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Doing Succession Planning The Hard Way

How an industry bank saved a family-owned agency from the worst-case scenario.
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As long as baby boomers have owned independent insurance agencies, they've heard a drumbeat on succession planning from merger & acquisition consultants, financial advisories and bankers: “Do not wait. Get an agency valuation. Create a written perpetuation strategy. Give yourself a five- to seven-year runway to stage an orderly exit. You'll thank us later."

Do principals listen? Some do. But most wait.

Waiting can bring uncertainty and chaos. And Exhibit A is Avery Moore, now president & CEO of ECI Insurance in Piedmont, Oklahoma. After an emotional ride, at age 32, Moore took ownership of the agency last year.

The agency is a family legacy for Moore. Her grandfather, Earnie Cornelius, returned from the Korean War and founded ECI in 1964. Back then, Piedmont was a town of 5,000. He said he wanted to be a big fish in a small pond, Moore says. Today, it's a bedroom community for Oklahoma City and the county is growing fast.

Cornelius' son, Scott Cornelius, later took over the firm along with his sister Denise Johnson, Moore's mother. Decades later, there was the next generation to consider: Moore and her cousin were in line for ownership.

Moore was skeptical about insurance as a career at first but fell in love with it while working at another independent agency. In 2014, she bought her mom's book—Johnson is now CEO of Big I Oklahoma—and started producing.

“Being family owned has been an incredible source of pride for our family," Moore says. “It was always understood that I would take over the agency with my cousin. But there was nothing in writing. My uncle [Scott Cornelius] said, 'Nothing is going to happen to me, and I'll retire when I'm 67—and you guys can take it over.'"

Hard Conversations

Moore joined a local women's executive group. When she presented what she thought were her major business issues, the group pushed back with a bigger problem.

“They said, 'The problem you're presenting is not the problem. There is nothing actually tying you to the agency. There is no buy/sell agreement,'" Moore recounts.

The issue wasn't on Moore's radar. “It was the first time I heard the terms 'buy/sell' and 'first right of refusal,'" she says. “With our family, everything had just sort of worked out. Nothing bad had ever happened in the past. When I heard that from the group, I had to have a conversation with my uncle."

Moore asked her uncle for a written agreement, but he was reluctant. “He felt like I was trying to push him out—but I was trying to protect my work," she says.

The conversation continued for four years. They finally signed in May 2020. The plan called for Cornelius to retire at age 67. Moore and her cousin had first right of refusal on the agency's book. They would be 50-50 owners. The purchase price would be 1.5 times the commission value—perhaps half of what ECI Insurance might fetch in the open market. In addition, Cornelius would fund a 15-year note at a 4% interest rate.

Why an owner-financed loan? Cornelius was uninsurable, Moore explains. He had been treated for skin cancer in years past, so his retirement plan was the value in the agency's book.

In sum, Cornelius offered Moore the same deal his dad offered him. “He wanted to give us the same opportunity," Moore says. “He was an incredibly generous person."

Indeed, such a low sale price and attractive financing terms are typical in family succession plans. Owners seek to continue the local brand, customer loyalty and family agency legacy, which in the case of ECI Insurance is a legacy spanning seven decades.

Tragedy Strikes

Moore's uncle's generous terms never came to pass. There would be no 15-year loan window. In early 2021, he suddenly passed away from cancer. The family was forced into finding another way to keep the agency in the family.

Two days after the funeral, Moore and her family sat down with lawyers. “It was the worst-case scenario," she relates. “My aunt was grieving the loss of the love of her life. Attentions on business got lost along the way. I was negotiating the best benefit for myself … but to do that in the middle of grief … I wouldn't want anyone to have to go through that."

Moore said the succession plan wasn't clear on a transition in the event of a sudden death—or how to treat contingency income, profit sharing or customer fees in agency revenue.

Meanwhile, the agency team needed attention. “It took five months of me trying to hold on to my employees," Moore says. “It felt like 'Top Gun'—trying to hold on and pull out of a nosedive just to keep the team and business going." Cornelius had hired two staffers a few weeks before he died.

Financing Travails

In April 2021, Moore began to seek financing to buy out her cousin's first right of refusal and assume ownership of the entire firm. Her agency friends gave her names of bankers for loans. “Our financial health was incredibly good," she says. “I was so confident walking into that first bank."

For collateral, the banker asked about ECI's hard assets. He wasn't as interested in commission revenue or customer lists. After the fourth failed meeting, Moore sat on the curb outside the bank and cried.

“I said, 'I don't know how I'm going to do this,'" she says. “For a female entrepreneur like me, there was so much head trash going on at the beginning: Can I do this? Can I lead my team? Will they follow me? Can I make it successful? All the doubts were going on in my head that I can't do it. But I told myself I am taking this opportunity."

Moore approached a total of eight banks. It was a “no" from all. Finally, taking her mom's advice, Moore called InsurBanc.

Scott Freiday, division director at InsurBanc, told Moore he had helped other agencies transition through an unexpected death of a principal. And he thought he could help ECI Insurance.

In fact, Freiday relates, “All of the agency's credit metrics were solid. It was a third-generation owner, a strong, well-established agency, a great market, and an excellent book of business. We could do all the financing they were looking for, including buying out the cousin and establishing a line of credit."

“[Moore] was well experienced and clearly capable of running the agency," Freiday says. “Avery spent a significant amount of time working at the agency. It was clear she was the one to take over. She had the experience and the mentorship there."

The InsurBanc deal closed in 30 days, and the agency was now wholly owned by Moore. Looking back, she is still amazed. “I had just turned 32 and I'm borrowing millions of dollars," Moore says. “I don't know many 32-year-olds who can borrow millions of dollars."

“InsurBanc is like the Oprah Winfrey of lending—they've got lots of wisdom," she says. “They do all our banking. They're literally almost an extension of our agency because now we have a banking relationship. We didn't have that with our local bank."

Looking Ahead

A year after the sale, the firm is doing well, with 15 employees. Last year the firm grew commission revenue by 11.5% and year-to-date gross revenue 2022 is up 18%. Moore says she's joining an agency cluster to generate more growth. The book is more diversified as well, including life and health products.

“I have an incredible team," Moore says. “We didn't lose a single employee during all of that. That was one of my biggest fears. Those are the people I show up for every day."

“I miss Scott every day," Moore continues. “We talk about him all the time. My uncle and I were incredibly close. He was my mentor. At least once a week I still try to text him."

“Sales is so easy compared with agency ownership and management," she adds.

Peter van Aartrijk is principal at insurance branding firm Aartrijk

Family Planning

Agency principals shouldn't rely on a handshake agreement to set up ownership for the next generation. Here are five ways to plan for the future today:

1) Bring it up. “I loved my uncle, but we avoided the hard conversation" about a written succession plan, Moore says. Be clear, too, about what happens in the event of a serious illness or death.

2) Get your personal finances in order. Living above your means can dissuade bankers from loaning you money. “Set yourself up for financial success," Moore says, noting her only significant personal debt was a home mortgage while she was looking for a loan. “I cannot stress being financially sound enough."

3) Go to experts. “I would do things so differently today," Moore says, reflecting on the string of failed meetings with Main Street banks. “Go to a lawyer who understands independent agencies. I would have my own lawyer review the buy/sell." She notes that she wishes she had started with InsurBanc for a succession loan versus leaning on local bankers who discounted the value of her agency's book.

4) Start early. At least five years is a smart runway to start putting together a perpetuation plan. Staging an owner's exit can begin the process of gradually transferring ownership to the next generation of agency principals while providing economic benefits to all parties and building agency value, says Scott Freiday, InsurBanc division director.

5) Ask about financing options. Internal perpetuations are an excellent way to continue an agency's legacy. “Creative financing solutions are available to work with agency principals to structure lending terms to meet their tax strategies," Freiday notes. “Some agency principals may look for a combination of cash at closing and holding a note payable over time that earns interest and provides income during retirement." —PvA

Wednesday, November 30, 2022
Perpetuation & Valuation