All the Agency World’s a Stage (of Perpetuation)

A growing trend is the “staged perpetuation” — transferring ownership of the agency in phases, rather than selling it entirely at one time. Not every agency principal is aware of this viable alternative to selling outright or how it works.

Source: Scott T. Freiday, InsurBanc | Published on June 15, 2023

Insurance agency perpetuation

Many independent agency owners have found great success in perpetuating their agency — that is, transitioning ownership to an individual or a group who works within the agency.

A growing trend is the “staged perpetuation” — transferring ownership of the agency in phases, rather than selling it entirely at one time. Not every agency principal is aware of this viable alternative to selling outright or how it works. Here are some of the benefits of a staged perpetuation:

The owner can stay involved but with a transition plan in place. Agency owners often want to step back from work as they reach the end of their careers. Yet they aren’t quite ready to move away entirely from agency ownership.

Maybe they want to cut back on their day-to-day involvement, taking on the role of CEO or chairman for the agency while a president runs day-to-day operations. Staged perpetuation can allow the owner to throttle back but continue to benefit from ownership and help the agency grow by providing strategic advice.

One issue that agency owners need to consider is their “runway” for leaving the agency — that is, how much time they’ll take to lift off and fly away from the business. Some underestimate that time period. A staged perpetuation allows the agency principal to have a runway of their choosing. At the same time, perpetuation locks in a buyer, rather than leaving that question open for the future.

A staged perpetuation can prevent seller’s remorse. I’ve seen agency owners sell their agency quickly after receiving an attractive offer. But agency owners who sell their agency outright (either to a private-equity buyer, another buyer, or to an internal buyer through perpetuation) often miss their involvement in the business.

Sometimes these sellers then buy or start another agency. But that route, while feasible, might not be as desirable as a gradual sale of their agency over time. Staging a perpetuation allows owners to leave in their own time.

 The seller can “groom” future owners. Not all buyers will be ready to take over an independent agency from a standing start on day one of ownership. It stands to reason that they need education and mentoring/coaching in how to run the agency. Who better to prepare them than the current owner?

A staged perpetuation keeps the original owner in management, but transitions responsibilities over time. Meanwhile, the owner acquaints the buyer(s) with various roles of agency leadership and ownership.

Growth in the agency’s value can lead to a greater wealth. What some principals don’t realize is that, by continuing to own a share of the agency, they benefit from its ongoing growth. Even though their ownership percentage diminishes with each year, their equity continues to yield cash flow and wealth creation. The bonus for them is that they have owners alongside them who have incentive to grow the business.

The buyer has a more affordable option to buy the agency. Rather than needing to come up with a significant amount of capital to purchase an agency outright, the buyer can use the staged purchase to take ownership of the agency in tranches. Staged perpetuation also can open up the potential for the seller to provide more of the financing than if the agency were sold outright.

The buyer and seller can preserve and enhance the agency’s culture. Successful agencies typically have a positive culture that provides opportunity for producers and staff as well as strong business results for the owner(s). When contemplating an agency sale or purchase, an agency principal and potential buyer may focus primarily on the financial elements. But intangible elements such as workplace culture can provide tremendous value and must be considered.

The perpetuation can diversify ownership. A perpetuation does not need to be limited to one seller and one buyer. Through perpetuation, the agency can diversify the makeup and number of owners, and also add skill sets.

Independent agency owners, and their motivated producers or staff who want to step up to ownership, can choose a staged perpetuation as a viable path. For the owner, net-net, doing the math on a staged perpetuation can mean a financial result close to or better than what a private equity offer could be, if it’s available.

About the author

Scott Freiday is senior vice president and division director of InsurBanc, a division of Connecticut Community Bank, N.A. He oversees the bank’s commercial lending and cash management operations and has nearly a quarter century of experience in domestic and international banking and financial services. InsurBanc specializes in financial products and services nationally for the independent insurance distribution community. Started in 2001 as a vision of the Big “I,” InsurBanc finances acquisitions and perpetuations and helps agencies become more efficient by providing cash-management solutions.