Tony Caldwell's Blog

Insights on entrepreneurship and strategy for the insurance industry.

Planning Retirement for Insurance Agency Owners

You've probably read some of the same articles I have, which tell us that about seven out of 10 people in the independent insurance industry are planning (or at least age-eligible) to retire in the next 10 years or so.

Maybe you're one of those - an insurance agent who is 59 or older has to be thinking about their retirement goals. But as an agency owner, retirement is a little more complicated for you than it is for some of your employees - you’re not just retiring from your job, you have to prepare to sell or hand over your insurance business. Whether your personal plans after retirement include going into management, consulting, or working on your golf game, you have to think of what will happen with your small (or not so small) business without you at its helm.

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I'd like to discuss planning for retirement: planning for a successful and profitable exit from your independent insurance agency. So let's begin talking about some of the things that you need to think about as you contemplate your exit.

It's never too early to start thinking about it

Don’t wait until you’re nearing the average age for retirement to start planning - a really profitable agency succession is not a short-term project. You may be 10 or 15 years away from that day, but let me stress that it is not too early to begin thinking about succession.

Conversely, if you find yourself thinking about leaving next month, well, you've got a lot of work to do to maximize your profit and make a smooth transition! You’re no longer an independent agent, but an agency owner, and you want to make sure the business you created continues to thrive after your retirement.

How much is your insurance agency worth?

The first thing I want you to think about is that valuations of insurance agencies have never been higher. Many insurance agencies are now selling for three times revenue, and we even had one agency sell this year for six times revenue, which is somewhere between 10 and 15 times EBITDA. 

The reasons for that are really pretty simple, and it's the current low interest rates, because low interest rates make it more affordable for folks to buy an insurance agency. But it also means that investors have a tougher time making adequate returns on their investment. So businesses that have predictable consistent cash flow, like insurance agencies, have never been more valuable.

The good news is that that low interest rate environment is going to last for a few years. The Federal Reserve is indicated that even if we see inflation in the next couple of years, they intend to keep interest rates low. So valuations of agencies should be high for the next few years, something to think about as you plan your potential exit.

Keep in mind that EBITDA is a much better valuation method than revenue, and that more and more buyers are using it to appraise agencies. 

Good agencies are in high demand 

One of the consequences of low interest rate and high demand is that the supplies are actually lower than they've ever been before. One insider in the M&A industry told me that there's only about a four year supply of investment-grade insurance agencies available in the marketplace today. That low supply factors into the basic law of supply and demand in economics, which means your agency's likely never been worth more than it is now. But there are some risks to think about.

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COVID's effect on independent insurance agencies 

The first risk is that the COVID economic disruption is going to have an impact on many insurance agencies, as they lose customers, or lose premium and commission due to customers shrinking. And it's likely that those conditions are going to last into 2021 and potentially as long as 2024-2025.

If you're thinking about an exit in the next few years, you need to bear that in mind and make sure you're doing everything you can to maintain and grow your income. Because that obviously leads directly to your value. 

Financial planning before you retire

Speaking of time and preparation, bear in mind that in the ideal circumstance, it's great to have at least three to five years before you're ready to sell the agency. Why? Because to do it well takes time to plan. 

business documents on office table with smart phone and laptop computer and graph financial with social network diagram and two colleagues discussing data in the backgroundI don't know about you, but for me, my agency is the largest asset in my personal financial statement. This is the case for most entrepreneurs, and retirement is a once in a lifetime opportunity to cash in that nest egg you've been building for 2030 or later. Let's talk about the things you need to do.

First of all, you need to do some financial planning. I'll talk more about that in another blog, but let’s at least remember that you're going to want to make some changes to the way your business is structured, at least on your profit and loss and balance sheet, to maximize your value. 

Rethink your staff 

Another thing that you really should give some thought to is the composition of your staff. As agency owners get older, so do their long term employees. And when someone is looking to buy your agency, they don't want to face the fact that the whole team might walk out the door a year or two after the acquisition closes. So if you’re starting to think about retirement, this is the time to make sure that you have an adequate spread of age inside the agency. This will add to your agency value, and it's something that takes time to prepare for, so I wanted to mention it upfront.

There’s are two more things you're going to have to evaluate about your agency staff. Staffing has a couple of components to it, and one is to be sure that you're not overstaffed, because those are profit leaks that will lower your EBITDA and cause you to get less money for your agency. 

The other thing is to consider how much you are paying. One of the most common mistakes that many agencies do is overpay producers.

The industry standard is to pay about 30%, maybe 35% for production.

So if you're paying producers more than that, you're going to want to begin to think about how you can reduce that expense to maximize your profitability, and therefore your value. This takes time, and if you have been overpaying, it will take some negotiation.

 

Think about your buyer

Another thing to really give some thought to is, who's your buyer? 

Let’s consider some options:

  • It may be a son, daughter, or another family member, and this is going to be an easy transition. Great.
  • Is it a key employee? Think about how you can help them prepare to get the money they're going to need to buy you out, and also for the management experience they're going to need to make sure they keep the thing running the way you do.
  • Is it a local insurance agent? Have you identified someone (or perhaps several someones) who could be your buyer? If you haven't, and your goal is to sell locally, now's the time to begin to think about who that might be. 
  • The last major category of potential buyer for your agency would either be a national broker or a PE firm (private equity). PE firms are not only some of the biggest buyers in the industry now, but they're also some of the ones that pay the most money.

Transition period / earn out 

How long does the transition from agency owner to former agency owner take? You need to understand that many deals are structured with what's called an earn-out. In other words, you don't get all of the money upfront: you're going to earn some of it after the sale. This usually means that you need to stick around for a few years in an advisory role, to make sure you get all of your money. Typically, earn-out periods last somewhere between two and four years, with three being average. 

Back to getting ready and preparing - how far in advance should you start? Well, it could be as much as 10 years. Imagine you want to go on the market in three or four years. Once you get a buyer, it usually takes a year to get a deal consummated, and then you stick around for three or four years. Well, there's a decade! 

It's never too early to get started planning. 

However far away your retirement may seem now, contact us and let’s have a talk. We can help you assess the value of your agency, and make a plan to increase it before it’s time to sell.

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