There are in excess of 35,000 independent insurance agents andbrokers in the United States, and the vast majority of them areprivately held.

Our experience would suggest that they are privately held for anumber of reasons including the autonomy they desire, the qualityof life they enjoy, the economic opportunities presented and thecompetitive advantages that can come from private ownership.

In spite of the many potentialadvantages that can be gained by private ownership, many agentscome to the point of selling their organization to third parties.For some, it allows them to best accomplish their personal andcorporate objectives. There are others, though, that still desireto remain privately held, but they have gotten themselves into aposition where they cannot continue to do so. In many instances,this happens because they simply do not understand what it willtake to remain privately held.

The reality is that it is difficult and complicated to remainprivately held, and agency owners are getting a lot of confusingmessages. It is for these reasons that ReaganConsulting initiated The Private Ownership Study and solicitedthe support of Amerisure Insurance, Cincinnati Insurance Companies,Hanover Insurance Group and Liberty Mutual Agency Markets to dothis significant research and produce this study.

The purpose of this study is to demystify a very complicatedprocess and to provide the information, insights and resources tohelp agency owners remain privately held, if it is their desire todo so.

The study establishes that there are four critical requirementsfor ownership to be perpetuated internally. These “pillars” onwhich private ownership rests include:

• Healthy operations
• Reasonable sellers
• Able buyers
• Effective ownership transfer mechanisms

Although each of these elements is required, clearly thestarting point is the willing and reasonable seller.

Such sellers are the folks that currently own and lead insuranceagencies across the United States. These are the people that wework with most closely in our consulting practice.

They are also my peers age-wise, and they are people with whom Ihave a lot in common. I started in the insurance business 35 yearsago, I have been consulting for 25 years, and I founded ReaganConsulting 15 years ago. I am the chief executive officer of aprivately held consulting firm that has every intention ofremaining privately held indefinitely.

The basic question for my friends and peers that are principalsof privately held insurance agencies, and for me, is: “Are we trulywilling and reasonable sellers, not simply in words, but also inour actions?”

To answer that question, let's draw from the findings of thestudy and consider the key elements that will determine whether ornot we are willing and reasonable.

The reasonable requirement has three components, the first ofwhich is the value that will be established for the equity thatwill change hands. Internal perpetuation will work if the value isestablished based on the earnings and growth potential of theagency as it exists, not based on what a third-party buyer would bewilling to pay for the agency. Reasonable sellers must accept aninternal, going-concern valuation and cannot expect that the nextgeneration of internal owners will be able to pay what the highestbidders will pay.

For Reagan Consulting, this was an easy point to come to basedon the significant advantages we gain by being privately held, andthe reality that the value that we establish must be supported bythe earnings that we generate.

The second element of reasonableness is the current owners'willingness to provide or arrange financing for the buyers. Thiscomponent results from the fact that the next generation of keyemployees coming along does not have the personal resources tosimply write a check, and they need the majority of their currentearnings to support their families and lifestyle.

It is also necessary to provide a source of funding, which inmost instances is in the form of profit distributions. It wasinteresting for us to see in the study that the typical insuranceagency provides financing terms which allow future profitdistributions to cover most, if not all, of the future principaland interest payments required to purchase equity.

For Reagan Consulting, this was also a logical andnecessary point to come to. The valuation that we use and thefinancing terms that we make available need to be largely coveredby the distributions of profits that the new owners will beentitled to receive.

The third key component of reasonableness is the willingness ofthe current owners to sell and distribute ownership on a timelybasis. If an agency principal hangs on to all of his or herownership until he or she is ready to walk out the door, internalperpetuation is not likely to work. The best scenarios are whereagency principals use stock as a means to attract, motivate andreward key employees and they begin transitioning a portion oftheir ownership well in advance of the termination of theiremployment.

At Reagan Consulting, I am still seven to 10 years away from myintended retirement, but it became apparent to me shortly afterReagan Consulting was formed in 1995 that it would be to myadvantage and the firm's advantage to begin sharing ownership withkey employees. The ownership that I sold to my six partners reducesthe amount of ownership that I hold, but it makes for a muchhealthier organization with a meaningful percentage of ownershipbeing held by key players in their 30s and 40s. From myperspective, I own less of the company, but the percentage that Iown is more valuable due to the talented young people that we havebeen able to bring into our organization.

Well, if you pass the test for being reasonable, the final andultimate question is are you willing to perpetuate internally.

Some agency principals are motivated to remain private based ontheir desire to maintain autonomy and a quality of life that theyfeel can only be preserved in a privately held firm. Others desireto remain private based on a clear sense that over time, they willget the best economic return. If you look at our industry andmeasure compensation levels, profit distributions and equityappreciation, insurance agencies have provided some of the besteconomic returns available in the marketplace.

In addition to all of this, many agency principals desire toremain privately held because they have found that they have acompetitive advantage in recruiting talent as a privately heldfirm.

For Reagan Consulting, the commitment to remain privately heldis not only influenced by each of the factors mentioned above, butalso by the reality that we will be best positioned to consult andprovide advice and direction to our clients when we are independentof the direction and influence of a third-party owner. As aconsulting firm, being private is a critical part of ourculture.

Our hope is that The Private Ownership Study will motivateagency principals to assess their commitment to private ownershipand to determine if they are, in fact, “reasonable” and positioningtheir firms to remain private and enjoy the benefits of doingso.

We do recognize that the objectives of some agents and brokerscan be best achieved by selling to a third party. For ReaganConsulting, we have determined that it is in our best interest andthe best interest of our clients to remain privately held. As aresult, we are not only willing to perpetuate internally, but weare prepared and positioned to do so effectively.

I am pleased to report that we have taken the same medicine thatwe have regularly prescribed and we will benefit from it. It is myhope that many of my agency owner friends and peers will do so aswell.

Bobby Reagan is CEO of Reagan Consulting Inc.,an Atlanta-based management consulting firm focusing on theinsurance distribution system. He may be reached at 404-233-5545,or by e-mail at [email protected].