Determining when and how to transition a business is never an easy decision, but more models exist today that match a variety of circumstances.
Most independent insurance agents choose the path of independent business ownership because of the flexibility it offers, the opportunity to be your own boss and the ability to run the business as you see fit, from staffing to marketing to the hours worked. These are clear benefits. But, when it comes to retirement or succession planning, the path isn't as easy to see.
Today, there are several ways to hand off an independent agency. Some offer fast exits, and some happen over time. The path you choose depends on the level of financial income you need to retain in the future. It may also depend on any staff you employ, overhead costs, the current health of the company, book of business and other factors.
Here are three exit strategies to consider:
1) Sell the business outright. Selling the business outright may seem like an easy answer. It provides near-immediate payback and offers an opportunity to retire or start a new business. But the process of selling a business can be daunting. As the seller, you can either sell it yourself or work with a third-party broker to manage the sale.
For many agency owners, both paths can be more complex than anticipated. It's critical to understand the value of your business and a proper sale price, which buyers offer the most value, and which offers reflect the least financial risk.
Some sellers prefer a one-time payment—just sell and go. This is attractive but may mean that the offers are lower, reflecting the seller's desire for a transactional relationship. Other sellers want payments over time, which can introduce risk if the buyer defaults. These are better handled through third-party brokers who have lots of experience managing financed sales.
A hybrid combination of these—an earnout—is another popular financing option. In an earnout, the buyer pays some of the cost upfront and some of the cost later, after predetermined future earnings are met. Earnouts often require that the business owner stays involved in the business during a period of transition, which may not be ideal for agency owners who want to move on quickly from the business after a sale.
Lastly, another consideration is employees. Do you want to ensure their employment continues, or are you more interested in selling your book of business unrelated to the personnel? Often, this decision comes down to your employee relationships, performance and what the buyer is willing to purchase. Understanding the buyer's plans for your employees should be a factor in your decision-making.
2) Join a large franchise brand. Selling your agency into an insurance franchise brand is an option that offers some interesting opportunities, as well as some limitations.
Typically, owners join a franchise brand to remove or reduce many of the daily agency management tasks, such as lead generation, marketing and policy management. This is a great option for owners that want to stay involved, but don't really want to service policies after the sale.
One upside is that owners retain a percentage of every commission earned for each policy written. But the downsides include a sometimes hefty upfront franchise fee and a model that may be more attractive for owners who don't want to remove themselves completely.
This approach can reduce a lot of administrative tasks, deliver nice commissions and help owners and agents build their business—but it's important to understand any long-term requirements of the owner and staff before jumping into a franchise relationship. If you want to truly exit the business, or at least the daily management of it, franchising may not be the right path.
3) Sell to an independent insurance broker. Another model that is gaining traction is selling to an independent insurance broker. This model works similarly to a franchise model, but without the upfront franchise fee.
Like a franchise, employees of the independent agency become employees of the broker and have access to their carriers and products. This allows the agency to reduce many administrative and business oversight tasks, cross-sell products and build its book of business. The broker assumes responsibility for the management of staff, policy servicing, agency marketing, lead management and post-sale customer service. They may also offer their own staff training to advance sales and customer relationship-building skills.
The goal with an independent insurance broker is to shift many of the operational responsibilities to a third-party. This allows independent agency teams to focus on selling new products from more carriers and building strong relationships with customers, helping fill in any gaps in coverage to reduce client risk. This approach often leverages modern technology, including artificial intelligence (AI) and automation, to create sales opportunities. It focuses on building the business, but also on retaining clients by providing better insurance options and greater overall value.
While there are still fees involved, this model also allows independent agency owners to decide if they want to remain active in the daily business. If they don't, they can still retain ownership of the business and its revenue stream without being involved in the daily business.
Whichever path you choose, the first step is to decide what makes the most sense for your future, your family and your finances. Chances are you know other agency owners who are also considering exits or succession planning, or owners who have already completed their transition. Ask around and learn about their experiences, ask the hard questions, and meet with as many people as you need to in order to make a smart decision.
Determining when and how to transition a business is never an easy decision, but more models exist today that match a variety of circumstances—and chances are, one of them is the right fit for you.
Tasos Chatzimichailidis is co-founder and chief insurance officer at COVU.