Navigating the Work Zone: Essential Growth & Perpetuation Planning for Insurance Agencies
The insurance industry is constantly changing, and agency owners face challenges when it comes to optimizing the performance of their business. Whether you're in growth mode, planning for retirement down the road or looking to sell now, there are specific areas of your business (the “work zone”) that can be developed to both maximize profits today and build long term value. This process requires careful planning and strategic decision-making. Here's an overview of how to maximize present performance and secure the future of your insurance agency.
The Basics
Ownership transition planning is about more than the sale of your business. It involves streamlining your business for today while also preparing your agency for the inevitable transition. The key to successful perpetuation lies in understanding your agency's valuation and planning early. Whether the timeline is 20 years or 5 years out, you must have a clear grasp of how your agency performs vs its peers, what you can improve upon today and what your long-term exit strategy will look like.
In the early stages, it's crucial to understand the value of your agency and have a basic knowledge of mergers and acquisitions (M&A). This knowledge allows you to assess the next potential owner and create a roadmap for succession. As the timeline shortens, it's important to enhance your EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) margin, refine your agency's performance metrics, and assemble the correct team of advisors to help you through the process.
Key Metrics for Agency Performance
The foundation of a successful perpetuation plan is a growing, profitable agency. Four key performance metrics to monitor are:
Organic Growth: The growth of your agency without acquisitions. Policy in Force (PIF) growth is better indicator of true growth than revenue. Revenue growth can be misleading as it is influenced by hard and soft market conditions.
Revenue per Employee: A measure of efficiency, indicating how much revenue each employee generates and what type of clientele your agency has.
Spread (Profit) per Employee: Another efficiency metric that shows the difference between revenue per employee and costs per employee (payroll and employee benefits).
EBITDA Margin: A crucial financial metric showing cash flow as a percentage of revenue.
By tracking these metrics regularly, you can ensure that your agency remains on a growth trajectory, eliminate wasteful spending and become more attractive to potential buyers.
External Perpetuation
For agencies seeking to sell externally, understanding the types of buyers is essential. Buyers can range from local agencies, regional firms, or large national buyers. Each brings different terms to the deal, including cash, stock, earn-outs, or seller notes.
An important aspect of external perpetuation is professional assistance. Engaging with the correct team of experts (listed below) ensures you structure the deal correctly to meet your financial and operational goals.
1. M&A Advisor: Has a pulse on the market and which buyers would be an optimal partner. Their role is similar to a general contractor as they have experience in each phase of the deal. They ensure your sale structure accurately meets your financial and operational goals.
2. CPA: Helps to optimize your post-tax proceeds and assists in the diligence process by gathering financial data that will be requested by the buyer.
3. Attorney: Primary negotiator for the legal documents including the purchase agreement and employment agreements.
The process typically takes around six months, during which you'll also plan for a transition period to get the business integrated with the buyer’s to ensure a smooth handover.
Internal Perpetuation
If you're considering internal perpetuation—where the agency is sold to an existing employee or family member—it is vital to plan well in advance of your target date. Funding is often the greatest challenge to structure. The agency can provide financing, or the buyer may secure external financing. In some cases, equity is awarded or gifted to incoming owners, or they may use personal capital to purchase the agency.
One of the biggest decisions here is whether the perpetuation involves family members or non-family members. Family perpetuation can introduce emotional and estate planning complexities, while non-family perpetuation focuses more on the financial and operational readiness of the agency.
With either type of internal perpetuation, it is important to note that absent the correct planning, the purchase price is often 20% lower than what the business would garner from an outside strategic buyer. External buyers are typically better capitalized, have access to cheaper debt, and have the ability to create economies of scale that will increase revenue and decrease expenses post-closing. There are ways to close the gap between an external and internal sale and sound planning is the only way to achieve this.
Preparing for the Future
The path to successful perpetuation starts with an organized approach. Owners need to ensure their agency’s documents, financials, and contracts are in order. Having key information readily available and being able to respond quickly to questions from potential suitors helps to keep momentum during a transaction which results in the highest prices and shorter time frames to close. The mindset is equally important: owners should regularly assess whether their agency is performing better than it did a year ago and gauge their personal energy and commitment over the next 3-5 years. As the market evolves, sellers are getting younger, and personal health and lifestyle changes are becoming key motivators for earlier exits.
One future note to consider: The impending expiration of the Trump Tax Cuts and Jobs Act (TCJA) in 2025, agencies should be aware of potential tax rate changes that could affect the valuation and sale of their agency.
Looking Ahead: Industry Trends
Perpetuation trends show a shift toward younger sellers, as buyers want continuity in sales and leadership to ensure successful transitions. Cultural alignment between agencies and buyers is critical for successful integration, and many savvy sellers are opting to stay involved after the sale to maximize the upfront price and secure a second bite of the apple down the road.
The demand for organic growth is rising, and buyers are more selective about the types of agencies they pursue. Agencies with a strong history of growth and well-defined niches are highly sought after. Additionally, InsurTech acquisitions remain prominent, as the industry embraces technology-driven solutions.
Use the Work Zone to your Benefit
Navigating the work zone requires foresight, preparation, and a clear understanding of your agency's value. Whether you're looking to optimize your agency’s performance today, planning for internal or external perpetuation, or preparing for unexpected events, having a solid plan in place will secure the future of your agency and ensure a smooth transition when the time comes.
By taking a proactive approach and planning ahead, you can ensure that your agency will provide maximum value to you today and down the line, while protecting the legacy you've built for the long term.