start pondering the sale of my agency, two questions. One, how far in advance of when I think I want to sell it, should I start having conversations with my advisors, and two, who should I have around the table? What skill sets?

Terry Lammers:

Excellent questions. So the first one, I would ask you, what’s your number? So what’s your number by … what I mean by what’s your number, what’s your number that you need to retire? What do you need … where are you at right now and where do you need to be in order to retire? So that person at the table is your financial advisor, you know?

Drew McLellan:

Right.

Terry Lammers:

Once I know what you need for retirement, we can value your business. And I don’t know, let’s use smaller numbers. So let’s say you need $2 million to retire. And with what you have, and your company is only worth a million dollars. So we can … let’s come up with a coaching plan. I see your agency does coaching, to coach you up to that spot. Or at least you know how long you’re going to have to work. Can you get to that number? But generally the other people that you need at the table is, who’s your banker? Who’s your attorney? Do you have an M&A attorney? We’ve run into some disastrous situations where the seller has a relationship with their estate planning attorney, and then they want the estate planning attorney to help them do an M&A transaction or the sale of a business.

Drew McLellan:

Right.

Terry Lammers:

And it leads to bad situations. So have the right people at the table, and I think in a lot of times that’s going to be … it is going to be your financial advisor. It’s going to be your banker. It’s going to be your CPA. Maybe it makes sense for you to use your broker if you’re not opposed to using a business broker to help you sell the company. Those are the type of people that you need to have surrounded by with you. The business broker can probably help you think of different ways to structure the sale of the company to help you move forward with it. Because you guys are in a situation where you don’t have a lot of hard assets.

Drew McLellan:

Right.

Terry Lammers:

So, you know.

Drew McLellan:

I mean our biggest asset typically is the copier we rent and some laptops. Yeah.

Terry Lammers:

Yeah, exactly. So what you have though, is you have a relationship with your customers, and people want to do business with people they know, and I think that’s a powerful thing. And that was the reason that I loved growing by acquisitions on the oil company side. I could go talk … so we’re basically selling a fungible product, right? Diesel fuel’s diesel fuel, no matter what marketing you guys come up with, out on the street. That’s kind of funny, but it all comes out of the same pipeline. Doesn’t matter really where you’re getting it from. But so I could go talk to a farmer or a commercial account or a manufacturing company till I was blue in the face, and really have a hard time in getting them to switch.

But if I go buy that company that they have the relationship with, the old 80/20 rule, 80% of your business comes from 20% of your customers. So the day we would sell, we would go hit those 20% of the customers as soon as possible. And if the seller would say, “Look, Drew, I sold my business to Terry because I trust him. I like him and I think he’s a good guy. I’m going to continue to work with him for say the next six months or a year to help transition his business. So rest assured we’re going to be here to take care of you, just like I always have in the past.” And our experience from that was we would keep 95% of the customers.

Drew McLellan:

I’ve never heard of an acquisition where they kept 95% of the customers. But I do think you can build a team that increases the likelihood of keeping more customers as you transition out of the business. So talk to us a little bit about when someone is buying a business, what kind of a leadership team do they want to see? We talk a lot about the fact that if the owner is still quagmired in the day to day, and if pulling him or her out disrupts the function of the business, then that’s a problem for the buyer. So just talk to us a little bit about sort of the management structure and the owner’s role in that, that would either increase or decrease the value from the buyer’s perspective.

Terry Lammers:

Mm-hmm (affirmative). On our coaching platform, we use the value builder system as part of it, so the value builder system talks about eight key non-financial drivers of the value of the business. So what you was just describing is what we would call the hub and spoke. So if you’re the owner and you’re the hub of your company and the spokes are your employees, customers, suppliers, that is a bad situation. I’ll give you an example. I had a trucking company we was trying to sell. It did trucking and logistics. And I mean, they had over a half million dollars a year in cash flow. So that attracts a lot of people, but he was … the owner was the hub.

You take him out of it and that company does not run. So if you can build a team of people around you, especially as you’re getting closer to the end of wanting to retire, and the more you can be outside of that company, with that company still being able to function, it will very definitely have an effect on the value of the company. We never did sell that trucking company. It’s just it was a bad deal. The employees came straight to him. He was the one that called all the customers every day. He arranged everything.

Drew McLellan:<