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The Rough Notes Company Inc.



November 07
10:27 2016

Agency Financial Management

Are you ready for the next step? What is your exit strategy?

Have you given some thought to what comes next regarding your business plans? Insurance agents advise their customers about planning for the future and ensuring their property and health, and that loved ones are adequately protected. You should do the same.

Your book of business won’t disappear the day you walk out of the office for the last time, and you should make sure your legacy doesn’t either. Succession planning should be given the same amount of thought and preparation as estate planning or drawing up a will.

The good news is that there is no right or wrong answer when crafting an exit strategy. You may transition the business to a family member or a trusted employee, or you may sell it to another agency. To achieve your objectives, you need a succession plan that addresses who the owner will be and how they will be chosen, how you will prepare them to take control, and how you will transfer the agency’s assets—all while ensuring you get what you need financially to sustain your retirement and your family’s future.

When should you start planning?

Just like it’s easy to put off writing your will, it’s easy to procrastinate when it comes to your succession planning. You really need to give yourself adequate time to plan and think through all of the aspects carefully. This will reduce the risk that you’ll be backed into a corner by external or unforeseen events, such as a serious illness in the family. Once you develop a plan, a gradual transition will protect the health of the business and reduce the stress of everyone involved, including your employees. When people know what is going to happen and when, they tend to worry less so they’re more productive and focused on the objectives you’ve established.

It takes a minimum of two to three years to properly prepare an insurance agency for a transition. There are a variety of options to consider. Should you use an ESOP or a restricted stock plan, a leveraged buyout, an earn-out, or a seller-assisted plan? In any case, there are tax consequences that should be reviewed by a team of advisors with experience in agency business, including tax consultants, attorneys and CPAs.

Who will succeed you?

People may say that you can never be replaced, but it’s a fact that someone can and will succeed you. That brings up two other advantages of a succession plan: First, you can influence who the successor will be; and, second, you can allow time to prepare that person for the eventual transition.

No two agencies are exactly the same. That is why it’s important to envision the future you want for your agency. Should it stay in the family? Should you sell to employees or another agency? Should you sell to one of the aggregators? Your individual situation will help you narrow your options.

It’s common to look at a child or other family member as the logical successor as you would with your inheritance. It’s important that the family member be both qualified and passionate. A word of caution—history has proven that only about 30% of family-owned businesses survive in the second generation’s hands, and less than 15% make it to a third generation.

If your business is already a partnership, one of your partners may be interested in acquiring your share. In fact, your partnership agreement may already include language that facilitates a buy-in, buyout or other transition. Perhaps there are one or more employees who have served you and your customers well. Giving them the opportunity to become owners as a reward for their commitment is a great way to ensure that your clients will continue to be served by familiar faces.

What is your role in the plan?

If you’ve been able to sustain and maybe even grow your business, that speaks volumes about the leadership you’ve provided. As you implement your succession plan, your leadership will continue to be important, whether in terms of making sure your success or gains the knowledge he or she needs to succeed, helping employees through the inevitable changes, or seeing that current clients continue to be comfortable. Be mindful of how much value you attach to yourself and your professional reputation—your business should be able to survive and thrive without you and actually command a higher price.

That’s why part of your succession plan involves increasing the value of your company while simultaneously reducing its dependence upon you. For example, you may want to diversify your customer base, decrease your overhead, invest in new technology or develop your team’s management skills—most of these are steps business owners should already be taking.

Assemble your expert team

Successful business people know how to tap into knowledge and advice from a variety of experts. That’s especially important when it comes to creating and implementing a succession plan. Build a team of experts you trust, including your CPA and attorney, and keep them involved throughout the entire process. They will provide additional viewpoints and identify issues you may not have considered on your own.

Create a transition strategy

Once your succession plan is determined and you know your timing, you can start moving forward with the transition. The first step is to assess your agency from the ground up and determine its strengths and weaknesses. For example, do you have state-of-the-art technology, strong producers under contract, great carrier relationships, or an excellent brand reputation? Look for ways to enhance what you already do well and develop strategies for resolving other issues.

Very few potential buyers, including employees, will have the full purchase price in cash. If you can help the buyer access third-party financing, you stand a better chance of receiving the full value of your agency. Financing also opens up the sale to a larger pool of prospective buyers, which is essential for competitive bidding. Typically, the more money that can be borrowed to finance an acquisition, the more likely it is that you will obtain the best price and terms for your agency. You’ll also need to provide pro forma financials that project future revenue and profitability. Be sure these numbers exclude any one-time or non-recurring transactions.

Structuring the transition

Before you negotiate price and terms, work with your attorney and CPA to identify and develop the deal structure that best fits your objectives and tax situation. Three common approaches are: leveraged buyout/recapitalization; earn-out; and seller-assisted.

A recapitalization approach can provide the seller with cash needed to exit for retirement or other reasons, while leaving the business in the hands of employees, management, key producers, etc. who can continue operations. In a leveraged recapitalization, the buyer or buyers borrow funds from a lender in order to purchase ownership, utilizing the assets of the agency as collateral. A leveraged recapitalization as part of a succession plan can provide many benefits to both buyers and sellers if structured properly.

A buyer typically pays 60% to 80% of the purchase price up front, with the remaining 20% to 40% paid out over time as the agency achieves certain levels of revenue or profitability. In a seller-assisted transaction, a buyer can make a sizable initial payment and give the existing owner a note to cover the rest. The note is then paid off from the future earnings of the company.

Buyers often need assistance in securing funding for the transaction. Many prospective business owners look to local banks first as their potential funding sources, but banks are often hesitant to lend money to insurance agencies because of the intangible nature of their assets. Banks typically base their lending on balance sheet financials and collateral such as real estate and inventory. An insurance agency’s primary asset is the future cash flow embedded in its in-force book of business and new policies.

Making the actual transition

The work doesn’t end once papers are signed. The transition between owners is full of make-or-break moments involving carriers, customers and employees. Employees who aren’t buyers will want to know their jobs are secure and they’re not facing significant changes in the work environment. The more time you devote to sharing your plans throughout the succession process, the less uncertainty they’ll face. This is very important, because their moods and statements will have a significant effect on what your loyal clients think of the new owner.

Overall, clients want to be assured that their protection won’t suffer any disruptions and the acquisition won’t create any hassles for them. If the employees are well-liked, customers will also want to be reassured that they’ll continue to deal with experts on the risks of being insured and similar friendly faces.

Establishing a succession plan now will preserve your future, so don’t procrastinate!

The materials in this paper are for informational purposes only. They are not offered as and do not constitute an offer for a loan, professional or legal advice or legal opinion and should not be used as a substitute for obtaining professional or legal advice. The use of this paper, including sending an email, voice mail or any other communication to Oak Street Funding, does not create a relationship of any kind between you and Oak Street.

About the author

Rick Dennen is the founder, president and CEO of Oak Street Funding, which provides commission-based lending for insurance agents who need capital to buy, build or sell their agency. Dennen is a licensed agent for Life, Accident and Health products in Indiana as well as a licensed Certified Public Accountant in Indiana. In addition, he teaches a Venture Capital and Entrepreneurial Finance course at the Indiana University Kelley School of Business. He can be reached at

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