This may be the most common question asked by retiring owners who would like to perpetuate their agencies through their children, producers or employees.  Most young people who are the likely agency successors also have young families and are asset poor and debt-rich already.  Too many agents feel they have no choice but to sell their agencies to another firm in order to get their equity from the business because of the agency successors’ cash-poor status.

In reality no one purchases an agency solely with outside money.  That’s because an agency must pay for itself through its own cash flow to make sense for any investor acquiring an agency asset.  So whether a retiring owner sponsors a buyout himself, taking the risk of holding the note and gaining the maximum return through interest, or takes a 100% cash payment, eliminating all his risk but often discounting the agency’s long term value to make it a cash deal, the view from the buyer’s side and the primary question is always the same.

“Can the agency throw off enough cash to pay either the owner or a financial institution the principal and interest required to buy the business?”

When we calculate the value of an agency we also determine the agency’s cash flow to identify the terms needed to satisfy the value of the agency.

For example, if we determine an agency’s value (the value of its future earnings potential for the perpetuator over a period of time acceptable to the buyer before achieving full returns for the acquired agency) is $1,000,000 and the agency’s cash flow allows for $100,000 to be available each year to pay for the acquisition, the agency would need 13.5 years to pay for itself (including interest on the principal to someone).  However, if the agency’s potential cashflow was $200,000/yr, the buyer could reap the rewards of the acquisition after only 5.75 years.

So you can be assured that if we as appraisers of insurance agencies calculate both the agency’s future earnings value AND its cashflow, so does either financers of agency ownership transfers or other agencies considering purchasing your agency.  And, if that is the case, your internal successors have the same options for paying you for your interest in the business as do outside investors.  No one sells an agency in expectation of a default.  We calculate cash flow to be assured that any offer is reasonable to both the agency’s value and cash flow potential.  Agency Consulting Group, Inc.’s Liquidity Audit tool used in concert with agency sales (Marci, link the title, Liquidity Audit, to the website section for Liquidity Audit) assures a seller (or the financer of the deal) that the buyer will always be able to make the payments on a note.

Now the world opens up to all agency owners considering retirement.

If there is a close relationship between the owner and the perpetuator (especially in family transfers) with no urgent cash need by the seller, long term payouts at moderate interest makes it easiest for the perpetuator to pay for the deal and makes it financially rewarding for an owner to self-finance the deal.  If there is a need for a cash amount to offset a retiring owner’s immediate needs, cash is readily available through a number of Agency Consulting Group, Inc. financial partners.  And if a total cash deal is required because of debt or need, we have financial institutions ready to sponsor the transactions as long as an Agency Consulting Group, Inc. valuation and cash flow analysis substantiates the agency’s ability to meet the obligation over a reasonable period of time.

We invite you to call us at (800) 779 2430 to discuss your succession or perpetuation plans, either internal or external.  Sufficient financing is currently available to sponsor new or departing owners, to refinance agencies at historically low rates, and even to sponsor new producers to help agencies grow.