Everyone Sells Eventually: Preparing Your Insurance Agency for Perpetuation
As an insurance agency owner, it’s easy to get caught up in the day-to-day operations of your business and lose sight of the inevitable—one day, you’ll sell your agency. Whether you plan to retire, hand over the reins to a family member, key staff member, or sell to a third party, an ownership transition is inevitable. The key to ensuring your agency’s future success lies in preparing for that moment through thoughtful strategic planning. Actual transition might vary form the plans that are made, but the planning will create a healthier, more profitable agency as you move towards the transition.
The Inevitable Exit: Why Perpetuation Matters
Selling your agency is not a matter of if, but when. The question is, will you be prepared when the time comes? Many agency owners delay perpetuation planning, either because they believe they have plenty of time or because the process seems daunting. However, early preparation can significantly impact the value of your agency and the ease of transition when it’s time to sell.
Perpetuation planning involves preparing your agency for a transition of ownership, whether that be to family members, employees, or an external buyer. It's about making your agency attractive to potential buyers, ensuring smooth operations during the transition, and protecting the legacy you’ve worked hard to build.
Start Early: Time is Your Best Asset
One of the most critical aspects of successful perpetuation planning is starting early. The earlier you begin, the more time you have to enhance your agency's value and strategically plan for its future. To put yourself in the best position possible start 5-10 years before you plan to exit. This timeframe allows you to:
● Understand Your Agency’s Value: Knowing your agency's valuation is the first step. This includes evaluating key financial metrics such as EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) and revenue per employee. Understanding these numbers helps you set realistic expectations for a sale and allows you to identify areas where you can increase value before exiting.
● Identify Your Succession Options: Whether you're planning to pass the agency to a family member, sell to an employee, or seek an external buyer, understanding your options early gives you time to groom internal options for leadership or put yourself in a situation to attract external options who best align with the agency's culture and values.
● Enhance Profitability: Agencies with strong profit margins and consistent organic growth are far more attractive to buyers. By focusing on improving operational efficiency and boosting profitability, you can increase the appeal and value of your business over time.
External vs. Internal Perpetuation: Exploring Your Options
There are two primary routes when it comes to perpetuation: internal and external. Each has its own benefits and challenges, and your choice will depend on your goals for the agency and the potential successors available to you.
● External Perpetuation: This involves selling your agency to a third party, such as a local competitor, regional firm, or a large national buyer. External perpetuation often yields higher sale prices, often 25% more than internal sales, especially if your agency has strong financials and growth potential. However, it may involve more complex negotiations, including deal structures that involve cash, stock, earn-outs, or seller notes.
● Internal Perpetuation: In this scenario, you sell your agency to someone within the organization, such as a key employee or family member. Internal perpetuation can be smoother since the buyer is already familiar with the agency’s operations and culture. However, funding the sale can be a challenge and you’ll often receive a lower price. Financing options include agency-funded purchases, seller financing, or outside financing.
Preparing for Unexpected Events: Contingent Perpetuation Plans
Not all perpetuation events are planned. Unexpected occurrences such as death or disability can throw an agency into disarray if no plan is in place. Without a clear strategy, agency operations can be disrupted, employees may leave, and clients may start looking elsewhere for their insurance needs. Competitors can also take advantage of the situation.
To avoid this, it’s essential to have a contingent perpetuation plan that outlines what will happen in the event of an unexpected exit. This plan should include a buy/sell agreement that triggers in the event of death or disability and should outline the steps for an orderly transition. Having this plan in place ensures that your agency remains stable, even during difficult times.
Key Steps to Take Now
Perpetuation planning can feel overwhelming but breaking it down into manageable steps can make the process more approachable. Here are a few key actions you can take to start preparing your agency for perpetuation today:
Organize Financials: Ensure that your financials, contracts, and operational documents are in order. Buyers will want to see a clear and accurate representation of your agency’s financial health.
Monitor Key Metrics: Keep a close eye on key performance indicators such as organic growth, revenue per employee, and EBITDA margin. Consistently tracking and improving these metrics will enhance your agency’s value.
Plan for Contingencies: Develop a contingency plan that outlines what will happen in the event of death, disability, or other unexpected circumstances. This plan should include a clear buy/sell agreement and strategies for maintaining leadership stability.
Seek Professional Help: Perpetuation planning involves complex financial and legal considerations. Working with a CPA, lawyer, and M&A advisor can help you navigate the process and ensure that you’re making informed decisions. The process is a one-time event for you, so seek the advice of professionals that have the experience to ensure a plan that meets your goals.
Securing the Future of Your Agency
Everyone sells eventually, and by planning for perpetuation early, you can secure the future of your insurance agency and protect the asset you’ve spent your life building. Whether you're planning an internal transition or selling to an external buyer, the steps you take now will determine the value of your agency and the legacy you leave behind. With careful planning and proactive preparation, you can ensure that your agency continues to thrive long after you’ve moved on.