Many agency owners are unsure of their exit plan, and many fail to take the time to consider their options because they are busy running their day-to-day agency operations. But a time will come when they must decide whether they will sell externally to a third-party buyer or sell internally to family or key stakeholders.

Whether you choose to sell internally or externally, having a plan in place will ensure that you have options available to you when it is time to decide. Your plan should address these six areas:

1) Hiring next-generation talent. If you are like most agencies, you are always searching for rising stars—and often come up short in your quest. This is certainly a theme that is endemic to the independent agency space, and one of the biggest factors affecting an agency's ability to perpetuate internally or sell for the highest multiple.

Those that were either born into or stumbled their way into the independent agency channel know that it is a best-kept secret with the potential for a high quality of life and high earning potential. Communicating these benefits effectively will help you recruit others who might not have considered insurance previously.

Additionally, many agencies find success recruiting stars from other industries and teaching them insurance, instead of looking for latent talent in other agencies.

2) Developing your talent. Once you get talent through the door, agencies can do many things to develop their talent. Pairing new talent with successful agents in a job-shadowing or mentoring program will teach them what makes a successful employee. For outgoing agency principals or producers, handling of key accounts in a timely manner will ensure that the agency is positioned for success without hitting retention.

3) Creating ownership opportunities. During the recruitment process—and early in the careers of your next-generation employees—demonstrate the financial rewards that will be available to them if they meet certain performance expectations.

Set and communicate the criteria that would need to be met to be invited to own agency stock. Create models that show how agency stock could be transferred and the impact it would make on their future. Additionally, draw a current and future organizational chart that shows what the agency could look like if the employees continue to perform at a high level.

4) Implementing a sales culture. Ultimately, agencies are sales organizations. Creating a culture focused on organic growth by establishing and enforcing various metrics will be key. These metrics may include requirements for minimum book size, new business written minimums, and trading down smaller accounts to the house or small business units. 

5) Finding your niche or expanding to new ones. Depending on your location, demographics and many other factors, it is necessary for your agency to find the niche that will promote the most success. Maintaining a strong balance of personal and commercial property & casualty lines and avoiding oversaturating one specific area is key.

For example, Agency A has an 80%/20% personal-commercial lines split, whereas Agency B writes 50% personal lines and 50% commercial lines. Agency A carries much more risk than Agency B. The commoditization of personal lines is increasing the risk in the industry because customers now can easily shop for coverage and change their minds at the drop of a hat to save money.

Commercial lines, on the other hand, has much more stability and businesses are more likely to stick with their coverage rather than shop around. Balancing your agency's P&C lines can significantly reduce risk and bring consistent revenue and contingencies into your agency.

Another option for your agency would be to expand into a new niche market. According to the 2022 Best Practices Study, a joint initiative by the Big “I" and Reagan Consulting, group life & health make up only 3.3% of gross revenue for even Best Practices agencies, bringing in less than $1.25 million in revenue. Group L&H continues to be an untapped area of revenue for agencies. There is tremendous opportunity for agencies to invest resources in this area of the market.

As you can see, the median Best Practices agencies' organic growth levels in L&H is -2.5%, whereas the top-performing Best Practices agencies—the cream of the crop— are seeing organic growth at 34.4%. By investing in a niche with high growth potential, your agency could see increased organic growth that will take your agency to new heights.

6) Managing your book of business. A vital aspect of agency growth that often gets overlooked is successfully managing your book of business, and there are a few red flags to look out for when you review and analyze your book of business.

One of the first things you should do is look at your agency's top 10 accounts. This is a major indicator of the health of your agency. The top 10 accounts will provide insight into whether your book is in a place to continue to grow and expand, or if there are risks that could bring about potential speed bumps down the road.

For example, how much revenue do your top accounts bring in as a percentage of your total gross commissions? A single account should not be generating over 5% of your agency's total commissions. If, for example, an agency has an account with a local business that accounts for 17% of total commissions and that local business decides to look for other potential options, this would be a major blow to the agency. Keeping your top accounts well-balanced is essential.

Secondly, it is just as important to continue to attempt to bring in new high-revenue generating accounts with a variety of producers. Having your top revenue-generating accounts in the agency for 25 or more years with the same producer creates extra risk. If unforeseen circumstances were to occur, your agency might not be prepared. It is vital to transition long-standing accounts to younger members of the agency to ensure the continued success and retention of top clients.

By creating a plan that addresses these six key areas, agencies will put themselves in the best possible position when considering their future options. By planting the seeds of growth now, your agency will harvest the rewards in the years to come.

Luke Hippler is business planning and valuation analyst at IA Valuations.