Filed Under:Agent Broker, Agency Management

Agency Perpetuation From the Lender’s Perspective

Only Well-Positioned Agencies Need Apply

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

While a sale of the business to an aggregator or public enterprise may appear to be lucrative for the seller up front, it forestalls the same opportunity for the next generation of owners, including the owner’s descendants. Further, an ownership transfer through a perpetuation takes place when the timing is right for all involved rather than relying on the vagaries of the market or “which company is looking to buy right now.”

The well-run agency is one that can grow organically and produce a healthy bottom line. The agency valuation is dependent upon profitability since the value of an agency represents the capitalization of profits to the owners over time. How can an agency that is not profitable have good value? Agencies usually trade at multiples ranging from five to seven times cash flow. Even using the old revenue multiple rule of thumb that assumes an agency is worth 1.5 times revenue, there is an implicit assumption that the business has a 25-percent profit margin. The multiple represents approximately six times that bottom line. Agency profits over time not only represent value but also provide the cash flow needed to repay the debt used to acquire the agency.

Agency owners can position their agencies to be peak performers by installing a growth culture in their organization. To accomplish this:

A proper and sustainable perpetuation structure is vitally important. The perpetuation plan should allow a selling owner to achieve retirement goals of reaping a solid return on the productive time and effort he put into the business. By the same token, the plan should enable the successor owner(s) to achieve their own business goals (which presumably are to buy a productive agency with a bright future). The plan cannot be one-sided. It must be designed to work for both the seller and the successors. Important elements of the plan should include how taxes will be minimized for both the buyer and seller, how control will be passed on to the succession team, how the buy/sell agreement is funded, what flexibility the plan allows, and the role of outside financing.

A strategic lending partner can help work out the details for a financing structure for an agency perpetuation. Traditional banks have not been a good source of capital for agency perpetuation transactions because they usually require hard collateral (tangible assets such as property, plant, and equipment) to back up business loans. However, insurance agencies do not typically have significant tangible assets. When traditional bankers scan financial statements, they may not view intangible business assets as valuable for collateral. Thus, some banks may require agency owners to pledge a house or other assets as personal collateral.

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