While no one enters marriage with the prospect of divorce, it happens. Independent insurance agency owners endure a highly stressful environment, particularly the past five years with COVID-19 and the hard market, and a divorce can wreak havoc on an agency.

For business owners experiencing divorce, 57% say their company has taken a financial hit and 70% couldn't focus on their work the same way, according to a report from Clarify Capital. More than 1 in 3 (35%) of owners had to rely on outside help, such as family and friends, to keep their business afloat. And nearly 5% ultimately shut their doors due to the financial strain of the divorce.

Divorce can impact your agency both operationally and strategically. From an operational standpoint, in many family-owned agencies, it is common for the spouse to play an important role in the agency as well. If so, a divorce could impact the internal dynamics of the operation and hinder growth.

If the spouse works in the agency, develop an amicable plan as quickly as possible to exit the non-owner spouse out of the agency. But even if a spouse does not hold a role in the agency, a divorce can still have an impact on the strategic value of the agency. This will depend on whether the couple entered into any prenuptial agreements prior to the marriage.

IA Valuations strongly advises all family agencies with multiple owners or those who are planning to perpetuate to the next generation to have prenups that remove agency ownership or value from joint marriage ownership. Having a prenup creates open communication at the start of the marriage about the agency ownership, financial stability for the agency in the event of a divorce and a simpler divorce if things go sour.

If you have done this, then the impact of divorce on your agency should be minimal. If not, as settlement terms are being negotiated, your soon-to-be-ex spouse's attorney may request the value of your insurance agency because it is subject to the 50/50 division of assets.

Make sure you hire a divorce attorney that has experience dealing with dividing business ownership assets, as this may be one of the key sticking points in the dissolution. Whether the split is amicable or not, the division of assets will have an impact on the strategic value of your agency.

Obtain an independent fair market valuation of your agency with a valuation analyst that has experience as an expert witness in this type of matter. It is possible that the agency is the biggest financial asset between the couple and could be a point of contention in the divorce proceedings. No divorce attorney is going to accept the agency owner's estimate of the value of the agency. Be proactive and select a firm that has experience in these situations.

Additionally, be sure to work closely with the valuation analyst on all factors that could affect the value. There are up to 27 factors that IA Valuations assess in determining value, which include but are not limited to growth, profitability, loss ratios and contingencies, staffing, carrier relationships and expense management.

How the agency performs and reports on these factors will be a plus or minus in terms of the agency's value. Working closely with the valuation analyst to ensure every ongoing and one-time expense is properly accounted for will impact value. It's a tedious process, but one that ensures an accurate value is given to the agency and helps you avoid a contentious debate over the value of the agency.

Jeff Smith, J.D., CIC, CAE, is CEO of IA Valuations and the Ohio Insurance Agents. 

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. If you are considering how a divorce could impact your agency, please contact Jeff Smith at jeff@iavaluations.com.

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