Internal Perpetuation Versus Sale of the Agency

By Catherine Oak and William Schoeffler Jr.

Death and taxes are as inevitable as life itself. Yet most fail to plan for the inevitable. An ounce of early preparation is worth a pound of last-minute maneuvering. Thinking through the eventual exit ahead of time allows you to build the systems and people equation that takes time. Investors look for businesses that run themselves and do not depend on an owner’s brilliance or consistency in order to profitably function. An Oak & Associates survey found that only 20% of agencies had a long-term plan, which was mainly a purchased life insurance policy.

There are two main ways owners perpetuate. The first is internally to members of the owner’s family or to loyal employees. The second is to an outside investor, such as another independent agency or a national broker with private equity monies.

Internal Perpetuation Route

The usual route for internal perpetuation is for the owner or owners to bonus or gift some stock to the key people. For the remaining stock, there is usually a note promising to pay the owner their value over time, which is based on the firm’s fair market valuation and paid over seven to 10 years. This is compared to a third-party sale, which typically pays out over one to two years, or in some cases, today can be paid upfront. Remember the firm needs to be profitable into perpetuity if owners expect to receive their full value as it is paid from these earnings.

A popular option is a Grantor Retained Annuity Trust (GRAT), however, the owner cannot die within the first five years. If that is reasonably certain, this option allows the payments to be tax deductible to the agency. The candidates can be family members or key employees. If the former owner does not survive the payout period, the entire value reverts back to the owner’s estate.

Sale of the Agency

There has been something of a gold rush in selling to private equity firms. Buoyed by low interest rates and salivating at the consistent earnings in insurance, private equity money managers have been rapidly consolidating the insurance agency industry over the last few years. This has made the decision for many clients to sell to a third party easier. Key employees and families benefit from large upfront direct bonuses and monetary gifts. This can reduce the payout period and uncertainty. Gold rushes do end, yet interest rates will continue to remain low for the next few years.

After exhausting internal perpetuation options, it is best to develop a great Agency Profile & Pro forma report to use in search of the right buyer.

The key is to find the best fit for the agency’s culture and book of business. It is also good for the owners to have representation, so word does not get out on the street and to ensure that confidentiality agreements are signed and the process is properly managed. In that way, the owners can still do what they do best, which is manage the firm and sell new business and handle existing key service aspects of their book of business.

What Assistance Should be Received

Good consultants do add a lot to the process and are there to paint the picture of what the agency is. They also properly screen the buyers so that the number of buyers approached is reasonable and the private confidential information of the firm is not placed in the hands of so many people. After the appropriate buyers are brought to the table and the offers are in, the consultant can manage the analysis of the letters of intent, negotiate price and terms and then can be there for the end of the due diligence process. When the final results come in, the consultant then helps manage why the data received may or may not match what was done in the Agency Profile and Pro forma report. These results then need to be negotiated.

The agency owner’s CPA and attorney are always involved. In addition, the consultant also helps with checking that the purchase agreement matches what was promised and some of the terms that are often typical from one deal to the next are checked. This includes the working capital requirement, agency errors and omissions liability tail coverage requirement, the settling of debts and also looking over the new employment agreements for the owners.


The perpetuation process of an agency is often not easy. It can be as simple as just doing a valuation and getting the price and terms in place if the right players are employed. It can also be a great education process for the perpetuation candidates and the owners. With the assistance of a third party, a perfect plan can be developed. If this does not work out, there then may need to be a sale to a third party with the help of a professional.

About Catherine Oak

Oak is the founder of the consulting firm, Oak & Associates, based in Northern California and Central Oregon. Oak & Associates. Phone: 707-936-6565. Email: from Catherine Oak

About William Schoeffler Jr.

Schoeffler Jr. is a financial analyst for Oak & Associates who specialize in financial and management consulting for independent insurance agencies, including valuations, mergers acquisitions, sales and marketing planning as well as perpetuation planning. Phone: 707-935-6565.

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