According to the 2014 Future One Agency Universe Study, 11% of independent agencies plan to perpetuate by selling the current principal’s interest to a non-principal employee.

It’s a big opportunity for young agents and new producers who have their eye on playing a more significant role in the agency’s future. But how does the process work? And what’s standing in the way of success on both sides?

What the Experts Say

The biggest questions involved when a principal decides to sell their agency to a non-principal employee: Is the right person in place? And does the agency have the financial discipline and wherewithal to make it happen?

“Internal transactions are funded out of cash flow, so consequently the agency has to be well-positioned financially to be able to do that and have the right discipline in place,” says Tim Cunningham, partner at OPTIS Partners, LLC.

“It’s probably the hardest [perpetuation plan] to make happen because usually the employee doesn’t have the finances and maybe not the experience,” agrees Mike Mensch, certified business intermediary and merger & acquisition master intermediary at Agency Brokerage Consultants. “We’ll start talking to an agency owner that wants to sell to an employee, but they just can’t come up with the money. So what happens is the owner ends up having to finance a portion or take a lower sales price on the business than they might otherwise get by selling it in the open market.”

An agency can fund itself in two ways, says Al Diamond, president of Agency Consulting Group, Inc.: compensation of the originating owner or bank loans. “It’s really important for agencies that are going to transition internally through non-owner employees to set up their operating statement and balance sheet in the best light possible so that if a bank or some other financer looks at the agency, they’re not seeing someone close to bankruptcy—they’re seeing someone with a conservative fiscal approach and with money in the bank,” he suggests.

Diamond encourages retiring principals to find out who might be able to afford the sale and give or sell them a small ownership interest. That way, someone else has ownership in the event that something happens to the owner.

“There is a serious legal problem when the only stockholder of a corporation dies because that’s going to go to the courts, and during the several months that there’s a transition, the clients go away and sometimes the employees do as well,” he warns. “Much better off preparing by bringing an employee or several employees or producers into the mix as small interest partners.”

What It Looks Like

When Clint Ivy, president of Fleming & Riles Insurance in Albany, Georgia, started as a producer fresh out of college, the agency owner and two older producers were all over the age of 50. He gradually grew his book of business as an active member of the national Young Agents Committee (YAC) and former chair of the Georgia YAC, and when one of the older producers retired, “we started talking about what was going to be the strategy for the agency going forward,” Ivy says.

The previous owner had two daughters who were not interested in the business. “I was looking for an opportunity and he was looking for a way out, so we basically were looking for a commitment from each other,” Ivy explains. The team sought legal counsel and drew up an agreement, agreeing on an appraiser and a valuation with help from Reagan Consulting.

“That let me know early on that this is where I wanted to be long term, and that gave him peace of mind,” Ivy says. “So we were able to just keep doing what we were doing for a while until we got to that time.”

The biggest challenge throughout the process? “You’re dealing with people who built a business themselves and you’re basically telling them you’re going to take it over,” Ivy says. “No matter what happens it’s hard for them to let go, and I understand that. The best thing to do in the beginning is for people to not get ahead of themselves and put numbers out there. Talk to experts so everybody’s on the same page of how these things really need to work before they start to face disappointment.”

At 38, Ivy has some time before he starts planning the next wave of perpetuation—but that doesn’t mean it’s not on his mind. Fleming & Riles recently purchased a one-man operation and Ivy sees similar opportunities down the road. “I would say in the next seven years I’ve got to start thinking about what the plan is,” he says. “We’re looking to hire another producer—do I then start letting them buy a piece of it? We’re not there yet, but that’s something I have to start thinking about sooner than later.”

The Agency Universe Study cites three other common perpetuation paths among independent agencies: children or other family members take over (38%); other principals buy all or part of the current principal’s interest (29%); and outside party or organization buys out current principal’s interest (24%). For strategies on how to implement these plans at your agency, don’t miss the June issue of Independent Agent magazine.

Jacquelyn Connelly is IA senior editor.