Selling an Independent Insurance Agency

Every owner eventually reaches the point that they are ready to transition their agency. The decision could be driven by positive circumstances (to pursue a new business opportunity or hobby, spend more time with family, travel, or diversify their assets). Or unfortunately, the decision is often for undesirable reasons (health issues, family circumstances, or burn out).

Successfully selling an independent agency requires diligent planning and execution. With proper planning you can maximize the value you receive and ensure a smooth transition.

Preparing Your Agency For Sale

Assess your agency's financial condition

Has revenue increased or declined over the past 3 years?
What percentage of your revenue is CPC?
Have profits increased, decreased, or remained steady?
How do your key financial indicators compare with industry averages?

Address any legal, operational, or compliance issues

Are there any liens or encumbrances?
Are there unfunded liabilities or unpaid taxes?
Are there any pending legal actions?
Do you have staff being paid as 1099 when they qualify as W2?
Are you a member of a network/cluster?
- If so is there a breakup fee?
- Does your agreement include any restrictions on selling your agency?

Initial Action Steps

Gather your agency financials & carrier production reports – 3 years
Aggregator/Network/MGA contracts
Engage an M&A Advisor
Get a Market Value Analysis
Determine your timeline, ideal buyer, and your desired involvement level post-sale

Estimating Your Agency’s Market Value

In the past, discussing agency values, a multiple of revenue or commission was often quoted, typically ranging from 2x to 3x.

However, in recent years, the focus has shifted to a multiple of EBITDA, which stands for Earnings Before Interest, Taxes, Depreciation and Amortization.

EBITDA = Earnings – (Interest + Taxes + Depreciation + Amortization)

Multiples of EBITDA for insurance agencies typically fall into the 4x – 8x range depending on revenue along with several other factors.

In smaller agencies Seller’s Discretionary Earnings (SDE) may be used. In it’s simplest terms SDE is EBITDA + 1 owner’s salary, perks & non-recurring expenses.

Here are a few of the many factors affecting the multiple:

Revenue
Geographic Location
Agency Growth Trend
Quality of the Book of Business
Carrier Relationships
Profitability
Customer Demographics
Retention Rates
Number of Policies per Customer
Systems
Staff
The Economy
Types of Buyers

To get an accurate value of your agency, talk with someone who is willing to dig in and get to know you and your agency. There are far too many variables for a one-size-fits all formula.

Learn Your Agency's Market Value

Request a Market Value Analysis

Targeting Your Ideal Buyer

Prior to developing your go-to-market strategy, you’ll want to identify the ideal buyer for your agency.

The primary types of independent agency buyers include:

Local independent agency owners looking to grow through acquisition
Current captive agents looking to go independent
Larger regional and national brokerages
Private equity backed firms
Family offices

There are pluses and minuses with each of these buyer types.

Answering the following questions will help zero in on the right type of buyer for you:

Is you goal the highest sale price?
Is maintaining your legacy and taking care of your staff equally or more important that price?
Do you want to remain involved in the agency after the sale?
Do you want or need to sell quickly?
Are you willing to finance a portion of the sale price and carry a seller note?

After identifying your ideal buyer, you can craft a marketing strategy that includes messaging that will resonate with them and utilize marketing channels that are most effective for reaching them.

Confidentiality and Discretion

Maintaining confidentiality throughout the selling process is critical. You do not want your employees, customers, or competitors to learn about the sale before you’re ready to announce it.

Marketing a business for sale is very different than selling residential or commercial real estate. In a business sale scenario “teaser” marketing materials that don’t identify you or your business should be used for initial promotion. Only after signing a non-disclosure/confidentiality agreement should prospective buyers receive specific information that would reveal your agency’s identity.

With a DIY approach maintaining confidentiality becomes much more challenging. Confidentiality is one of the reasons most agency owners engage a professional mergers & acquisitions advisor.

Screening Prospective Buyers

This is often the most time-consuming portion of the agency sales process. All prospective buyers should be thoroughly screened for compatibility and financial capability. Additionally, they should sign an NDA prior to receiving details on your agency. This prevents you from wasting time with unqualified tire-kickers and reduces the risk of word getting out that your agency is for sale.

Negotiating the Deal

As potential buyers express interest in your agency, the negotiation phase begins. At this step in the selling process you need to remain flexible. When sellers dig in their heels and refuse to engage in some give and take, they usually end up with an agency that remains on the market and potentially never sells.

There’s a popular saying when it comes to M&A: “You can have your price & my terms, or my price & your terms, but not both”.

Having an independent M&A advisor with an understanding of insurance agencies negotiating on your behalf has multiple benefits. In addition to removing emotion from negotiations, they’ve also done this before and can anticipate objections, questions and concerns.

Additionally, when you and the buyer reach a stalemate, an independent intermediary can play “bad cop”, enabling you to maintain a positive relationship with the buyer (keep in mind, there’s a good chance you’ll have ongoing contact with them for anywhere from several months to several years depending on the type of buyer and deal terms).

Letter of Intent (LOI)

A letter of intent is a (mostly) non-binding document that aims to establish agreement between the buyer and seller on the significant terms of the transaction. This step is taken before investing further time and money into due diligence and final document creation.

Points often addressed in an LOI include:

Purchase price and terms (including ie. will you offer seller financing, will there be an earnout, etc.)
Non-Compete – how long will you be barred from competing with the buyer
Post-Close Consulting – how long will you stay on and in what capacity after the transaction is completed
Exclusivity – how long will the buyer have the exclusive right to negotiate the deal without you engaging with other prospective buyers

Due Diligence

Once a tentative agreement is reached via LOI, the due diligence process begins. Buyers will scrutinize every aspect of your business, from financial records to operational procedures.

Due diligence is mentally and physically exhausting. Both the buyer and their lender will request a substantial amount of information about your agency.

Here is a partial list of the items you’ll need to have readily available:

Tax returns (3 years)
Income statements & balance sheets (3 years)
Accounts receivable/payable lists
Inventory list (including values)
Real estate lease(s)
Operational documentation
Staffing records
Copies of contracts and agreements
Customer information
Carrier lists & reports
Marketing & sales materials
Business licenses & registrations
Business formation documents

It is a best practice to establish a “virtual deal room” which is an encrypted data sharing portal, to upload your sensitive documents. This will enable you to share information with the buyer and their lender in a secure, controlled manner.

The Sageview Agency Exit Roadmap

01.

Price

Price Your Agency & Execute Agreement

02.

Prepare

Marketing Materials & ID Potential Buyers

03.

Market

Buyer Outreach & Screening

04.

Negotiate

Deal Terms & Due Diligence

05.

Close

Coordinate Closing Process & Documents

Frequently Asked Questions

1) How long does it take to sell an insurance agency?

There is no way to accurately predict the time required to sell an agency due to the number of factors that can affect this process. The timeframe from beginning to end can range from a few months to more than a year. If you are just selling a book of business the timeline is typically much shorter. Properly preparing the agency for sale, being reasonable on price and terms, and providing clean financial data can help you sell more quickly.

2) What are the legal aspects of selling an agency, and should I consult an attorney?

It is highly recommended to consult an attorney who is experienced in business sales transactions (M&A) to guide you through the legal aspects of the process such as contracts and agreements, any legal issues that arise during due diligence, and the closing process. we can provide a list of experienced M&A attorneys if you’d like.

3) What is the difference between a stock sale and an asset sale?

In a stock (equity) sale, a buyer purchases the stock of the business; this includes all the assets and liabilities. In an asset sale, the seller remains the legal owner of the business entity post-transaction and a buyer purchases specific business assets (tangible and intangible) such as equipment, goodwill, phone numbers and customer lists. Each will have different advantages and disadvantages for both you and the buyer. You should consult with legal and tax professionals for tax implications and legal considerations specific to your situation.

4) I own the real estate the agency operates out of; do I sell it with the agency?

You have a few options including selling it along with the agency, keeping it and renting it back to the buyer, or performing a sale-leaseback where you sell it to a third-party and the buyer of the business simultaneously enters into a lease with the property buyer.

5) How long should I expect to stay involved after the sale?

The length of time sellers stay involved after the sale is negotiable and varies greatly, from a few months to a few years. Factors include the size and nature of the agency, your role and relationships with customers, the type of buyer and their needs, and your needs and interests. We will discuss your ideal post-closing involvement level and focus the marketing and buyer screening process to attract the type of buyer that best fits your desired outcome.

6) Will I have to provide seller financing for a buyer?

Today most agency sales include some form of seller financing and/or earn-outs. A key component of a business sale is how the buyer plans to finance the transaction. One of the first questions many buyers will ask is if you will finance a portion of the sale. Many will include it as a non-negotiable in their LOI. With seller financing you receive a down payment and then periodic, usually monthly, payments until the buyer pays you in full. While there is risk associated with seller financing, proper due diligence (including having your accountant help you pre-qualify the buyer), deal structuring, and legal documentation can reduce the risk substantially.

7) What are the taxes associated with selling an agency?

The purchase price of your agency and the allocation of that price towards physical assets vs. goodwill dictate how much you will pay in taxes and affect the buyer’s taxes as well. Often owners can treat all or a portion of the sale of their agency as capital gains. The structure of the deal can also impact your tax situation. This said, we highly encourage you to contact a tax professional before and after the sale of your agency for details, exceptions, and expert advice specific to your situation.