With agency valuations at all-time highs, many independent agents are considering selling their agencies now rather than waiting until they're ready to retire.
With agency valuations at all-time highs, many independent agents are considering selling their agencies now rather than waiting until they are truly ready to retire. Our client, “Mark," was no different when considering his options.
Mark owns a successful multi-generational insurance agency. He's in his late 50s, has been running the agency for 20 years, and is thinking about retiring soon. Mark's spouse Laura and their children are not involved in the business. Because of this, the current market and the multiple acquisition offers he received, Mark was feeling serious pressure to sell his agency even though he was unsure he was ready to do so.
The decision to sell your agency can be stressful and overwhelming. To help minimize the stress and provide clarity to the process, filter decisions through the four Cs: Clock, Compensation, Culture and Calculation.
We worked closely with Mark and Laura to discover their personal goals and their vision for the future of their family and agency. Then we walked him through the four Cs process:
1) Clock: How much longer do you plan on working? Mark was thinking about retiring in 3-5 years. However, he was willing to work longer if the agency was the right fit and also willing to retire earlier if the price was right.
2) Compensation: How much money do you need to support your lifestyle and that of your family? We helped Mark calculate how much he would need to save for retirement to achieve his goals if he did not sell. Then we helped him determine how much he would need to realize after taxes from the sale to achieve these same goals. Then we were able to help him compare the options and structure of each offer.
3) Culture: What is the culture of the agency you are considering selling to? It was important to Mark for the buyer to have a great culture, to understand and work in his niche, and most importantly for his staff to remain employed full-time. Mark had many interviews with the potential suitors to help get a better feel for each agency.
4) Calculation: How is your earnout calculated? Although this doesn't come into play until after the deal closes, it's critical to understand the growth needed to hit targets, how overhead expenses are applied, and who makes the calculations.
Going through these steps helped Mark see that he would not need to sell the agency to meet his financial goals. And this enabled him to consider the offers from a much more objective perspective.
Here is a chart that explains the offers he received:
| | Stay Independent | Large National Firm | Private Equity-Backed Aggregator | Growing Regional Firm |
| Structure | 100% owned by Mark | High cash offer for 100% of business | 75% cash and 25% preferred stock for 100% of business | Low cash offer with 50% ownership retained |
| Staffing | No change to staffing | Stay on full time | Mark could stay on full time, but no other staff would be retained | Stay on full time |
| Income post sale | No change | 30% reduction in cash flow | 25% reduction in cash flow | 60% reduction in cash flow |
| Earnout/Growth Expectations | 5% growth | 5% growth to hit minimum earnout over 3 years | 9% growth needed to reach minimum earnout (paid 50% cash and 50% stock) | 10% growth expectation with no earnout |
Exit Date
| 3 to 5 years | 2 to 3 years | 2 to 3 years | 5+ years |
| Four C analysis | Mark maintains control, does not have a boss to report to and his staff stays on board. He can defer sale for a few more years. | While the clock and compensation were good, the culture was not a match, as the acquirer has no expertise in his industry niche. | While the up-front compensation was less, it was enough to retire. However, the culture was not a match as none of Mark's staff would be retained. | Although the culture was a good match, the up-front compensation and reduction in cash flow was not a good fit.
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When reviewing the offers side by side, Mark realized that the agency which was the best cultural fit was offering the least amount of money. In contrast, the agency offering the most money was not a good cultural fit. Ultimately, Mark decided not to sell his agency.
And although he knows there is a risk that his agency could be worth less when he is ready to sell, he is confident in his decision and glad to be driving the process, rather than letting market euphoria push him to a decision today that he may regret tomorrow.
After Mark and Laura walked through the four Cs, they now have clarity and confidence with their decision.
Whether you are actively looking to sell your business or simply want to elevate your confidence in your current agency's success, the four Cs can provide a guidepost for what you want, what you need and how to confidently move forward.
Jim King, CPA, CFP, is a wealth manager at BDF LLC, a Chicago-based wealth management firm with over $5 billion under management. He leads the firm's commercial insurance professionals practice group and is an expert on helping agents maximize their earnings and save for the future.
Important disclosure: Investments involve risk and past performance may not be indicative of future results. BDF LLC investment and wealth management strategy recommendations may not be profitable, suitable or equal historical performance. The information herein is provided solely to educate on a variety of topics, including wealth planning, tax considerations, insurance, estate, gift and philanthropic planning. BDF's current written disclosure statement is available for review at www.BDFLLC.com.
