Like Desperado in The Eagles’ famous song, independent insurance agency principals “ain’t getting no younger.” That means two things: Retirement day is drawing closer for many of them, and there will be substantial opportunities for their younger peers.
According to the 2018 Agency Universe Study from the Independent Insurance Agents & Brokers of America, the average age of agency principals is 54. Further, more than one in seven of the 36,500 independent agencies in the U.S. is led by a principal age 66 or older. That translates to more than 5,000 agencies that have at least one principal past the traditional retirement age.
Many agency principals love what they do and want to keep going indefinitely. Many others, however, are starting to slow down their pace of work by coming in maybe three days a week. Some principals are simply tired from long careers and are ready to exit the business for new stages in their lives.
Of those who are looking toward retirement, the lure of high agency sale prices is a strong incentive. MarshBerry reported that agency merger and acquisition activity hit a record 625 transactions in 2019. Agency valuations have increased 15% since 2016, with average sale prices exceeding three times revenue at closing and the potential for them to reach four times revenue after earn-out. For an agency with annual revenue of $1 million, a $4 million check can be difficult for an owner to pass up.
Many principals, especially those in family-owned firms, would prefer to pass the business on to their children or sell to their producers. However, the industry as a whole is having difficulty attracting the younger generation toward its careers. Family-owned agencies are experiencing this as much as any others. Their college-graduate children are drawn toward careers in technology or finance, rejecting insurance as stodgy and boring.
This leaves the door open for those younger people who have chosen insurance for their careers to acquire agencies whose owners are ready to move on. With the right experience, planning and funding, these acquisitions will benefit both seller and buyer.
Experts advise that agents should have some prior experience running an agency before they go shopping for another. “If someone wants to acquire a preferred independent agency in the future, start an agency now so that you can be seen as a player with actual experience as an owner,” says Joe Totah of Strategic Agencies, LLC, the publisher of AgencyEquity.com. “These have the best shot to acquire an agency.” Dan Menzer of Optis Partners notes that purchasing an agency requires convincing the seller that the agent has the financial wherewithal and will take care of the seller’s clients, “both of which likely take a little more time to position yourself.”
Three to five years’ experience is the minimum an agency should have before buying another. Experience breeds knowledge. “Having a strong understanding of the financial and legal fundamentals of this business is critical,” says Sam Patterson of The Springtree Group.
Access to credit for the purchase is also essential. The buyer needs cash on hand for a down payment and operating essentials before taking on debt, Patterson says. They also must be able to sell the loan underwriter by showing that they have run the numbers and determined that the agency is a good purchase. For those who don’t have a long credit history, Marc Greene of General Insurance Brokerage recommends U.S. Small Business Administration loans.
Once the purchase has been completed, “A clear path to profitability needs to be observable,” says Patterson. Indeed, Greene sees the responsibility of managing employees and paying the bills as a test of character. Menzer advises hiring management and planning experts and warns against excessive optimism: “Unrealistic expectations of growth or the ability to cut expenses to greatness is never a recipe for success.”
The guidelines for an agency wishing to take advantage of the retirement boom are both simple and hard to follow. Menzer stresses developing expertise while building a strong financial condition. Ultimately, Totah offers the most straight-forward advice: “Get experience, build your savings, start an agency and maintain great credit.” These are the foundations for the success of an acquisition.