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: catoak@gmail.com.More 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.

Sales Management & Producer Goals During COVID-19

By: Catherine Oak

Every insurance agency client we have today is seeing producers struggling with new production because of COVID-19 restrictions. They are used to cold calling and getting in front of prospects and that has been difficult, if not non-existent.

In addition, many prospects are afraid of changing insurance because of the marketplace hardening in both commercial and personal lines. The latter often because of natural disasters, like fires, hurricanes and tornadoes. For commercial lines even though rates are going up in some cases, payrolls may be down for some clients that are still struggling from the shutdowns and COVID-19 restrictions.

Sales Management

To have a successful, growing firm, proper management of sales and producer performance is critical now more than ever. Sales management can be simplified if a system is established that monitors specific sales activity and performance. Effective sales management not only will reward the owners, now and in the future, but also will assist non-owner producers in achieving their goals.

Often the task falls to an owner or the top producer. This is not necessarily a good idea because sales management can take away time from their own sales efforts. The key to effective sales management is to set up a system to monitor performance and encourage producers.

It is more difficult today because most of the time the sales calls are being done on Zoom and it can be difficult to form good synergies and group dynamics over the internet.

‘To have a successful, growing firm, proper management of sales and producer performance is critical now more than ever.’

Establish a System

Ideally, once an effective sales management system is created, self-motivated and properly trained producers may be able to “manage” themselves. The sales management role, in this hypothetical situation, is to monitor performance, remove any unreasonable obstacles to production and create an overall environment for sales.

However, producers are human and need guidance and support to succeed on a regular basis. A good sales management system creates a structure for the producers to succeed, while minimizing the effort required by the sales manager.

Good Producer Performance

What is an acceptable level of producer performance for experienced, “seasoned” producers? It depends on several factors such as: available producer support; sales skills of the producer; size and type of accounts in the geographic area; and competition and the local economy.

If performance standards are not set for producers, they will set their own, which most likely will be lower than what management expects.

Ideally, management can use the performance of the best producer who has ever worked for the firm as a great guideline for “top” producer performance. The average property/casualty commissions per producer, from firms in our database, are in the range of $300,000 to $400,000. The range is based on size of the firm, location, and the typical target clients of the agency. These commissions are not the producers’ book and include “house” accounts and direct bill commissions of the firm, which are not necessarily commissions “handled.”

Well-run firms have $400,000 to $600,000 in commissions per producer. In surveys in which owners are asked what size book they would expect experienced producers to handle after three years in the firm, they report $150,000 to $300,000 in commissions handled, based on size of firm. With regard to their expectations for new business produced each year in addition to the books handled, the range is $30,000 to $65,000, based on size of firm. New business produced each year as a percentage of the book handled averages 18% to 20%.

For new producers without experience, approximately $100,000 in commissions handled is expected after three years, and new business of $25,000 to $40,000 in commissions per year. For new producers with experience (and without existing books of business) $150,000 to $200,000 in commissions handled is expected in three years, with $35,000 to $50,000 in new commissions produced per year.

Setting Producer Goals

Producers should be involved in the goal-setting process. Each year, every producer (including seasoned producers) should be given a new production requirement, for example 10% to 20% growth, net of attrition. The producer then should let management know how this production will be accomplished (for example, the number of quotes and customers that need to be written to accomplish his or her annual objective).

Based on the producer’s own hit ratio and size of account written, it should be determined if the production goal is achievable. The goals should be broken down into monthly quote-to-write activity to make it easier to manage producer performance. Management needs two sales goals for each producer.

One goal is the required new business increase in the number of accounts or commissions handled by the producer.

The second goal should specify the type of account as well as the source of the new business to be pursued (such as account development, writing new accounts from referrals, target marketing or direct mail programs, etc.). Again, because of COVID-19, these goals may be more difficult to achieve until more businesses open-up and producers can call on their prospects in person.

Hold Sales Meetings

Sales meetings need to be held so sales activity can be properly monitored. Specific sales activity should include new business produced, lost business, hit ratio for each producer, prospect activity, what referrals have been obtained from new sales, etc.

These meetings also should provide owner and non-owner production staff with information on markets, sales goals, collection problems and service backlogs. Now, the meetings are usually held on Zoom, so they need to be more lively to keep people’s interest.

There should also be individual coaching of producers at least twice a month, in addition to the monthly sales meeting. This again, will unlikely be in person and having the mentor or sales manager accompany producers, especially the newer ones on sales calls, will not be possible.

Producers have egos and need recognition. These sales meetings are also an excellent time to recognize superior performance, encourage double-teaming, and provide support by coaching and training. Many employees, including the service staff need more accolades in this difficult time.

Hit Ratios

Another sales management key is managing the producer’s hit ratio (the number of risks written to the number quoted). A hit ratio of 25% to 30% is average for commercial lines, but obviously the closer to 100%, the better. Owners’ hit ratios are usually in the 50% to 80% range, as they are more experienced and better at screening leads. In personal lines the hit ratio is usually 50% to 60%. If the hit ratio is improved, the firm’s expenses will be reduced greatly.

Hit ratios can be improved when more time is spent initially qualifying the prospect. Key areas to uncover in the first critical 20-to 30-minute interview are:

What is most important to the prospect in the insurance program?

What are the politics, price and product the producer is competing against?

And has the producer built a good rapport after the initial meeting or call?

Survey forms and collection of copies of existing policies should be completed in the second interview after the prospect has been properly qualified.

Producers can greatly improve their hit ratio on writing new accounts when they have good marketing and placement support. More firms today are using a central marketing person or department to help write new medium-size or large commercial accounts.


Managing producers and their performance is critical. If a sales manager can be found within the agency, that is great. It can be a part-time role. If not, outside consultative support can be provided for your agency.

Oak is the founder of the consulting firm, Oak & Associates, based in Northern California and Central Oregon. Oak & Associates specializes in financial and management consulting for independent agencies, including valuations, mergers acquisitions, sales and marketing planning as well as perpetuation planning. Phone: 707-935-6565. Email: catoak@gmail.com.