Episode 185: Your Agency is Worth What? with Jon Persky

Welcome to the Unstoppable Profit podcast. This podcast will give independent insurance agents all of the tools to grow your business and live life on your terms. Wherever you are today, if you're starting with nothing or well on your way to the success you desire, with the right people, processes and promotions in place, you will be unstoppable. And now I'd like to introduce your host, Mike Stromsol.

Foreign.

Welcome to the next episode of the Unstoppable Profit podcast. This podcast has been brewing for a number of months and finally I was able to get him off vacation, back in the office. And I am proud, honored and privileged to have on the podcast Mr. John Persky. John, welcome to the podcast. So we are thankful and grateful to have you here. I've got some information on who you are, I know what you do. But before we dive in and pull some wisdom out of your experience in your mind, wanna give Everybody just a 30, 30 seconds to a minute on who you are, history about, you know, what you've done, et cetera.

Absolutely. So from a designation standpoint, I have my CIC designation. I also have a CPA designation. So that helps me with all the task issues. And obviously the CIC helps me with understanding the terminology. I also have a PHR background, which helps me from the standpoint of what are we going to do with the employees, how do we transition them? And then I also have my.

What do I have? Oh, my MBA in finance. So as far as how to structure the deal, I've been the exclusive speaker for the national alliance on Agency perpetuation for probably 30 years now. I've written five books, two on human resources in the insurance industry and three on agency perpetuation.

So literally, I. I can say I wrote the book.

Yeah. Yeah, you truly have. Five times over. So that I was not aware of. So I'll have to dig in and get a copy of that because I want to continue learning on how to get better and helping agents everywhere. So congratulations on your accomplishments so far. Thank you for all that you've done for the industry for so many years.

My pleasure.

Yeah, and that's. I remember that's how we originally met. It was down in Palm Desert at, At an event. And you were there, you were. You had a table, you were helping agents. And that's the first time that we met and that was well over a decade ago. So I'm glad I met you very. And for many, many reasons. So thanks for all you've done and thanks for all your continuing work. Let's Dig in and, and help some agency leaders and owners that invest in time and listening and watching this podcast. So, John, I put together some questions that I'd like to ping you with, with your permission, and we'll, we'll, we'll pull it out of you on how to help agents through this. So, John, a lot of people are talking about right now possibly moving on from the agency business, doing something else. They've been in it for a number of years and things are getting more challenging than ever. And the, they're thinking about moving on. What are some of the first things that an owner should think about before even beginning to sell their agency business or getting it ready for that?

Sure. Well, the very first question I ask people is, can you afford to sell your agency, retire and maintain your current standard of living? And you would think that that would be something that most people would know. In reality, most people are like clueless. And we'll have a discussion. And you know, it's how much do you have in your 401k, your Sapphira, how much, you know, in other assets, stock portfolio, real estate. And once we know what that number is, then we can say, okay, now tell me how much you need to retire. Because the typical rule of thumb is that the typical person, person can spend somewhere around three times their, their outstanding cash assets and never run out of money. Now, that's not always true. Right now, with the way the economy is, I would probably back that down to maybe three times. So, for instance, if somebody says to me, Well, I need $100,000 to live off of every year, I take that number and I divide it by 3 or 4% and say, okay, you know, let's use the 4% number. That's going to give us $4 million. And then we look at all of their assets, excluding their home. Because you can't sell your home. You have to have a place to live, right? So let's assume that all of those other assets, the liquid assets, are.

Million and a half between the 401k, the sapphire, all that sort of stuff. Well, that leaves two and a half million dollars. So then the question is, can we get two and a half million dollars for your agency? If we can, terrific. We can sell the agency and you can retire. If we're nowhere near close to that number, well, that means, you know, the owner, if they still want to retire, has to lower their standard of living, which, you know, for most people, they don't want to do. And then, of course, there's always the third option. Which is die sooner. Because if they die sooner, they don't need as much money.

So the first, we don't want to do that either.

Right. So the first issue is, can you afford to retire? The second thing I always ask is, well, what are you going to do when you retire? And I always take the attitude you retire from. You retire to something, not from something. I mean, financially, I could have retired years ago, but, you know, I'm. I'm still traveling a lot. I'm going scuba diving all over the world. And I look at the last year, I think I took something like 18 weeks of vacation. And so the question is, what am I going to do with the rest of my time? And unless you know what you're going to do, whether you're going to, you know, volunteer work for a church, do something, don't retire. You need to know what you're retiring to. And then obviously you need to talk to your spouse and find out just what does your. What's your spouse's role? And in all of these cases, we need to look at the age, both the owner and the spouse. I can remember years ago, I had a situation. The owner was about 72 and his wife was about 50. And he called me up and said, john, I want to sell my agency. I'm sick and tired of this. And so I went down to meet with him and talked to him and his wife. And his wife said, well, wait a minute, because she was working in the agency. And she said, I'm not ready to retire and you can't sell without my okay. And he looked at me and he said, is that true? And I said, well, you know, you're an S corp who owns the stock. He says, I own 100% of the stock. I said, then you can do whatever you want. And he turns to her and says, honey, I love you, but I'm selling the agency. And if you don't like it, you know what? I'm going to sell it. We'll get a divorce. And you. A true story.

Wow.

And you can have half the money because he was just so burned out. Now, in that circumstance, what we did, we sold the agency to somebody that was willing to keep the wife around.

In an office manager position. And she did that for a number of years until she was ready to retire. So you really need to understand what everybody's attitude is regarding retirement. The owner, the spouse, and the children. You know what? I've run into people that want to perpetuate to their kids and the kids. Look at me. And they go, I don't want to have this responsibility. I don't want to owe dad, you know, three or four million dollars. So then we have to look at what are the other alternatives. So you really need to think those issues through.

That's a lot. And I hope everybody caught that. There's so much to think about. And, John, depending on the size of the agency, the complexity of the agency, all of the moving parts, I mean, you just can't wake up one day and say, I want to sell and expect it to be done in 30 days.

For the most part, that is true. You can sell it in 30 days, but you're not going to maximize the value you get for. And I will tell you that I have a number of clients, a couple of them right now that they're not planning on retiring until 2024 or 2025, but they've engaged my services to sell them. And we're working from now till then on what can we do to maximize the value that you get when you sell your agency. You can't just wake up one morning and make all these changes. For example, I've got people that will say to me, oh, when I sell my agency, the owner, I don't have to pay the owner anymore, so my salary all drops to the bottom line. And my response is, so what you're telling me is that you're worthless.

Because if it's true that you don't come in, you don't work in the agency, you're doing nothing, then that's a valid statement. But if this is an owner that's renewing business, managing the agency, you know, writing new business, they. Somebody has to do that role. And even if you sell to another nearby agency, they still need to factor the cost of that into their EBITDA to determine how much they can afford to pay. Because it's certainly not free for you to do that.

Right? Speaking of valuation, there is so much conversation going on out there. My agency's worth three times, four times, I've recently heard, six times annual commission. Tell us more about valuation. How does that work? And, John, what's the real truth?

Okay, the real truth is you cannot value. Well, let me back up. The real truth is that. Mike, do you know the three lies every insurance agency owner tells?

No.

So the first one is what they shot in golf.

I don't play golf, so I'm good there.

The second one is the size of the fish they caught. And the third one is, what did they sell their agency for? Ah, now you Know, I've heard people say, and I've seen articles that people have written that say, oh, you know, agencies are selling for 12 and a half times EBITDA, not revenue, but EBITDA. And I sit there and I go, not possible. I mean, it can't cash flow at that level. But what you're not seeing are all the details, okay? Because, for example, a buyer might say to somebody, well, I'm going to pay you eight times EBITDA as a down payment. But of that, five times EBITDA is in cash and three times EBITDA is in our company stock. And then if you hit these specific growth targets, you are entitled to another, let's say five times ebitda, of which half is in cash and half is in stock. And then the biggest question I have is, okay, how do I sell my stock? And everyone says, oh, well, you know, when we flip our private equity, well, what happens if that doesn't happen?

Okay?

So you've got to be really careful because the other thing they factor in is they say, well, you know, if we had the eight times and, you know, the five times, that's 13 times. And then, you know, based on the growth over the next five years, there's another three times. So you're selling your agency for 18 times EBITDA. No, you're not. Okay. It's, for lack of a better term, it is a bait and switch. And my attitude is I want to know how much cash I'm going to end up with so that. Because that's the only thing I can bank on. All right? Correct. So you have to look at the cash aspect. Now. If you want to take a small amount, if you want to take 5 or 10%, Tom, in the equity of the buyer, that's your decision. But again, I don't want to put a huge amount into that because now we've got a problem. You know, what we're doing here is we, we have too much in company stock. How do I get out of it? You know, where am I spreading. How am I spreading the risk?

I mean, go back to, you know, the 1980. I'm sorry, 2007, 8, 9, when people were selling to banks and banks were paying huge numbers for agencies, but they were almost paying the entire thing in company stock. And everyone was like, oh, look, the stock keeps going up and up and up. And I'm like, what happens when it doesn't? Oh, that'll never happen. And we know what happened.

Wow.

So you got, you know, the issue there is just what is your risk factor. I know people that did that back then that lost everything and had to go back and start a brand new agency and they're trying to grow that so that they have some money to retire on. So you've gotta, you gotta look at a multiple of ebitda. Now EBITDA stands for earnings before interest, taxes, depreciation and amortization. Okay? And if you look at it and again these articles will say 10 times, 12 times, but no one bothers to read the fine print. I was actually out on the Internet yesterday and there was an article the average agency is going for 12 and a half times EBITDA. Well, if you look at, you know, the fine print, it says that this is for a very well run agency with between 3 and 10 million dollars of commission income. Well, that is not the typical agency out there. And again, they play games with this. For example, if I have a nine times, or I'm sorry, if I have an agency that's selling for nine times EBITDA. And let's assume it's 3 million backup. Let's assume we have a $3 million commission agency and we sell that for, you know, its EBITDA is seven times. Okay, you do the math and let's assume we have three of those. Then let's assume we have a 9 million dollar commission agency that's selling, that's extremely efficient, you know, 40, 50% EBITDA and it sells for 12 times. Well the way they do the calculation is they go well on, on the $9 million agency we got 12 times EBITDA. And on the other $9 million, you know, maybe we got seven times. So they take the average between seven and 12 and you look at that and do the math and go well wait a second, that doesn't make sense because the majority of the agencies sell or a lot less.

Right? So you know, it's, it's, is it similar to real estate where the true value of an agency is what somebody's willing to pay for?

Absolutely correct. Willing buyer, willing seller.

Right.

I mean typically I can come in, I can look at an agency based on its characteristics and makeup. I can say to an owner, conservatively, you're worth X amount of money. Now if I'm marketing that agency for sale, I don't tell them that I want, you know, $4 million for the agency because if they're willing to offer me 8 million, woohoo, that's a good number, right? So I always tell people that the seller wants as much as they can possibly get. And I show them a realistic pro forma ebitda, which then they have to adjust because some people might say, oh, I can eliminate that space. I can consolidate into my operation. I can eliminate the operations manager and the cpa. And they really shouldn't be giving you credit for all of that because you can't do. You can't run the agency on your own.

Right.

Without those functions. But some people do, and they offer crazy high multiples. And I'm happy with that. And so are my clients.

Exactly, exactly. And there's a lot of intangibles, I guess, if you will also, you know, reputation and branding and all that I have seen bring extra money that you can't anticipate. I know you put together a very.

Excellent, detailed profile that you put out there, and it really tells the story. So that's fantastic. So, John, somebody that might be thinking about this sometime in the next two, three, five years or even into the future, not only should you prepare adequately and properly for when that comes, what are some of the pitfalls and challenges that sellers have encountered?

The question, the first question in my mind is who to keep? Who do you plan on selling to? A lot of times people say, oh, I want to sell my kids. Well, you know, the kids have worked in the agency for 10 years, and you want to sell to them. That's great. Let's realize a couple of things. First of all, the price the kids can afford to pay you is less than if you sell to a third party, because there are no economies of scale.

Right.

The second thing, and I always say this is, do not. Do not. Do not hold a note from your children. Because you hold a note from the kids and, well, why'd you do that? Well, they're going to use the cash flow of the agency to pay off mom and dad. But what happens if something goes wrong? What happens if they screw up? That makes for a really super awkward Thanksgiving and Christmas. So I always say, if it even.

Happens at all, if it even happens at all.

And I've run into kids that the parents are like, well, I want to sell you the agency. And they're like, I don't want to own the agency. You know, go sell it to somebody else, and I'll just become an employee for whoever you sell it to. So if you have kids involved, the very first thing is you've got to have an open and honest discussion with them. Do they really want to own or run the agency that. I had that conversation with an agency owner last week. He's supposed to be meeting with his two sons this week, and we're going to see, you know, where that goes. The other thing is, if you do want to sell to the kids, do the kids have the cash to pay you? Because again, I don't want the seller to hold a note right now, typically, you know, we can go to a bank and do an SBA loan that will do 90. 90%.

Do a 90% deal where the bank will lend 90 and the son or daughter has to put up either 10 or five and then have mom and dad hold the other five, you know, but again, the question is, do the kids have, you know, good credit? Do they, you know, is the bank willing to make this loan to them? And as I said earlier, the big problem is that the kids are not going to pay as much as a third party. And I've seen some third parties say to the kids, you're going to pay me $3 million for this. And the kids go, okay. And they're paying it off for the rest of their life. And it just, it doesn't cash flow. If the bank is not willing to lend the kids the money to pay you off so that you can retire, then the answer is, that's not the right price for the kids.

Right.

And you have to think, you know, do. Do we. If I, if I really need as much as I can possibly get for the agency, you may unfortunately have to sell the agency to a third party as opposed to selling it to, you know, one of your kids. The other thing you should think about, you know, because we just talked about internal sales versus external sales. Let's talk about external sales for a minute.

Right.

First, the first thing is if the seller is a C corporation.

Good. Yeah.

The typical buyer wants to do an asset purchase. So doing. Doing a asset purchase on a stock deal is going to result in double taxation.

Right.

Okay. So that screws up the cash flow. So it may not work. So the rule as of today is if you're a C corp.

And you convert to an S corp, you have to wait five years.

So that's changed. It used to be 10, right?

It used to be 10. And then that changed quite a while ago. That changed almost 10 years ago.

Okay. Okay.

From that perspective. So you gotta keep that in mind.

Right.

You know, you need. You should have the agency valued by a third party in case you sell. Before that 10 years is up. You can circumvent that. There are ways to do that, but you have to do an application for. You have to do a report for personal Goodwill and allocate part of the price to personal goodwill. And it's not simply make up a number.

Right.

It's. There's a very specific process that you have to go through that. So you got to look at all those things. Are they a C Corp or a VNS corp that may require you to wait five years, you know, and then do you want to hold a note from this third party that's not even your kid, and what, you know, what's their other debt and what are the chances you're not going to get paid? Because I've seen situations where people have done deals and they're like, oh, I can just take the agency back and then the buyer starts fighting them and then it's all the legal fees and all of that stuff. And long story short, they end up losing a lot of money because they didn't think that through. So absolutely, you need to think that through.

Yeah. And I've seen that happen as well where an agency owner sold it, you know, held the note, had to take the agency back, and not only is it time, energy, loss of focus and everything else, like you said, legal fees, and I can't emphasize enough that entity aspect as well, you know, make sure your entity is going to flow with the entire situation. And that's one of the big, big benefits of dealing with somebody like John Perskin and his team or anybody out there. So that lends to another question, John.

Sure.

Should a seller sell his own agency? I mean, I've been in the industry for 30 plus years. I know everybody and I know a lot. I can handle this on my own.

So, you know, what I always tell people is, okay, so you know your agency. Let's assume you want to sell your house, okay? And I say, would you sell your house on your own? And they go, oh no, I'll hire a realtor. And I get, well, why? You lived in the house for 30 years. You should know how to sell it. Chuck, the skill set of running an agency versus the skill set of selling an agency are totally different. And several years ago I had somebody email me and they emailed me, it was like August or September. And they said, dear John, I sold my agency back at the first of the year, okay? And here's what I did. They outlined everything they did and they said, now I've got some questions, okay? So they listed their questions and I clicked on the reply button and I responded next to each question. But then right at the top of the email I said, dear Bob, based on the information you've provided. It appears as though you've done everything wrong. Please see below. So I hit the send button. Fifteen minutes later, I'm getting a phone call from this guy, and he's like, well, what the heck do I do now? I go, now why are you calling me now?

People seem to think, oh, because they run their agency. They know how to sell their agency. They do not understand the tax implications. They do not understand, from the buyer's perspective what sort of representations and warranties they're going to want. They're not going to understand who they should get as an attorney on the deal. So all of those issues come into play, and if you do it wrong, it can cost you a lot of money. So just, you know, make sure. But, you know, lots of brokers out there, myself included, and what I always tell people is talk to the broker and ask them, what's their process? Because when I talk to somebody, I tell them, here's what I do, here's how I do it. Here's the time frame that you should expect.

And if they say to me, well, I don't like your process or that time frame, you know, I want to sell at the end of the year, and it's, you know, the middle of November, I say, you know what, I wish you a lot of luck, but I'm not the guy for you.

And that's one of the things. I know that about you, John. You will tell people straight up exactly how it is, and you don't hold any. Anything back and don't pull any punches. And I love that. I mean, with our life's work, right?

Absolutely.

I mean, this is something that we've been. Some people have invested 20, 30, 40 or more years in blood, sweat, tears, nights, weekends, agony, and the whole nine yards to create something special. You want to be able to move to the next step in your journey to. With peace of mind, I guess, if you will.

And. And if they're talking to a broker, you know, two, three, four years before they're ready to sell, it gives them the time frame to make the adjustments that they need to maximize the balance. If they call me today and say, I've got to sell by the end of the year, there's no way you can maximize the value.

Right, Good point. I mean, that's, that's critical. And let's reiterate that one, because, you know, I said earlier, you know, people do. They wake up and decide that they want to sell their agency within the next 30 days. You know, I don't think like that. But you can is what you said earlier. But it's not in your best interest to do so. And I know part of the work that you do for agencies is let's say their efficiencies aren't at their greatest level. Let's say there are some things that need to be corrected. Yourself and your team can help agencies with that and maybe work together for a year or two and update some of these things, correct some things, or it's not the right time. Let's get our house in order for the next one to two years to really make the best decision for the future of not only your family, but generationally. Right.

Just because somebody calls me and says they want to sell by the end of the year, I'm not necessarily going to agree to that. My question is, why now? If they tell me and I've had this happen where, you know, I've been given three months to live, okay, that's a different situation.

Right.

But, you know, there are others. I go, you know, if you go this route, here's how much you're gonna sell it for now. But if you, you know, take three years and you make these adjustments, you know, you can increase the price by, you know, 40, 50, 100%. You know, and people are often saying to me, oh, well, when I leave the. The buyer doesn't have to pay me. So therefore, all of that drops to the bottom line. And I look at them and I go, okay, so you're telling me that you're worthless because somebody's got to do that, even if it's the buyer, and there's a cost associated with that, and it needs to be factored in.

Yeah. Wow. Fantastic stuff. I hope everybody was taking notes. And if you weren't taking notes or you need to hear something again from the wisdom that John just dropped, please go down, go back and listen to this again. Watch it again. John, thank you so much for imparting incredible wisdom. Cic, phr, mba, cpa, author of five books. John has literally been there, done that, and is still doing it on behalf of agency leaders everywhere. So, John, thank you for being on the podcast today and sharing just a little bit of what people should be thinking about if they're even considering moving on to the next phase of their journey. And, John, before we wrap up today, anything else to add, sir?

No, I think, you know, I just wish everyone a good Thanksgiving and Merry Christmas and Happy New Year and all that sort of stuff.

Yeah. And John's out there. Optimum Performance Solutions. If you Just gts that or Google that stuff. You can find John and his team and if you have any questions about anything, I'm sure they're willing to have a conversation.

Absolutely. Just. I always tell people, do not call me because I'm never hung. What I want them to do is send me an email and then I'll say, here's my availability, what works for you, and we will block out a specific time to have a call.

Right. Regardless of where you are in the world, because I know that about you. That's how we work. Say, I hope you caught that one. If you didn't catch that one, email him. Don't call him. So. But he is responsive after that once you get on the calendar. So again, John and I heard you also say 18 weeks of vacation. Great, Great stuff.

Yeah, that was this past year. And I'm. That actually includes. I've got two weeks in Antarctica coming up in about three weeks.

Have you ever been there before?

Nope.

Oh, and it's summer. Is. Is Antarctica. Is this winter season in Antarctica or. It always is always winter in Antarctica.

No, it's their summer and it should be around in the 20s to 30.

Oh, nice and warm.

Yep.

Wow. Well, safe travels. Thank you.

Just a.

Just a kind of a fun question to wrap it up. So 18 vacations and you travel the world. I know. And do all kinds of cool stuff. Where's the funnest place you've been in the past year or most adventurous or greatest experience or all of that?

Well, the most fun. Normally I go to either Indonesia or the Solomon Islands for feet for scuba diving, but this year are pretty bad. So I don't know if it was just the reefs or what was going on, but I'll go again next year and see if it improves and if not, go somewhere else.

Fantastic. So John is also working on his designation for scuba diving consulting based on his worldwide travels doing so.

So that's. That's so that I can take a tax deduction.

That's why he has the cpa. Good stuff.

That was a joke.

I get it. We all know, hey, it's better to laugh than a cry, right?

Yep.

And that's the result when working with John Persky, you get to laugh more. So, John Persky, thank you for being on the podcast. If this is your first time on the podcast, welcome. My name is Mike Stromstad. I'm widely recognized as the leading author, speaker, and coach for the independent insurance agency industry. You can learn more about me@unstoppableprofitproducer.com if you're interested in attending one of our live or online presentations to learn to grow your agency, create wealth so you can have more freedom to live life on your own terms. Our virtual event portal is up fast start.

And you can find out more about our live events@be unstoppablebootcamp.com all of our events, all of our events are designed to share with you some of our best money making strategies developed over 35 years of experience as an proud independent insurance agency business and again to help you grow your business, create wealth so you too can have more freedom to live life on your own own terms. And you can also find more about our podcast out there on all the channels including Spotify, Apple Podcasts, stitcher and our YouTube channel and now Amazon. And please, if you haven't yet, please go to our podcast portal@undoppableprofitpodcast.com go to the top and hit subscribe. And if you know someone who would benefit from what you just learned on the podcast, please send them to again. Unstoppable Profit podcast.com Mr. John Persky, thank you so much for your wisdom today and safe travels to you. Happy Holidays.

You too, Mike.

All right, Appreciate it. All right everybody, until the next episode, get out there, make a difference, Be unstoppable. Leave no regrets. You got this. We believe in you. See you on the next episode.

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