Part 10: The Real Meaning of “No Fee to Seller” and Critical Importance of Understanding What This Unwise Sell-Side Transaction Fee Structure Means
This odd and unwise transaction fee structure makes your sell-side advisor beholden to the buyer, which is a major problem and conflict of interest as your sell-side advisor should be acting solely and entirely in your best interests as your personal transaction advisor and seller ally; because the buyer will be forced to pay his or her buy-side advisor’s fee as well as your sell-side advisor’s fee. In other words, the buyer will pay for everything; all buy-side and sell-side transaction fees as well as the acquisition price capital and any costs associated with obtaining that capital and all closing costs. Thus, your sell-side advisor, whom has been hired to act exclusively on your behalf and to solely protect and defend your financial interests as the seller, will ultimately not be paid by you the seller, but will actually be paid by the buyer and thus makes YOUR SELL-SIDE ADVISOR effectively beholden to the buyer; as this very strange and unwise transaction fee structure requires your sell-side advisor to not only enter into a legal binding contract with you the seller, but ALSO the buyer since the buyer will be paying your sell-side advisor’s fee. In simple layman’s terms, this very odd and weird transaction fee structure is a very foolish and imprudent move for the seller.
This risky and unwise transaction fee structure creates a de facto fiduciary relationship between YOUR sell-side advisor and the buyer; because YOUR sell-side advisor is only going to get paid if the transaction closes and will only be paid by the buyer, creating a financial conflict of interest directly between YOUR sell-side advisor and the buyer. It effectively makes it unavoidable and imperative that YOUR sell-side advisor must be very flexible and accommodating in negotiating price and terms with the buyer; since the buyer in this nonsensical and convoluted arrangement will be paying YOUR sell-side advisor’s fee, which ultimately will cost you much more money than just paying for your own sell-side advisor to act exclusively on your behalf only and not be paid by the buyer for anything at all whatsoever. Your sell-side advisor should only be beholden to YOU, the seller, as the fiduciary responsibility should only exist between YOUR sell-side advisor and yourself as the seller; which is impossible if the buyer will be paying YOUR sell-side advisor’s fee.
The silly and strange “no fee to seller” transaction fee structure is simply a gimmick to lure in sellers whom desire to hire a sell-side advisor; but do not want to pay for this very valuable service. Moreover, from a common sense perspective, the seller is going to miss out on many possible acquisition opportunities because many buyers are simply not going to embrace a fundamentally unfair transaction fee structure or simply do not have the means or desire to pay their buy-side advisor, and your sell-side advisor, and all transaction fees, and all closing costs and of course pay the acquisition transaction price for the agency being acquired.
Moreover, it is well-known common knowledge, and common sense, that the seller’s economic benefit of retaining sell-side advisor representation far outweighs the sell-side advisor’s fee, and that the total consummated transaction price benefit to the seller typically amounts to hundreds of thousands to multiple millions of dollars; versus an untrained, novice, rookie seller attempting to sell their own agency despite having zero background in insurance agency business valuation, insurance agency M&A, insurance agency investment banking or insurance agency transaction advisory.
Your insurance agency is very valuable and should be thought of as a Lamborghini and not just a vehicle for getting around. Your agency is a finely tuned cash flow generating machine that you have invested many years building into a very valuable asset and should be treated as such; and you would not work on your Lamborghini yourself or even allow a Ford Senior Master Technician to work on your Lamborghini, as this would be very unwise and risky. You would more than likely hire an expert to work on your Lamborghini; such as a Lamborghini Technician. Likewise, when it comes time to sell your agency to retire or pursue new chapters in your life, it is vitally important to hire someone whom is an expert in insurance agency business valuation and transaction advisory; as it is in your best, safest, and most risk averse financial interests, and will be the critical key to selling your agency for the best possible price and terms via a smooth and expeditious process.
Finally, I was recently hired by a bank to review an independent insurance agency acquisition and to provide a determination of fair market value for the agency being acquired; as the bank was lending the capital to the buyer to consummate this acquisition. This agency was worth an actual and realistically attainable fair market value of $8 million; easily and without question. I am not talking about some highly aggressive valuation amount; I am stating that it was worth an easy and fully defendable $8 million market value. This agency was sold for fully half of its fair market value for $4 million; which is great for the buyer and the lender, but very sad and unfortunate for the seller and nothing could be done to help the seller as the ink was already dry on the purchase agreement.
How does such a terrible travesty occur you ask? Well, the answer is very simple, the seller sold his agency without having it appraised first via an insurance agency business valuation, period. Moreover, he not only sold his agency himself without an agency valuation, but also did not hire a sell-side transaction advisor to help him, advise him, and protect ALL his best financial interests as this older gentleman sold his agency that he himself had founded and owned for 40 years. Even if he did not need or want the money, why not sell for a market rate of $8 million and then if he does not want half the proceeds from the sale, then he could have given the money to his church, alma mater, kids, grandkids’ college education, local high school football team or his favorite charity…..or buy a Lamborghini and hire a full-time Lamborghini Technician to maintain it for you.
Sean H. Hayes, CVA - sean@insuranceagencyappraisal.com
Mr. Hayes is a nationally recognized expert in the valuation of insurance agencies, insurance brokerages and other insurance industry entities. He is exclusively focused on providing business valuation, M&A and capital services to privately-held insurance brokers and agencies and other insurance industry entities for clients located throughout the United States, offshore and internationally. Mr. Hayes has over 29 years of business valuation, M&A, capital raising and expert witness litigation support experience and completes hundreds of insurance agency valuations and transactions every year, encompassing all types of valuation, capital raising, and M&A work; including buy-side and sell-side transactions, SBA 7(a) lending, estate/gift/capital gains taxes, litigation support expert witness testimony, financial reporting, wealth planning, strategic management, exit planning and corporate planning.
Mr. Hayes holds a Bachelor of Science degree with majors in accounting and finance and a minor in economics from Jacksonville University of Jacksonville, Florida; an AACSB accredited business school founded in 1934. Mr. Hayes is a Certified Valuation Analyst (CVA) and certified member of the National Association of Certified Valuators and Analysts (NACVA). Worldwide, the CVA certification is held by only around 6,500 valuation professionals and the CVA certification has been accredited by the National Commission of Certifying Agencies (NCCA), the accreditation body of the Institute for Credentialing Excellence (ICE). Mr. Hayes is a member of the American Society of Appraisers (ASA), the Institute of Business Appraisers (IBA), and a Sustaining Member of the National Association of Government Guaranteed Lenders (NAGGL). He is also a recognized Insurance Agency Valuation Expert designated by Business Brokerage Press, Inc. and a regular contributor to the Business Reference Guide: The Essential Guide to Pricing Businesses and Franchises. Mr. Hayes is headquartered in Chicago, Illinois, where he serves insurance industry clients and their advisors throughout the entire United States and internationally.
I am available to assist insurance industry clients, located throughout the United States, with the following matters: marital dissolution with goodwill allocation; business succession and exit planning; estate/gift/capital gains tax purposes; court ordered and other divestitures; capital acquisition services; shareholder buy-in/buyout; mergers and acquisitions transaction advisory; theft of book of business; noncompete violations; shareholder disputes; United States SBA 7(a) loan business valuations; buy-sell agreements; and ESOPs
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I have provided expert witness litigation support services, including courtroom testimony, in various states; including Michigan, Florida, Indiana, Illinois, California, Colorado, Hawaii, Maryland, Texas, Wisconsin, Ohio, Minnesota, and Iowa.
Sean H. Hayes, CVA
Insurance Agency Valuation Expert
M&A Transaction Advisor
225 N. Columbus Dr., Suite 5906
Chicago, IL 60601
904.655.5565
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