For insurance agency owners, a well-conceived and properlyexecuted perpetuation plan is a great mechanism for harvesting thevalue generated through their dedication and commitment to buildingtheir business. If planned properly and structured correctly, it ispossibly the most rewarding and efficient method of harvestingvalue while allowing successors the opportunity to grow and yieldvalue for themselves down the road.

While a sale of the business to an aggregator or publicenterprise may appear to be lucrative for the seller up front, itforestalls the same opportunity for the next generation of owners,including the owner's descendants. Further, an ownership transferthrough a perpetuation takes place when the timing is right for allinvolved rather than relying on the vagaries of the market or“which company is looking to buy right now.”

Perpetuation is an option, however, only for well-run,profitable, and growing agencies. If your agency is not a goodperformer, it is unrealistic to expect your younger producers to“bail you out” with an offer. However, businesses with reliable,recurring revenue will almost always have an opportunity to improvetheir operations if they are professionally run and managed with adaily focus on growing value. 

The best-conceived perpetuation plans that yield completedtransitions share some common characteristics. As statedpreviously, the first leg of the stool is a profitable, well-runagency. The other characteristics are reasonable expectations onthe part of the buyers and sellers, a properly structured andsustainable deal arrangement, and buyers that have the willingnessand necessary experience to be agency owners. The finalcharacteristic—one that is often overlooked until it is too late—isfinancing.

Show Me the Money
The willingness of the seller to finance a portion of thetransaction is secondary only to the availability of third-partyfinancing from a bank or finance company. The ability to make asubstantial down payment to the owner financed by a source outsideof the business is the best way to convince a seller that theinternal sale can be as good on day one as a sale to a publicbroker or aggregator. In these days of low investment returns andratings agency downgrades, cash received in-hand speaks volumes. The well-run agency is one that can groworganically and produce a healthy bottom line. The agency valuationis dependent upon profitability since the value of an agencyrepresents the capitalization of profits to the owners over time.How can an agency that is not profitable have good value? Agenciesusually trade at multiples ranging from five to seven times cashflow. Even using the old revenue multiple rule of thumb thatassumes an agency is worth 1.5 times revenue, there is an implicitassumption that the business has a 25-percent profit margin. Themultiple represents approximately six times that bottom line.Agency profits over time not only represent value but also providethe cash flow needed to repay the debt used to acquire theagency.

Agency owners can position their agencies to be peak performersby installing a growth culture in their organization. To accomplishthis:

• Hire only producers who you truly believe can be ownerssomeday.
• Pay for performance of your staff; do not pay fornon-performance.
• Pay particular attention to the compensation structure ofproducers and staff. 

Remember, compensation is usually the most significantexpense for an agency. Be reasonable in the compensationexpectations for yourselves, reduce debt aggressively wheneverpossible, and keep balance sheet risk low by maintaining anappropriate level of working capital and staying in trust. There isa wealth of available information to benchmark the financialperformance of your agency to other agencies of similar size.

Coming to Terms
Reasonable expectations of buyers and sellers are a little moresubjective to determine. However, the most sensitive discussionsusually pertain to differences in perspective regarding the valueof the agency. Profitable, growing, well-run agencies are morevaluable and can repay the debt incident to the perpetuationtransaction. Getting professional advice and a valuation from areputable advisor is strongly recommended for both parties early inthe process.  A proper and sustainableperpetuation structure is vitally important. The perpetuation planshould allow a selling owner to achieve retirement goals of reapinga solid return on the productive time and effort he put into thebusiness. By the same token, the plan should enable the successorowner(s) to achieve their own business goals (which presumably areto buy a productive agency with a bright future). The plan cannotbe one-sided. It must be designed to work for both the seller andthe successors. Important elements of the plan should include howtaxes will be minimized for both the buyer and seller, how controlwill be passed on to the succession team, how the buy/sellagreement is funded, what flexibility the plan allows, and the roleof outside financing.

A strategic lending partner can help work out the details for afinancing structure for an agency perpetuation. Traditional bankshave not been a good source of capital for agency perpetuationtransactions because they usually require hard collateral (tangibleassets such as property, plant, and equipment) to back up businessloans. However, insurance agencies do not typically havesignificant tangible assets. When traditional bankers scanfinancial statements, they may not view intangible business assetsas valuable for collateral. Thus, some banks may require agencyowners to pledge a house or other assets as personalcollateral.

On the other hand, a specialized lender that works frequentlywith insurance agencies tends to understand agency value and thebusiness's ability to repay a loan. To use intangible assets ascollateral requires a lending institution that recognizes howindependent insurance agencies operate and create value.

When shopping for a lender for your agency, an agency owner orthe acquiring parties should look for an institution with insuranceindustry knowledge. The more a lending institution'sdecision-makers recognize the unique aspects of the agencybusiness, the more likely they will understand the value to becreated or harvested in a perpetuation transaction for anindependent agency.

A good rate does not a good deal make. Just like a consumer orbusiness owner needs to shop on more than price, an agencyprincipal should look at more than interest rates and terms.Banking professionals should be knowledgeable, informed, andinformative.

Finding the Right Advice
The guidance and perspective of a qualified, experienced lendingofficer and/or an industry financial consultant can help agencyprincipals avoid costly missteps and capitalize on opportunities.Often, banks tout their insights into business to try to attractcustomers. However, the number of bankers with insurance experienceand expertise is relatively low.

One size does not fit all in agency perpetuation. Agencyprincipals need lenders that are fair and disciplined in theiranalyses, while also being flexible and creative in developinglending solutions. As an agency owner looks to realize the valueheld within his agency, a key ally is an experienced lender whotakes a complete look at the agency to determine needs andrecognize the long-term value.

A good banker is like a good insurance agent. Each looks at thewhole picture of a situation, considers the client's objectives,and prepares a professional recommendation based on experience andexpertise. The independent agency owner who has that type ofrelationship is an agency owner with a strong ally and a brightfuture.