Something is happening out there in the independent agency world—and it's not what you might think. With so many older principals selling to large aggregators, you might wonder if the independent agency system is on the ropes. However, lenders are seeing a different phenomenon: Young producers are coming into their own, acquiring firms and reimagining the modern independent agency.

Far from a decline, we're witnessing renewed interest, energy and activity in the independent agency space. And young producers, eager to take the reins from older agents, are driving it.

Baby-boomer owners are retiring in large numbers, and some are taking advantage of the attractive multiples offered by the big brokerages and private equity firms. But we've been encouraged by the many young agents who are drawn to the independent agency model and want to start their own firm or buy an existing one.

A New Generation of Owners

We're reminded of that Oldsmobile campaign, “This is not your father's Oldsmobile … this is the new generation of Olds." Only with a twist: Younger agents aren't rejecting their father's Olds. Rather, they're embracing it. But they're also being creative and souping up that classic Cutlass Supreme with a new paint job or set of wheels.

Younger agents understand the value of building a book of business. They appreciate that steady cash flow derives from renewals, which in turn provides the capital they need to grow and expand their business. At the same time, they're willing to experiment with new forms of marketing, leverage the latest digital technology, create a presence on social media, and communicate with clients using mobile devices and virtual meetings.

It's what General Motors would have wanted for Oldsmobile, had those ads really worked. Unlike the Olds brand, which languished for years before being retired in 2004, the independent agency system remains vital.

A Strong Demand for Financing

Even in the face of uncertainty during the pandemic, the demand for financing to acquire new business, expand agencies and develop producers is increasing—and we're seeing it all around the country.

Young agents are hungry to acquire books of business and become partial or full owners of an agency.

The young owners we've worked with are extremely savvy. They know how to efficiently run a business and manage and develop teams. They're comfortable with new technology and know how to make the tough decisions required to grow an agency.

Older agency owners are getting attractive offers from aggregators, but many of these owners would prefer to keep their agency within the family or perpetuate it to someone internally. They have tremendous pride in what they've built, and they want to leave a legacy. They're loyal to their staff and the communities they serve. They're willing to work with a younger producer to groom them for ownership and possibly provide seller financing.

Younger Agents Need Willing Sellers

The young agents we work with are typically in their mid-30s to early 40s. Some have been at the agency they'd like to acquire for 10–12 years. They may have worked their way up through the organization, taking on more management responsibility. Or they may be seasoned producers who've built a profitable book of business for their agency.

They have the ambition, drive and smarts to run an agency, but as the song goes, “it takes two to tango." Without a willing seller, an acquisition can't occur. The common thread in all successful transitions is an owner who has a plan for how they want to pass on the agency.

Having a perpetuation plan is the key to business continuity. When an agency is sold to an aggregator, it's often because the owner didn't have a plan. That's why it's important for owners to have meaningful conversations with their employees, so everyone is aware of how the agency will be perpetuated.

Financing Is Critical for Young Agents

Generally, young agents don't have the assets to acquire an agency, so financing is important for them. A bank may provide financing for part of the sale, with the owner financing the rest. Or the owner may give the agent shares in the firm as part of their compensation, reducing the amount the new owner has to borrow.

Today, more owners are selling their agencies in stages, which has advantages for all parties. It allows the older owner to reap the benefits of a partial sale, but still retain control of the firm and potentially earn more when the rest of the firm is sold. It gives the new owner skin in the game because they have partial ownership and an incentive to help grow the agency during the transition.

Young agents have varying needs. They may be seeking a loan to finance the down payment on an agency, purchase a book of business, acquire another agency or hire new producers.

From Dream to Reality

Retiring principals can help this next generation of aspiring owners realize the dream of agency ownership. Older owners who actively recruit younger agents into their agency will be better able to identify and mentor a successor. That, in turn, will make the transition from old to new much easier. Younger agents who make their interest in ownership known and are willing to work hard to make it happen will be better positioned to achieve their dream.

Automobile enthusiasts say the Oldsmobile brand died because it abandoned its older owners and failed to deliver on its promise to younger owners. The independent agency system stands in stark contrast: Regardless of your generation, it remains a coveted jewel to be treasured. Young agents are increasingly recognizing the unique value of agency ownership and are going after it.

The Right Profile: Which One Are You?

Here are four examples that illustrate how young agents are becoming owners or expanding their agencies:

1) The rising star. A promising young agent rose through ranks at her agency and was groomed to become its eventual owner. She started as a customer service representative, became a producer and then became operations manager. The principal didn't have any family members interested in the agency, so she was the natural choice to take it on. She financed 30% of the purchase, and the owner provided financing for the remaining 70%. The key is that the agent knew early on that she was in line to take over the company. She had a reason to stay and work hard at the agency.

2) The captive who went independent. An agent joined the captive market in 2012. He started to grow his business by acquiring other captive agency offices nearby and consolidating his operation into one location. He saw an opportunity to go independent and diversify his book of business. He needed the capital to make the switch. He is now working to acquire his first independent book of business. His story isn't unique. Many other agents learn the business and gain experience as captives then become independent.

3) The tech-smart owners. Young agents that are indicative of a new breed of owners have embraced technology to modernize agency operations. They acquired an agency with seed money from a family member, but now they need capital to repay their silent partner, hire new producers and grow. These owners have been very astute in their digital marketing to a younger clientele. They're harnessing technology to market online in multiple states and to integrate their management and accounting systems to stay on top of their operations.

4) The savvy specialist. A young producer built a profitable commercial lines book of business within a large agency over the course of about 10 years. He had grown the book to the point where it was generating $1 million in commission income. He wanted to use that book to start his own agency. He approached the owners and asked to buy the business. This is a good example of how young agents working at a large agency can leverage their experience to strike out on their own. In this case, there wasn't an ownership opportunity at the agency where he worked.

So You Want to Be an Owner?

Do you dream of starting an agency or acquiring an existing one? Here are five tips to help you prepare for ownership:

1) Make it known. If you're interested in acquiring the agency where you work, make your desires known to the owner. Having those conversations early on can smooth the way for eventual ownership. Or you may find out they're already planning on someone else to take over. Either way, you'll know where you stand and can adjust your plans accordingly.

2) Create a roadmap. If ownership is a possibility at your current agency, work with the owner on a transition plan. Be clear about the timing and terms of the eventual sale. Will you be vested over time in a profit-sharing arrangement? Will there be seller financing?

3) Find a mentor. Seek to enter a mentorship-type relationship with the current owner. This gives you time to learn all the nuances of running the business and to gradually take on more management responsibility before the owner steps down.

4) Know what you're buying. If you're buying another agency, do your due diligence. Review the agency's financials, look at its operation, consider its markets and carrier appointments, inspect its books of business and look at key ratios, such as renewal rates. Make sure you're buying an agency that's in good shape and can generate the cash flow to pay off the financing.

5) Prepare to borrow. If you're borrowing from a bank, understand they will do their own financial analysis and will carefully examine all aspects of the target agency, as well as what you bring to the table as a buyer. Financing can be approved quickly if you've done your homework and can provide the necessary documentation the bank needs for underwriting.

Scott Freiday and Keith Mangini are vice presidents and commercial loan officers at InsurBanc (insurbanc.com), 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.