The last item we discussed on valuing an insurance agency was seller's discretionary earnings. Now we will move on to our third factor.
3. SELLER'S TRANSITION PLANS
The seller’s transition plan is one of the most important factors in valuing an independent insurance agency. Owners are often surprised when I tell them this, unless of course, they have already bought an existing agency themselves. We have seen many deals die because either the seller didn’t have a transition plan, meaning they didn’t know what they were going to do after they sell the agency, or their plans were simply to retire the day the agency was sold. We have also seen deals die where the seller didn’t have a plan and refused to sign a non-compete agreement, which is always automatically a deal killer.
The importance of having a transition plan is to help confirm to the buyer that you are willing to stay on board for a period of time to help ensure a smooth transition without a loss in retention or customer service. An agency seller who waits until the day they are ready retire has very few potential buyers. Anytime someone makes a major investment they, of course, want adequate returns, but also want to minimize their downside risks.
The best way to minimize risks in an agency acquisition is to keep the seller on board for an interim period of time. During this transition period the seller will most often help acquaint the buyer with the local markets, help grow the business, introduce the buyer to their insureds and underwriters to help retention, as well as teach the buyer any specialties agencies may have such as a niche market in USL&H or aviation insurance, which require additional training The key here is that the buyer is purchasing more than just the book of business; they are also buying the agency seller’s knowledge and skills that helped grow the business.
In order to maximize the value of an independent insurance agency the seller should be willing to stay on board for three to five years. This is especially true when selling to larger agencies and brokerages, as well as buyers without an existing local presence. Many of these buyers are looking for agency sellers who are willing to become partners and thus stay on for a minimum of five years.
3. SELLER'S TRANSITION PLANS
The seller’s transition plan is one of the most important factors in valuing an independent insurance agency. Owners are often surprised when I tell them this, unless of course, they have already bought an existing agency themselves. We have seen many deals die because either the seller didn’t have a transition plan, meaning they didn’t know what they were going to do after they sell the agency, or their plans were simply to retire the day the agency was sold. We have also seen deals die where the seller didn’t have a plan and refused to sign a non-compete agreement, which is always automatically a deal killer.
The importance of having a transition plan is to help confirm to the buyer that you are willing to stay on board for a period of time to help ensure a smooth transition without a loss in retention or customer service. An agency seller who waits until the day they are ready retire has very few potential buyers. Anytime someone makes a major investment they, of course, want adequate returns, but also want to minimize their downside risks.
The best way to minimize risks in an agency acquisition is to keep the seller on board for an interim period of time. During this transition period the seller will most often help acquaint the buyer with the local markets, help grow the business, introduce the buyer to their insureds and underwriters to help retention, as well as teach the buyer any specialties agencies may have such as a niche market in USL&H or aviation insurance, which require additional training The key here is that the buyer is purchasing more than just the book of business; they are also buying the agency seller’s knowledge and skills that helped grow the business.
In order to maximize the value of an independent insurance agency the seller should be willing to stay on board for three to five years. This is especially true when selling to larger agencies and brokerages, as well as buyers without an existing local presence. Many of these buyers are looking for agency sellers who are willing to become partners and thus stay on for a minimum of five years.