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Agency Financial Management

Agency ownership transition—Case study #2

Owner with desire and resources to perpetuate should weigh the options

By Tom Sukay and Paul Vredenburg

In the January issue we discussed a case study for a fictitious firm, Duncan and Associates, which was undergoing an ownership change. The firm's owners concluded that their best option was to sell to an external third party. The managing shareholder preferred an internal perpetuation, but the remaining shareholders were unable to finance the transaction.

This month we present a case study on another fictitious firm, TOBI Insurance Agency. TOBI, although similar to Duncan in size and makeup of business, has decided to take a different course of action—opting to perpetuate itself internally. Although TOBI is well situated to perpetuate internally, we believe the firm's owner should still evaluate all his options along with the risks and benefits for each strategy.

As we did last month, we will provide three perspectives: one from the agency owner; the second from Sukay & Associates, as the advisor; and the third from an independent third party, Assured Partners, Inc.

Background of TOBI Insurance Agency: The agency was founded in 1933. It has revenues of approximately $4.0 million and is structured as a sole proprietorship. It is located outside of a major metropolitan area in a desirable area near several economic and cultural centers. It has been built on personal service, and its staff averages more than 20 years of experience. TOBI represents many leading insurance carriers, ranking among the largest agencies in the United States for one of those carriers. The owner feels a strong sense of responsibility to the current staff.

The agency is owned 100% by a single shareholder who is in his early 60s. Several family members are involved in the business, including one of the owner's children. The agency has been very profitable for many years. The owner's situation is unusual in that he has adequately provided for his eventual retirement and does not need any of the proceeds from an internal or external perpetuation to fund his lifestyle.

Owner's Perpetuation Perspective: During the last decade, TOBI Insurance Agency has been approached by many potential buyers including all of the large publicly traded brokers and several banks. We have never considered a sale because these buyers could not adequately answer one fundamental question: How would an external perpetuation affect my customers, staff and my own career? What do they have to offer that we don't have within the current agency environment including additional markets, products or technologies? It always seemed ironic that most offered the ability to conduct my business in the same manner as we had done prior to the deal. If that was the case, why would we consider doing a deal?

I truly love the independence of owning my company and I look forward to coming to work and meeting with clients. Owning an agency has allowed me to be financially independent. However, the ownership of the company must ultimately pass along to another party, just as it passed along to me 36 years ago. My current intention is to sell the business to a family member. The amount of the sale and the manner of payment is not as important to me as my ability to maintain the independence of the agency. The most important issue is whether the family member is ready to grow and manage the business. It is my responsibility to act as mentor in order to continue the legacy of the agency.

Sukay & Associates (Advisors) Perpetuation Perspective: TOBI Insurance Agency enjoys favorable long-term perpetuation options. Most agency owners who might want to perpetuate internally are forced to perpetuate externally because they face at least one of these major hurdles:

1. They have no obvious successor in the agency. No employee has the skills required to run the operation and solicit or retain new and existing clients.

2. The current owner does not have the financial resources required to maintain his or her lifestyle throughout retirement and is unwilling to accept a lower valuation from internal buyers.

3. As a result of the tight credit markets, internal buyers cannot obtain outside financing to buy the agency or are unwilling to provide personal guarantees. As a result, the owner has to accept an unsecured note from the buyers.

TOBI Insurance Agency is not burdened by any of these restrictions. We would expect the owner to transition ownership to a family member in the next five years. We would then expect that the current owner would continue to be actively involved in the business well beyond that time period.

One of the few concerns we have is whether the new owner has the ability and willingness to assume ownership risk. Just because a family member seems to be the likely successor doesn't mean that he or she is willing to assume the headaches and responsibilities of ownership. We would assume that the agency would be transferred at less than fair market value. If given the option, would the family member choose to buy the company at a discounted price or prefer to share in the sale proceeds and have his or her career protected by an employment agreement? We also recommend that the owner consider all of the family dynamics if the company is transferred at less than its fair market value.

In an external perpetuation, the owner is forgoing the rights to future cash flows in exchange for the shares of the company and an upfront payment. At this point, the market risk is shifted from the seller to the buyer. If the seller has confidence in the management team, he or she always has the ability to retain ownership interest and stay involved in an oversight role. In this situation, it is extremely important that all key employees execute non-compete and non-solicitation agreements. The owner can enjoy the benefits of a reduced work schedule and always retains the right to sell the agency in the future.

AssuredPartners, Inc.—Third Party Potential Buyer's Perpetuation Perspective: Many agency owners wish to perpetuate the agency, and in many cases the most successful perpetuation plan is to a child or family member. In those cases, the ownership has a vested in interest in making the transition successful. The agencies that fail tend to be internal sales to non-family members and the selling party does not dedicate the appropriate investment in time to make that party successful.

As a buyer of firms, we would be interested in working with firms like TOBI. The key reason is that the management team has a transition plan and we would benefit from having the next generation involved to keep the agency growing. I like to ask the following questions of sellers that want to perpetuate internally to make sure they are committed to that plan:

• Can you cede control to the next generation and allow them to "manage" you and the agency?

• Are you willing to take a 25% to 40% discount on the value of the firm to see it in the hands of the next generation?

• If the asset is a key to your retirement, do you feel good about putting that pressure on your child?

• Are you willing to invest the time to make the transition successful?

• Would the next generation benefit from being part of a larger organization or would those individuals like a role in a larger organization?

• Will you be able to grow if the agency is saddled with perpetuation debt? The debt will consume dollars that could otherwise be used to hire new producers, invest in systems, etc.

The owner must receive adequate answers to all of these questions to be successful. Internal perpetuation should be commended but the effort to achieve this transition is significant, all while receiving a discounted value for the firm you created.

AssuredPartners, Inc., would allow the next generation to control their destiny by maintaining operating autonomy and provide financial protection for the current ownership. We believe that you have the best of both worlds in that the next generation would have the capital to grow in their marketplace and assist in developing the direction of the company.


It is commendable that TOBI's owner wants to cede this agency to the next generation. The only issue is that most owners are making the assumption that the next generation wants or can handle the pressures and responsibilities of ownership. Pressure changes the way people make decisions. It is an awesome responsibility to continue a legacy. It is sometimes more pressure than anyone is willing or able to assume.

We ask a simple question of each agency owner who intends to perpetuate to a legacy. We create a hypothetical situation. The agency is valued at $10 million and the owner is willing to sell it to a legacy for $6 million. Most people would find that transaction very appealing. Our question is: Would the legacy prefer to buy the agency for $6 million and be responsible for the future payments to the owner or would they prefer if the owner sold the agency for $10 million and shared $4 million of the proceeds? You would be surprised by the answers to that question.

The consequences of failure are profound because no matter what happens to the business you can never walk away from your family. Maybe that is why internal perpetuations to family members are more successful. Or maybe it is the fear of what Thanksgiving dinner will look like for the rest of their lives.

The authors

Tom Sukay is president of Sukay & Associates, Inc. (, a financial advisory firm that represents insurance brokers, banks and other financial services companies. Paul Vredenburg is senior vice president of AssuredPartners, Inc. (, which was formed in March 2011 by two former Brown & Brown Inc. executives.


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