We’ve all heard the horror stories. Most are fiction, but a significant few scare every retiring owner. Some agents are actually scared out of selling their agencies whether to their children, next generation internally or to an outside entity.

An agent sells the agency and starts living the retiree’s life. He receives the monthly check from the buyer until one day the checks simply stop coming. When he inquires, he is told that business has taken a downturn and the buyer can no longer afford to pay the seller. Suddenly, the retirement benefit that the owner has counted upon has disappeared and the only solution is messy and expensive litigation.

Owners have tried to solve this problem in a very simplistic way, asking for cash payment for the agency amounting to hundreds of thousands and millions of dollars. This requires buyers, sometimes the very children of the owners, to seek financing for an insurance agency from the financial markets. It doesn’t take long for them to realize 1) insurance agency value is comprised of INTANGIBLE assets, 2) banks don’t like to loan money on intangible assets, 3) even friendly financial institutions have fallen under much more restrictive federal and state regulation that makes their latitude in making loans much more objective, and, finally, 4) private venture money is EXPENSIVE because they have to make a profit, as well.

Private financing of insurance agencies moving from one generation of ownership to another need not be a strain on the buyers nor a point of never-ending stress for the seller. AND IT IS THE BEST WAY FOR THE SELLER TO MAXIMIZE HIS RETURN!

As long as the cashflow of the agency can support the payments for the sale, it becomes a common sense to realize that the owner sponsoring the buy-out with private financing permits the seller to pay a LARGER AMOUNT for the agency over a LONGER PERIOD OF TIME at AN INTEREST RATE HIGHER THAN THE SELLER COULD ACHIEVE on his money if he received cash AND LESS THAN the buyer could finance (if financing is even available) from an outside entity.

The key is in establishing an agreement that calls for and requires a solid liquidity rate for the agency over the entire period of time required to sponsor the buyout. LIQUIDITY DEFINES WHETHER THE AGENCY HAS THE CASH TO MEET ITS OBLIGATIONS TO THE SELLER.

Agency Consulting Group, Inc. has employed an Liquidity Analysis Tool for over a decade to assure sellers of the buyers’ ability to make the payments to the seller. Employing this tool and codifying its use in the Agreement of Sale are the two keys to the easy payout for buyers and stress-free retirement for the sellers of insurance agencies.


Whether the sale of stock or an agency is done internally to a family member or staff members or done externally to a friend or agency buyer, you MUST have a legal agreement. Besides the price and terms and standard commentary about non-competition and non-piracy, it is important to identify within an agreement what would happen if the buyer doesn’t live up to his agreement. This is not personal nor an affront. It doesn’t mean you don’t love your children or that you mistrust your next owner. It is simply defining in a signed agreement what is expected and the ramifications of non-performance.

The needed component of the Agreement must address the requirement of a monthly Liquidity Audit on the agency’s balance sheet with the requirement that the Liquidity Ratios of the agency achieve either specific minimum levels or do not fall below the liquidity of the agency at the time of the sale. Ramifications of the violation of the Liquidity Ratios range from a request to self-correct the ratio, to a moderate level of requiring consulting intervention to strengthen the agency’s liquidity. However, if liquidity remains in a ‘Red Zone’ for over three months, the Agreement calls for potential seizure of the agency for re-sale to satisfy the obligation to the retired owner.


Upon the sale or assumption of control of the agency, the agency is required to send its Balance Sheet to Agency Consulting Group, Inc. (or to another selected auditor) for the calculation and validation of liquidity ratios. This is a very inexpensive tool employed to assure the seller of the continued ability of the buyer to make the cash payments to the seller each month.

If the audit verifies the liquidity ratios that prove the agency’s ability to make its continued payments an e-mail is sent to both the buyer and seller verifying this fact each month. If the Liquidity Ratios begin to deteriorate, the buyer and seller are so notified. If the Ratios continue to deteriorate the buyer is offered consulting services to correct the problem. If the Ratios do not recover, the buyer has the choice of finding the money to pay off the seller in total or will have the agency seized to be re-sold to sponsor the seller’s amount due. Any value to the agency beyond that due the seller becomes remaining value to the owner.

Whether the buyer is family, staff, friends or an outside agency buyer, the combination of the Agreement terms and the Liquidity Audit comprising the Liquidity Analysis is a means by which a retiring owner is assured that the buyer will maintain the ability to make payments to the seller.

Since a buyer will not have to seek higher cost outside funding two things happen, 1) the excess interest is available to use as a part of the higher purchase price, 2) since the buy-out will likely be a cashflow issue payable over a longer period of time, the total purchase price paid to the seller will be higher than that of a cash payment.

The Liquidity Test and Audit do not verify the honesty and integrity of the buyer of insurance agencies. If poor choices are made by the seller bad things might happen regardless of the liquidity ratios of the agency. But if the buyer is of the quality and integrity at least equal to the seller, the Liquidity Analysis will verify and validate that the agency will have the cash to pay the seller throughout the buy-out period.