Navigating the Details of Selling an Insurance Agency

There are a lot of things to consider long before being ready to sell an insurance agency. If this is uncharted territory, you may be finding it hard to know where to start. You could figure it all out on your own, but doing things from scratch typically takes more work and effort. Here are the key pieces when it comes to selling an insurance agency.

Valuations, Tax Implications, Buy Sell Agreements, and Pricing Considerations  

You’ve created or carried on a family legacy in the insurance business. Now it’s time to start thinking about the next chapter of your career: selling your insurance agency.  Whether you’re looking to retire, pursue new opportunities, or simply transition out of the industry, selling your agency is a significant decision that requires careful planning and consideration. In this article, we’ll explore some key aspects of selling an insurance agency. Which will include insurance valuations, tax implications, legal agreements, the importance of buy sell agreements, and determining the selling price. While this article is just the tip of the iceberg for what it takes to sell an insurance agency, it does give a starting point of what to think about when making the decision to sell.  

Understanding Insurance Valuations 

The absolute first step: get a professional insurance agency valuation specialist hired. They will perform a defensible valuation on your agency before you start talking to perspective buyers. Before listing your agency for sale, it’s essential to determine its value accurately. Insurance agency valuations typically consider various factors, including: 

• Revenue and Profitability: Prospective buyers will assess your agency’s revenue streams, profit margins, and growth potential. Agencies with stable income and strong client retention often demand higher valuations. 
• Client Base: The quality and size of your client base significantly influences your agency’s value. A diverse portfolio with long-term clients enhances market appeal and perceived stability. 
• Agency Size and Scale: Larger agencies with multiple lines of business and geographic reach may attract more buyers and command higher prices. 
• Market Conditions: Economic trends, industry competition, and regulatory changes can impact your agency’s value. Timing the sale to align with favorable market conditions can maximize returns. 
• Unique Selling Proposition (USP): Highlighting your agency’s unique strengths, such as specialized expertise, innovative technology, or exceptional customer service can enhance its perceived value. 
• Heavy Weighted Accounts: Does your agency have any single accounts that make up over 20-50% of the agency revenue? These accounts can cause unrest for potential buyers. If they leave the agency, so does a large percentage of the revenue. A good mix of business and all sorts of revenue sizes is attractive to buyers.  
• Talent: Does the deal bring on any talent, validated sales reps, expert account managers? Bringing on trained talent has value all by itself.  
• Access to Additional Markets: Does your agency have high franchised insurance partners that are hard to land organically? If you can get the sale approved, this may be a big boost in the buyer’s agency. This can help growth long into the future.  
• Book of Business Mix: A good mix of personal lines, commercial lines, and even benefits business can be attractive to larger operations with expertise in those fields. There are also instances where this can be a negative to some buyers who are only targeting single segments of business.  
• Use of Technology: Easy data transfers make the transaction much simpler and valuable to buyers. While paperless firms are the preference, we know that it’s not realistic for all agencies.  Paper agencies have a unique set of challenges. There are increased time constraints and manual labor costs in converting paper files to digital files.   

Engaging a professional appraiser with experience in insurance agency valuations can provide an objective assessment of your agency’s worth and help you set a realistic asking price.  

Documentation needed to get an accurate agency valuation: 

• 3-Year Profit and Loss Report  
• 3-Year Balance Sheet
• 3-Year Corporate Tax Return
• Book Of Business Report (Top Accounts, Mix of Business, Concentration with Carriers, Producer Breakdowns  
• Staff Roster with compensation breakdown and job duties  
• Loss Ratios with Key Carriers  
• Annual Growth Rate (5-Years preferred) 
• Annual Retention Rate (5-Years preferred) 
• Commission Revenue vs Contingency Revenue vs Fee Based Income  
• Producer agreements & commission splits.  

Tax Implications of Selling Your Insurance Agency 

First things first, I am not a CPA! These points are made from my personal experience in actual agency sale transactions. Do not take any of this as “tax advice”.  The sale of an insurance agency can have significant tax implications for both the seller and the buyer. Key tax considerations include: 

• Capital Gains Tax: Depending on your jurisdiction and the structure of the sale, profits from selling your agency may be subject to capital gains tax. Understanding applicable tax rates and exemptions can help you optimize your tax liability.  Capital gains tax liability is one of the most crucial decisions you need to understand prior to finalizing the term sheet of your deal.  Most agency owners know their exact cost basis, so they can determine what the tax liability will be, so start there. Then speak with your personal and business CPA on how to structure the payment schedule to maximize the dollars in your bank account at the end of the buyout.  Should you take a lump sum up front? Should you take it over a number of years? Should you take some cash and some stock in the deal? Should you owner finance the deal? The possibility of questions are endless, but you want to make sure you get this part right.  
• Asset vs. Stock Sale: Structuring the sale as an asset sale or a stock sale can have different tax consequences for both parties. Sellers may prefer asset sales to benefit from favorable capital gains treatment, while buyers may prefer stock acquisitions for potential tax deductions and asset step-ups. Asset purchases are preferable as the buyer doesn’t want to take on the prior ownership’s liabilities, but there can be cases for stock sales.  
• Seller Financing: If you opt for seller financing to facilitate the sale, you may receive payments over time. Which could have tax implications for income recognition and installment sales. We do see these transactions in family ownership transitions. They can make a lot of sense for the seller to pick up some additional revenue on the interest income that comes with the financing. Of course, you need to make sure the promissory notes and purchase agreements are rigid here as you take on a different level of risk in these types of deals.  
• Qualified Small Business Stock (QSBS): In some jurisdictions, selling shares of a qualified small business may qualify for favorable tax treatment under QSBS provisions, subject to certain criteria and limitations.  

Consulting with a tax advisor or accountant familiar with insurance agency transactions can help you navigate complex tax rules and optimize your financial outcomes. We highly recommend the use of a CPA who has transacted insurance agency deals, although there are plenty of CPAs with the knowledge capacity to get these transactions completely correctly.  

Legal Matters of an Insurance Agency Sale  

While we briefly discussed some items as they relate to the tax implications and CPAs, the legal side of the transaction is equally important. The legal structure of the contracts put into place are of the upmost importance for both parties of the transaction.  This will also be the most expensive piece of getting the deal across the finish line outside of the purchase itself.  To give a reference, the last deal that involved real-estate had a legal bill of almost $15,000 for us as the buyer.  

Here is a breakdown of the legal documents that may be executed in an insurance agency sale:  

• Asset Purchase Agreement  
• Promissory Note  
• Disclosure Schedule  
• Letter of Intent  
• Bill of Sale/Assignment of Intangibles  
• Personal Goodwill  
• Real Estate Purchase Agreement  
• Closing Affidavit  
• Operating Agreement  
• Articles of Incorporation  
• Independent Contractor Agreement  
• Non-Disclosure Agreement  

Determining the Selling Price 

One of the most common questions among insurance agency owners is, “How much can I sell my insurance agency for?” The selling price of an insurance agency is influenced by a combination of factors, including its revenue, profitability, client base, growth potential, market conditions, and industry trends. Additionally, buyers may consider intangible assets such as brand reputation, customer relationships, sales velocity, and future earnings potential.  

The main factors that are specifically broken out in the legal purchase agreement of an insurance agency are: 

• Real Estate: This can be included in the agency transaction if the agency is purchasing the real-estate. This can also be completed with a separate purchase agreement of a property holding company. We’ve seen it both ways, and it’s purely a tax liability decision from what we’ve seen.  
• Business Property: Most times the buyer buys all computer equipment, office furniture, etc. Usually a nominal piece of the entire deal.  
• Goodwill: What is the value of the residual income you’re purchasing? [Refer to the valuation section on how to get to this number.] The goodwill of the purchase typically makes up a lion share of the full deal.  
• SEO Value: Does the seller offer a tough to get domain with serious domain authority to generate leads and revenue? This can be of value to the buyer.  
• Brand: Are you buying a powerful brand that has US Trademarks and Patents in place? These brands can have significant standalone value.  
• Talent and Carrier Access: These can be hard to place a value on. It can be factored into the valuation if you work with an industry expert who understands the importance of these.  

Valuation Analysis

To determine a realistic selling price for your agency, it’s crucial to conduct a thorough valuation analysis considering both quantitative and qualitative factors. Engage with experienced professionals, such as business brokers, merger and acquisition advisors, and industry consultants to assess your agency’s worth and identify potential buyers willing to pay what your business is worth. 

Keep in mind that selling prices can vary widely based on individual circumstances, buyer preferences, negotiation dynamics, and prevailing market conditions. By conducting due diligence, seeking expert guidance, and positioning your agency effectively in the marketplace, you can maximize its value and achieve a successful sale outcome. 

Earn Out: These clauses are typically included in any merger or acquisition.  These are especially important to the buyer of the insurance agency. Earn outs keep the selling party engaged in the business for a pre-determined period of time. This can also be lucrative to the seller as it can add additional money to the deal if they maximize their performance during the earn out period. We’ve seen the earn-out clauses as high as 3x EBITA for a 3- year post-sale earn out. We’ve seen growth bonuses tied into deals, and we’ve seen retention parameters set that protects the buyer.  

Multipliers: You can pick up an industry publication and get to a ballpark figure. There are no 2 agencies that are worth the same.  Before interest rates saw significant hikes, private equity money was flying around at record levels, but that appears to have slowed in the near term. We’ve heard all the multiples in different transactions 1x, 1.5x,2x, 3x, 5x revenue – 5x, 7x,10x 15x EBITA. It’s safe to say you’ll fall somewhere in between. Get a 3rd party insurance agency evaluation to get to a fair asking price and then find a suitable buyer that you like, trust, and can see carrying out your legacy.  

While price matters, it’s not everything.  

Importance of Insurance Agency Buy Sell Agreements 

This topic is important post sale both to the seller and to the buyer. The seller should be concerned that their legacy and clients are taken care of, and if there is seller financing it is imperative that a strong buy-sell is in place for protection of the transaction. For the buyer, it is equally important that if something suddenly happens to them that the company lives on that the employees, the clients, the seller, and the insurance carriers are protected. The buy-sell agreement lays out a set of pre-determined decisions in the best interests of all parties. Buy-sell agreements are essential legal documents that govern the sale and transfer of ownership interests in a business. For insurance agencies, buy-sell agreements serve several critical functions: 

• Ownership Transition: Buy-sell agreements outline the process for selling or transferring ownership interests in the agency, including rights of first refusal, purchase terms, and valuation methodologies. 
• Continuity and Stability: By establishing clear procedures for ownership transitions, buy-sell agreements help ensure business continuity and minimize disruptions during ownership changes. 
• Dispute Resolution: In the event of disagreements or disputes among owners, buy-sell agreements provide mechanisms for resolving conflicts, such as mediation, arbitration, or buyout provisions. 
• Estate Planning: Buy-sell agreements can also facilitate estate planning by addressing ownership succession, inheritance issues, and liquidity needs for surviving spouses or heirs. 

Drafting a comprehensive buy-sell agreement tailored to your agency’s unique circumstances is essential for protecting your interests and facilitating a smooth transition of ownership, especially if something suddenly happens to a key player in the deal.  

Conclusion 

Selling an insurance agency involves navigating complex financial, tax, and legal considerations. By understanding insurance valuations, tax implications, buy-sell agreements, and pricing factors, you can position yourself for a successful sale. This will also allow you to maximize the value of your agency. Remember to seek professional advice from insurance brokers, appraisers, tax advisors, and legal counsel. They can guide you through each stage of the selling process and help you achieve your desired outcomes.  

This blog was written by Ryan N. Pessell– Agency Owner of Hitchings Insurance who has conducted 4 insurance agency transactions by age 38.