You picked up the local newspaper and Bob Jones,* a gentleman you have known for years through business, died of a heart attack. Bob had been a good salesman, operated his own rep agency, and you know that he had done well financially. He had a large home, belonged to a nice country club, and had educated his three kids in private schools. You didn’t know too much about his rep agency, but you know he had his business for 30 years. At 64 years old, you would have expected Bob had been looking toward retirement. He had seemed to be healthy, but…WOW! Who would have thought?

A few months later, you saw a mutual friend who shared with you that Bob’s widow was trying to handle the company but was having all types of problems. It was said that, as good of a salesman as Bob had been, he apparently had never completed his exit plan, and his family didn’t know what they could, would or should do.

Due to a lack of thorough planning, Bob failed to properly prepare his business and his estate for his wife and family.

What If This Were You?

You would be surprised how often this story becomes a stark reality!

This article is being written and edited to make it an easy read if your name could be “Bob” and you own part or all of a rep agency or any closely-held corporation.

It is said to be easier to “hit a hole in one” in golf than it is to prepare for one’s own demise. However, based on our love for our families and our desire to protect our employees and coworkers, we need to take steps to plan for this, as well as to insure the future of our agencies.

We would like to walk through a simple set of “professional steps” the agency owner should consider taking as he walks toward retirement.

Most agencies were started because the principal needed to provide for his family after a change in employment. Sometimes, that change in employment was leaving a similar firm that the person had worked for, and sometimes, the change was a direct result of the old employer moving, going out of business, or merging with another company.

Over a period of time and with a great amount of dedication, the principal builds a corporate structure that can supply enough income to meet his own needs (his family), and then, like a wind blowing into a sailboat’s rigging, the company begins to “tack” through time. The principal wakes up one morning after having made thousands of sales calls and hundreds of presentations, and he walks by the mirror and sees the reflection of an older man with gray hair and a belt with too many loops in it! Every old rep smiles back at that mirror and thinks, “Where did the time go?”

In my opinion it seems likely that 60 percent of rep agencies will change ownership or close within the next five to seven years.

The question becomes do you, as an owner of a rep firm simply work until the day you die and then your heirs hang up the “SOLD” sign? What other options are there?

You typically make sure that you pay your car insurance on time. You pay your home insurance on time. Have you invested in “Exit Planning Insurance (EPI)”?

EPI is the power you derive from taking the right steps and doing the right preparation for your exit planning. If you decide to close your agency, that is your decision, but is that really the best decision? How does that affect any inherent value you built up in the agency? What does that mean to your employees? How about your suppliers? What about those people you served that had become your friends? You wouldn’t expect that someone would be carried away from their home on the day they died and just “let it go.” In most cases, your business has inherent value that surpasses any other asset that you have accumulated in your lifetime.

Can you imagine a farmer who works his field for 30 years just letting the farm “go wild” after he passes away?

The agency principal needs to study, investigate, plan and execute for exit planning with the same enthusiastic zest he showed when he first opened his agency and passed out his first product catalog.

May we recommend the following simple first three steps to build the knowledge of your “EPI”:

1. Establish what the agency is worth.
2. Establish what the agency’s value is to a potential buyer.
3. Start a simple succession plan.

Establish What the Agency Is Worth

There are no concrete “rules of thumb,” but a sales price of one times “annual gross commissions earned” seems to be a good starting point. A second method is to take a multiple of “rep agency book value,” which is simply calculated as:

“Accounts receivable” less “accounts payable” plus assets (inventory and any hard assets the company owns such as buildings, cars, furniture, etc.) plus 75 percent of the “rep agency book value.”

These are several more technical methods that are used by professional business evaluators. We strongly advise the principal to have an independent professional evaluation performed as a starting point. (Note: The independent professional evaluation document is a great tool to share with any potential serious agency buyer!)

Establish What the Agency’s Value Is to a Potential Buyer

There are only two components to the “real value” of your company. The first is what your family could collect and what they could sell if they had to sell. Think of a garage or estate sale; you sell everything for pennies on the dollar!

This often could be 75 percent of your receivables and 25 percent of the value on furniture and most assets other than a building or vehicles.

The second value of your company, and this is what is really important, is the amount of income the company can generate annually without your being present and active.

If you have built a rep agency where every sale and every move goes through your desk, the machine stops if your desk is empty.

Start a Simple Succession Plan

The vast majority of rep agencies are sold to someone who has worked within the agency, and therefore who knows and understands the business. You wouldn’t hire a receptionist who doesn’t speak the same language as your customers.

Your succession plan is built on your team speaking the same language as you.

If you accept that your best chance of selling your business exists through the future sale to one or more of your employees, then it is in your best interest to hire and evaluate good people that understand your corporate mission.

There is a famous case study in every rep agency whereby the principal hired a younger man, and after only two years, sold him 15 percent of the business as a deep discounted price and then signed a five-year sale agreement of the other 85 percent based on an agreed to “Fair Market” formula. When his business consultant asked him why he almost gave away the first 15 percent to the younger but capable employee, the principal simply said, “By giving away a piece, I was able to give more value to the whole.” Think about that one for a while.

Summary

Being a manufacturers’ rep is a noble and honest way to make a living. Often you can spend a lifetime serving customers who become friends. What a great job description: getting paid to serve your friends.

However, it is imperative that as a rep agency principal, you start developing your Exit Planning Insurance (EPI) today. Take a few moments to look around your office or business. Your eventual successor and purchaser of your agency should be within your current eyesight!

---

* This article was written to educate Agency Sales readers. Bob Jones is not a real person. The details were drawn from the author’s long experience in the rep industry and do not relate the story on any particular person.

MANA welcomes your comments on this article. Write to us at [email protected].