Many agents find that their dream of retiring in comfort, using their agency’s value as a retirement asset, is exactly that – a dream. Actually, it’s a “pipe dream.” The scenario we’ve seen is often as follows:
An agent works his entire lifetime to support his family by selling and servicing insurance. He may have employees or be a one-man shop. He has used all of the agency’s profits after expenses every year to compensate himself and pay for his family’s expenses. Now, thirty or forty years later, the agent is in his mid-sixties and wants to retire. He expects the value of the book of business he built to sponsor his retirement. As he has built his business, he hasn’t had the money available to invest elsewhere, so the agency is his primary asset along with his home.
Many of these folks have spent their lives insulated from the rest of the world, basically selling and servicing insurance for several hundred or thousand clients. They have few, if any, outside interests, never actively participated in business-related political, service or civic functions, so they don’t really know any of their competitors in any form of close, deep relationship.
They’ve always assumed that they could get a “multiple” of “something” in cash, and because the agency is a “good” one, the multiple could be from two to four. So, the agent figures if he does $500,000 of income, he should get a check from $1 Million to $2 Million and can retire on that.
Imagine his shock when prospective buyer after buyer offers him a wide variety of “deals” based on a percentage of his renewal commissions on a monthly basis for a few years and asks him to stay on to assure an easy transition. If he doesn’t stay, it doesn’t make much difference to the buyer since any loss of clients will reflect in the amount paid over time and a competitor is eliminated in the process. Any buyer who is prepared to make a cash offer, whether using his own money or that of a financer, is also astute enough to do all the due diligence necessary to determine how much potential earnings can be achieved from the acquisition and the cash-flow potential and adds conditions to the deal that will keep the buyer from losing money in the process.
No buyer pays more for an agency than he feels it can bring him in additional earnings over a reasonable period of time. Would you pay $1 Million for a business, regardless of how much revenue it earns, that you project would give you no more than $100,000 of after-tax earnings in profits after expenses and taxes each year? Yes, you will make money in the long run, but few business people would make that kind of investment for 10 years of loss or break-even to eventually make money. You wouldn’t do it. Neither would the potential buyers of your agency. And, it is more likely that they want to see a positive cash-flow in years 1 or 2 and profits by the fourth or fifth year after paying for the agency.
Even if offers come in, once the “blush” of being offered a value for the agency wears off, the owner comes to the realization that the proceeds from the sale will not support him for the rest of his life, nor will it provide a sufficient inheritance for his wife and family should he expire early.
What should the agent do if the value of his agency will not sustain him in retirement?
There are three potential scenarios that should be considered:
- Join, or create with other similar agencies, a Virtual Insurance Agency. This concept, the next generation of the cluster concept, is a mega-merger of several agencies, each operating independently of another, but joined for most administration, services and expenses. The concept permits agents to continue in operation at lower expense levels with a large group of agents satisfying a larger number of common carriers than the agents could manage on their own. A unique aspect of the VIA concept is that it will identify and generate replacement agency managers if something unforeseen happens to one of its owners. Those managers earn the right to “own” stock in the VIA by growing your agency. Contact Agency Consulting Group for more information about the VIA concept and whether one can be established that would include your agency by calling (800) 779-2430, email us at info@agencyconsulting.com or you can visit our website: www.agencyconsulting.com.
- Merge, rather than sell your agency, to permit you to continue operations within a larger, combined agency. The benefit is personnel back-up, carrier relationships, a buy/sell agreement in the event that something happens to you and a continued commission income stream over a long period of time. If the merger partner does not have to pay cash for an agency, he can establish a veritable annuity for the agent to enjoy for many years based on the income of his book of business.
- Remain in your own agency, reduce expenses to a minimum to enjoy maximum earnings ability and ‘wear down’ your book of business over time. This process is called “Retirement-In-Place,” and is already done, albeit inadvertently, by many agents who no longer solicit new business. They simply manage the clients they have until their businesses wear down. In the meantime, Retirement-In-Place with either the agent acting as the servicer or having an employee managing the on-going efforts of customer service, administration and renewals could generate more financial returns to an agent than a sale or a merger; that is, as long as the agent or his surrogate is able to properly manage the book of business of the agency.
- Consider another option that agencies are now offering, a Service Agreement with a Shadow Stock option that ties the future value of your business to a percentage of the value of the agency with whom you create the program. For instance, if you’re Book of Business and Goodwill assets are worth $1 Million and the agency with whom you are considering as association is worth $3 Million you enter into a service agreement that allows the host agency to manage and service your accounts for a part of your commission income each year and when you die, disable or retire you would get 25% of the value of the host agency. You do NOT become a stockholder and the deal can be tailored to the level of activity that you expect to continue within the host organization. This is a way for you to transfer the responsibility of service and administration while not yet retiring since the value does not yet meet your retirement planning needs. Call us (see below) for more information about Shadow Stock.
Reality is rarely as pleasant as the dreams we have of graceful retirement to someplace warm that allows us the liberty to do whatever we want for the rest of our lives. Reality involves illness or the desire to retire without the means to do so. However, the reality can be dealt with if approached objectively and from a positive mental attitude. Whatever happens to us, we have done ourselves, for the better or for the worse. We cannot undo what has been done, but we still have options if we have a viable business. That’s the common ingredient that could permit even small independent agents a more comfortable retirement. Call Al Diamond at Agency Consulting Group, Inc. at (856) 779-2430 if you need assistance with perpetuation planning or retirement planning involving your insurance agency asset. We can help.