Being a seller in today's mergers & acquisition market provides owners with a tremendous chance to cash in on their greatest financial asset. However, as the old saying goes, knowledge is power, and understanding the challenges and opportunities that agency owners will face along the way to selling is vital to creating a successful experience.

Just like independent insurance agencies, every transaction is unique and requires careful planning and consideration before, during and after the process. Here are three challenges and three opportunities that owners will face along the way.

Challenges

1) Valuation and pricing. Get a valuation before taking the agency to market. Further, having a sound understanding of the agency's financials, growth and performance over multiple years will only enhance the owner's ability to market and get the price they want for their agency.

It is important to note that there is a difference between the value of the agency and what someone might be willing to pay for it. An understanding of value will give owners a baseline, and depending on the factors of the deal, the chance to incorporate ways to bring more value into the transaction.

2) Finding the right buyer. This can be a challenge for sellers because there is so much at stake besides the sales price. Depending on a new owner's plan, this could affect the future of their staff members, their consideration and commitment to their clients, and other values.

In many instances, owners who sell their agency continue to play a major role in their communities. Leaving their clients in the hands of new agency owners who are committed to taking care of those clients is just one of the many factors sellers are forced to consider while determining a buyer. Finding a fit is a long, meticulous process that will have an impact on sellers down the road.

3) Client retention. In an industry with high commoditization, one of the biggest challenges owners will face is the retention of their book of business. Often, maintaining strong retention numbers will be incorporated in the deal's terms, which adds higher incentives but also additional challenges for these sellers.

As an owner, staying on for a period to assist with the transition will have a major impact on the success of the deal. If not, bringing along experienced producers and employees can also bring about strong results for both parties. Creating a plan and communicating with clients can also significantly help with the challenge of client retention.

Opportunities

1) Exploiting a strong M&A market. While insurance agency and broker M&A levels have begun to fall after record activity in 2020 and 2021, many of the circumstances that make agencies an attractive investment remain. The high demand for agencies creates a competitive environment where prospective buyers are not just abundant, but also willing to pay a premium for an agency that is well-established in its community.

Owners can capitalize on this market. An owner approaching retirement age with a strong agency and book of business will have no shortage of prospective buyers. Owners have the advantage of choosing from a pool of interested buyers to ensure they find the most lucrative deal for themselves and their agency.

2) Financial gain. One of the more obvious benefits of selling your agency is the financial gain. Selling the agency represents a culmination of years, often decades, of hard work, dedication and strategic decision-making.

A successful sale can be orchestrated as one lump sum or paid out over multiple years, whichever structure suits the parties' financial goals. Ultimately, a sale can allow owners to enjoy retirement after a long career of helping protect friends, family and neighbors in their community.

3) Reduced risk and administrative freedom. Selling an agency can significantly reduce owners' risks from market uncertainties. The insurance industry, like any other, is susceptible to fluctuations, and ownership often entails bearing the brunt of these risks. Selling mitigates the owner's exposure to market volatilities in addition to securing their financial freedom.

It will also reduce the administrative responsibilities that come with operating an agency. If an owner chooses, they can not only take advantage of the agency's sale, but also continue on as a producer with fewer demands.

Successfully managing these challenges and seizing these opportunities ensures a seamless transition, rewarding owners for their years of dedication while ushering in a new chapter of growth and stability for their agency.

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

The information provided in these documents is general in nature and shall not be construed as personal legal, tax or financial advice for your situation. Please email contact@iavaluations.com to discuss your personal situation. 

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