7 minute read
Planning Decisions this Time of Year: Protect, Grow, and Sell Health Commissions
By Phil Calhoun
The greatest problem with planning is getting started. In 2024, there is still time before you get lost in AEP and open enrollment work. As an Active Broker, you need a Commission Protection Plan to protect your hardearned income and address the fact you will lose your commissions in a life event that prevents you from staying licensed, certified, and capable to handle your client’s service and support. Risks you can plan to deal with include your death or disability. It is common to decide to wait until next year to do this planning work. Another option is to engage in the first step which is to learn more about the process.
This pre-AEP period is a good time to jump on a 15-minute call and get answers about your options to handle risks to your commissions. The most common options for our callers come to resolve are:
#1 Do you want to retire soon and avoid AHIP and carrier certifications, or #2 Will you stay active and work to find a commission protection option.
Planning takes time! The key is to start the process and get your questions answered by a subject matter expert. Your CPA knows tax related issues both personal and corporate. Your lawyer knows personal and corporate legal planning issues. Our commission planning process includes the work we have accomplished with numerous CPAs and estate planning attorneys for 12 years. Through our work with hundreds of brokers we have perfected our role as the expert in health insurance commission planning.
Know the Components of Planning
All our planning includes a Purchase Agreement. For plans where the broker stays active, as well as, when the brokers want to sell soon, we use our Purchase Agreement.
The Business Sales Process—Commission Solutions
Preparing to sell a book of business is a significant undertaking. For most health insurance professionals, the process requires careful planning and consideration. Again, in situations where brokers decide to stay active, they need a plan to protect their commissions. Many of our broker clients have similar concerns. Most often we see the timing when to retire followed by how they want to be paid when they do sell. The solutions we work on for our broker clients are all customized with solutions to fit the broker’s requirements.
Let’s start with the key components that most brokers move through as they start the process to exit the business.
Financial Preparation:
IT/Tech is always important to have your financial statements, tax returns, and any other relevant financial documents organized in an electronic format. Current numbers with details such as revenue by carrier and type of insurance line is the goal.
In some cases, your accountant can help as they normally have a solid heads-up on your business and can efficiently get your financial records accurate and up to date.
When it comes to determining the value of your book of business, Buyers need to see two key items, revenue, and client numbers. From these stats they will see trends. First your financial statements will show the commission income for the current year and the recent two years. In addition to these totals, Buyers want to review trends. Trends lead to the second focus which is a review of client growth and retention. The number of clients you have now and what the client numbers were each of the past two years will be used to complete the trend analysis.
Solid financials lead to higher value and stronger Buyer interest.
Legal and Regulatory Compliance:
Ensure all legal and regulatory requirements are met, including insurance and business licenses, permits, contracts, and agreements.
Resolve any outstanding legal issues or disputes that could affect the sale process. The marketing rules and requirements need to be documented and shared.
Since health insurance sales are mostly only on commissions that are transferred to a Buyer, commissions are the top asset of value to a Buyer. Employees who will stay are also of value to most Buyers. Office equipment and technology may not be needed and certainly are of limited value in many cases.
Operational Optimization:
Streamline your operations and improve efficiencies to make your business more attractive to potential buyers.
Document key processes and procedures that can be scalable and sustainable. Mostly your annual renewal processes are considered both to determine if there is any unique value or take away in your processes, and if so, can these processes be transferred.
Processes lead to consistency and increase the value of your book of business.
Consider hiring a team of professional advisors, including a business broker, investment banker, attorney, and accountant, to guide you through the sale process.
Marketing and Promotion:
Quietly let your trusted colleagues know you are looking for potential partners and buyers. Health plan reps offer a possible lead source. Working with a listing service or business broker is a last resort but may be necessary. Often brokers who have purchased a book recently know of colleagues that may be an option.
Build a strategy to attract potential buyers. If large enough you may include creating a confidential information memorandum (CIM) or teaser document.
Identify and target potential buyers, including strategic acquirers, competitors, investors, and private equity firms.
Develop a best fit list of qualities you look for in a Buyer.
Consider your employees as your Buyer.
Confidentiality Measures:
Maintain confidentiality throughout the sale process to protect sensitive information and prevent disruption to the business. Use non-disclosure agreements (NDAs) and confidentiality agreements to safeguard proprietary information.
Professional Advisors:
Your CPA or Attorney can be the first place to start. They may know Buyers or be connected to colleagues who have clients in the industry.
Consider hiring a team of professional advisors, including a business broker, investment banker, attorney, and accountant, to guide you through the sale process.
Seek advice from experts who specialize in mergers and acquisitions (M&A) to ensure a successful transaction.
There are local associations and groups to consider such as the Exit Planning Institute. Members often have many connections in the M&A industry.
Due Diligence Preparation:
Anticipate buyer due diligence inquiries by compiling comprehensive documentation on all aspects of the business, including financial, legal, operational, and human resources.
Be prepared to address any potential concerns or questions raised by prospective buyers during the due diligence process.
In most cases, when a Seller wants more of the agreed value paid up front (100% in a short time), the risk increases for a Buyer. Look for a Buyer who can show they have the funds needed and a track record and process to retain clients.
Negotiation and Closing:
Negotiate favorable terms and conditions of the sales agreement, including price, payment terms, warranties, and representations.
Work with your advisors to finalize the sales transaction and ensure a smooth closing process.
Post-Sale Transition:
Develop a transition plan to facilitate the handover of the business to the new owner, including training and support during the transition period.
Communicate with employees, customers, suppliers, and other stakeholders to minimize disruption and ensure a seamless transition.
In your planning work, success when staying active is to assure you have 100% commission protection in all life events when you stay active and wait to sell your book of business.
The above information is a fit for all situations. When you plan to stay active or if you want to sell soon, doing this planning work outlined here will help. We know planning for your business can be a complex and time-consuming process. There are many ways planning starts and stops, gets sidetracked, or just is put off for another day. Please know that with careful planning and the right support, you can maximize the value of your business and achieve success. In your planning work, success is staying active with 100% commission protection in all life events or in the sale of your book of business.
Phil Calhoun is owner and publisher of California Broker Magazine. Phil also is a leader in coaching health insurance professionals. He is an active member of several insurance associations including the California Association of Health Insurance Professionals (CAHIP) and local chapters in Orange County, Los Angeles, San Diego and Inland Empire Health Insurance Professionals. He attends many state and local California chapter meetings. He offers complementary 15-minute coaching sessions. To schedule a phone call “Click Here”
714-664-0311
