Life After the Sale: Are You Ready for Retirement?

As the owner of an insurance agency, you’re faced with solving other people’s problems every day. There’s one problem, though, that is strictly your own: Are you ready to sell your business?

If you’re like many owners, you receive frequent phone calls urging you to sell your business—which makes you wonder how much your agency is worth. But that shouldn’t be your only consideration.

Suppose someone offers you $1 million more than what you think your agency is worth. Awesome, right? Actually, you don’t know. You have to do some planning to determine whether this figure will support future dreams.

The last thing you want is a gap between your current net worth and what you want it to be after you sell your agency. With a clearer picture of both the price you want for your agency and a realistic timeline for selling it, you’ll be in a better position to answer buyers when they call.

Determine Your Vision

Cementing a vision for the future gives you the opportunity to pick your head up from the day-to-day grind and remember why you’re working so hard. You have many factors to consider here, including where you’ll be living, what interests and hobbies you want to pursue and what your typical day will look like post-sale. The most successful transitions tend to occur when an owner involves their spouse or significant other in this stage.

Answer the following questions to get started:

  • Why would I sell my agency? Think about your options for selling. Do you want to transition your business to family or current employees, or do you want to sell outright? Consider factors like the culture of the acquiring firm, the time necessary for a successful transition and the legacy you want to leave behind.
  • Can I work for someone else? Do some self-reflection to decide whether you can transition from boss to employee if you plan to remain with the company for any time after the sale. Not everyone can or even wants to—many agency owners would rather forgo the financial upside in favor of maintaining their control and freedom.
  • How much longer do I plan on working? Know when you would like to retire or move on to the next phase of your life so you can work toward that goal during the planning process. The wealth you accumulate by working longer could impact your retirement lifestyle.

These questions are not easy to ponder, and there are no right or wrong answers. The only limits are your imagination and budget—and making sure your significant other is on the same page.

Know Your Number

Now that you can picture your future, it’s time to determine how much money you’ll need to support your vision over the long term. Your first step is figuring out your current net worth: your assets—such as real estate and investment accounts—minus your liabilities—such as mortgages. Typically, an owner’s most valuable asset is their agency [see sidebar].

Let’s go back to that fictional offer you received for your agency. Now that you’ve thought it through a bit, will that be enough to support your post-sale vision? How much money will you need to realize from the sale of your agency in order to retire comfortably?

Many factors impact the answer to this question, including:

  • Your age
  • Your life expectancy
  • The age when you want to retire
  • Additional financing to support the lifestyle you desire
  • Current investment portfolio balances
  • Annual savings prior to retirement
  • Inflation rate

A variety of tools can provide you with a good estimate of how long you’ll live, while others can help you calculate how inflation is likely to affect how much money you’ll need to live comfortably. That number can be so big that it’s shocking—those who begin to consider this well in advance of selling their agency will be the most prepared.

When the value of your agency isn’t as high as your desired selling price, you have to rethink your strategy. Perhaps you adjust your spending rates to fit within the amount you could get for your business today, or your retirement age and work a few years longer. Spend those extra years focusing on activities that will increase the value of your business so selling it can fund the life you want.

Remember the Taxes

The single most overlooked drag on an individual’s wealth is taxes. If someone offers you $10 million for your agency, that amount after taxes will probably land somewhere between $6 and $8 million. That’s a significant reduction in how much money you thought you had to fund your retirement.

Understanding how your agency is structured today—and what that means for current taxes, as well as the future—is critical. For example, if you’re a C corporation, your tax position is probably not as favorable as it would be if you were an S corporation. But if you’re planning to sell in the next 10 years, you probably don’t want to switch from a C to an S corp, since there’s a 10-year transition period in which you can eliminate built-in gains tax when converting. Thinking about transitioning your business well in advance of doing so will enable you to leverage the most tax-advantageous method possible.

Whether your agency is a sole proprietorship, partnership, LLC, S corp or C corp, understanding the ins and outs of the relevant tax laws is equally critical to structuring the deal effectively. Every transition approach has different tax consequences. Consider the tax implications of some common deal structures:

  • Asset sale. Choosing this type of option takes you out of the business immediately and entirely. The tax consequences are still a consideration, though, because there might be a large capital gains tax bill in the year of the sale.
  • Consulting. A consulting agreement provides a steady flow of income for a certain period of time. This can be well suited for those who want to continue working, but the income from this arrangement is typically taxed at ordinary income tax rates, which are higher than the capital gains rate.
  • Installment agreements. The most common arrangement involves a cash-down payment of 60-80% of the purchase price. The remainder is earned out over time, usually three to seven years, adding to your projected cash flow. You are only taxed on the amount you receive in any given year, but you risk your client base leaving or the buyer failing to make payments as promised.

Note, too, that taxes and tax rates vary between states. If you live in California, you’ll face steep income tax rates; Florida, by contrast, is one of a handful of states with no state income tax. And in addition to federal, state and local income tax, you also have to consider estate, inheritance and gift taxes.

Many agency owners believe they will net enough from the sale of their business to fund a very comfortable retirement, but that’s not always true. You don’t even know what you’re trying to fund until you and your spouse have a unified vision of the future. Only then can you take an in-depth look at your finances and establish a financial plan that will secure the future you desire.

A buyer will be calling soon, if they haven’t already. Before you jump on that great-sounding offer, you need to know what you want your life to look like after the deal. The earlier you start the financial planning process, the more prepared you will be to navigate the sale process.

Jim King, CPA, CFP®, is an owner and wealth manager at Balasa Dinverno Foltz LLC (BDF), where he leads the commercial insurance professionals practice group. He uses his understanding of the insurance industry to help insurance professionals maximize their prime earning years, develop a discipline around saving those earnings and put a plan in place to best utilize assets.

Important disclosures: Past performance may not be indicative of future results. BDF’s investment and wealth management strategy may not be profitable, suitable for you, prove successful or equal historical performance. BDF does not provide legal, tax, insurance, social security or accounting advice. BDF’s current written disclosure statement discussing advisory services and fees is available for review at or upon request. 

What’s Your Worth?

The amount you realize from selling your agency will help fund your retirement, but you need to be practical. There may be a large gap between the amount you expect your business to be worth and what it’s actually worth.

To get a ballpark value of your agency, consider that value is a multiple of profit. In the insurance industry, this multiple usually falls between 4.5 and 7.5 times profit, depending on the size of the agency and the client makeup. Note, too, that while this number is great for initial planning, it’s a good idea to engage a valuation professional for an honest assessment when you get serious about selling.

It’s important to know this number early because the more time you have until retirement, the better your chances of closing the gap. When you understand your net worth, you secure a snapshot of where you are today—a good benchmark to compare with your vision of the future to determine when you will have the necessary assets to fund the retirement of your dreams, in the timeframe you wish. —J.K.