GENERATIONS COMING TOGETHER

As older owners exit, young producers
are buying agencies

By Scott Freiday and Keith Mangini

Every once in a while, the demographics align. Such is the case with younger producers’ desire to own agencies and older principals’ willingness to perpetuate to a new owner. The two necessary and vital forces of agency ownership—a new generation ready to take the reins and an older generation prepared to let go—are coming together.

Today, we’re seeing a new crop of younger agents who want to buy into agencies. And recent survey data shows that older owners may be more inclined to prepare for their agency’s succession.

According to the last few Agency Universe Studies conducted by the Big “I,” the average age of principals with 20% or more of ownership hovers around 55 while the percentage of owners 55 and up is increasing. The majority of these owners have considered at least some basic perpetuation planning, including having children or other family members take over, other principals buy part or all of their interest, or an outside party buy their interest.

At the same time, agents and producers under 40 are optimistic about their prospects. They feel good about their career choice and the potential to earn income. Most of these younger agents see insurance as a permanent career, and many have aspirations to own an agency.

Agency values are robust and buy-sell activity remains vibrant. That agencies are an attractive investment, capable of generating recurring income and profitability, is an incentive for both buyers and sellers.

For example, JP Morgan’s 2022 Business Leaders Outlook survey revealed that the percentage of business leaders across industries with plans to transfer their company increased from last year and that the expected timeline for completing a transition accelerated. “The combination of challenging market conditions and favorable valuations could be driving more business leaders to consider selling their companies,” the report says.

In short, there is probably no better time for the orderly transition of a business from one generation to the next.

What’s the catch?

The catch is that retiring principals must proactively plan for succession. At the same time, prospective owners must take the initiative to identify ownership opportunities, ask themselves if there’s a chance to become part of the succession plan, and prepare themselves for a future management role. Both old and new generations must be intentional and actively involved in the process.

Often when agency owners reach retirement age, they haven’t given enough thought to succession. As a result, there’s a lack of qualifying candidates from within the agency to buy the business. This remains one of the leading reasons why principals sell to a third party.

Happily, there is a very good solution, and that’s a staged exit where a prospective buyer is identified early on and steps are taken to prepare that individual for ownership. A staged sale allows the exiting owner to cash in some chips now but continue to profit from growth until the agency is sold. It allows the incoming owner to earn equity and ease into their new role.

Let’s look a little further into how this can be accomplished and why today’s younger agents make ideal candidates for future owners.

A well-considered transition plan

Too many agency owners put off the preparation it takes to create and execute a succession plan. According to Reagan Consulting, “Poor planning in the areas of valuation, shareholder departure timing, repurchase terms and funding can render internal perpetuation virtually impossible, forcing a sale to outsiders.”

Principals should consider retaining the services of professionals who can properly value an agency; draw up a workable buy-sell agreement; and engage the legal, accounting and lending expertise necessary to ensure the smooth succession of their agency. An experienced agency valuation consultant can determine an agency’s value, which provides a benchmark and starting point to negotiate the agency’s selling price.

Most independent agencies are owned and operated by a single owner. Some seem to be more of an extension of the principal’s personality than a well-run business. Many are still paper based.

The main driver of agency value is cash flow. As agency owners begin to think about a transfer in ownership, they must put their house in order and maximize their agency’s value. That means having strong carrier relationships and a good performing book of business with strong customer retention. It means taking a hard look at expenses, income and cash flow. It means modernizing operations, moving toward a digital office and taking advantage of online tools. Maximizing value isn’t a quick process, and owners need to allow themselves the time to accomplish it before they approach the negotiation table.

Younger agents aren’t afraid to try new sales channels, utilize agency management systems to their full capabilities or use technology to reach customers through online marketing.

An eager successor

Most of the young agents who fit the mold of an ideal successor are Millennials, and they are already making a name for themselves as entrepreneurs, small business owners and startup CEOs. This generation grew up in the age of the internet and personal computing. They see the value of technology and have mastered social media.

Young agents can help drive growth at a time when older producers are slowing down and are less productive. Younger agents aren’t afraid to try new sales channels, utilize agency management systems to their full capabilities or use technology to reach customers through online marketing. In fact, it’s the way they communicate with their peers, who also prefer to do business online.

Young producers who’ve purchased books of business and acquired agencies are experimenting with new marketing methods. They’re leveraging social media and mobile apps to establish a digital presence that, in turn, is propelling organic growth. Some are in specialty markets and have created a successful niche using online tools that allow them to reach consumers in multiple states.

Tips for owners and would-be owners

Whether you’re a principal approaching retirement, or a producer interested in eventually owning, there are steps you can take now to prepare for the transition. Keep these points in mind:

• Have the conversation early. Identify, train and mentor the up-and-coming leaders of your agency sooner rather than later. Don’t wait until the last minute to put together a written transition plan. We recommend a timeframe of at least five years. It’s about creating value for your agency over the transition period to reap the most from your business.
• Determine how the sale will be financed. Will the seller finance the purchase? Does the new owner have equity in the firm? Is bank credit needed? If there is a loan, can the agency generate enough cash flow to cover the loan and run the operation?
• Prepare financially and emotion-ally to be an owner. Are you ready to take on the responsibility and risk of running a business? You may have to make short-term sacrifices for long-term gain to realize your dream of ownership. Are you commit-ted to getting your personal finances in order, which may mean making lifestyle changes? What’s your willingness to take on risk and debt? Prepare to borrow before you need to.
• Develop the skills needed to run an agency. Pursue continuing education to round out your knowledge of accounting, finance and management. Can you successfully transition from employee to management? Learn to develop employees and build teams. Familiarize your-self with the agency’s management system. Do you have a firm grasp of the agency’s sources of income and its expenses? Do you have experience in securing carrier appointments? How will you reduce expenses to maintain cash flow so you can service your debt?

Industry’s future

The path to ownership can be challenging, but there’s no better time for young producers to invest in the independent agency system. With young agents’ proficiency in all things digital and their diversity and commitment to making a positive impact on society, the future of the independent agency system is in capable hands.

We can’t wait to see where these young owners take us.

The authors

Scott Freiday is senior vice president and division director, and Keith Mangini is vice president and commercial loan officer at InsurBanc, a division of Connecticut Community Bank, N.A. They have helped hundreds of agents finance acquisitions and grow their agencies. InsurBanc is a community-focused commercial bank specializing in products and services for independent insurance agencies. Organized in 2001 by the Big “I,” InsurBanc partners with agents to help them optimize growth opportunities and manage their agencies efficiently.