A perpetuation plan is a must for any insurance agency. If it is planned well and structured effectively, you can be sure that it will enable successors to grow the business while also harvesting true value. When it comes to perpetuation, it pays to look at it from the perspective of the lender. Only this way will you be able to ensure that your firm is well positioned and an attractive proposition. If you are not offering good value, how can you expect lenders to be interested?

Your agency needs to produce a healthy bottom line and grow organically if you are to ensure it sells for a profit and continues to grow once you are no longer about. When valuing your business, profitability is a crucial factor. After all, the value of a firm represents the capitalization of profits to the owners over time. It’s impossible for your agency to offer good value if it is not profitable – it is as simple as that.

Not only this, but agency profits over time will not only represent your firm’s value, but they will also ensure there is the cash flow required to repay the debt used to acquire the agency. Of course, this is the most important factor for all lenders. If you think about it, most firms trade at multiples from five to seven times cash flow. Even if you utilise the old revenue multiple rule of thumb, i.e. an agency is worth one and a half times its revenue, there is the belief that the firm has a 25% profit margin. This represents roughly six times the bottom line.

You need to instil a growth culture in your agency in order to position your firm to be a peak performer. There are a number of different ways you can do this. It is vital to have a sustainable and proper perpetuation structure in place. By doing this, a selling owner will be able to reach their retirement objectives of reaping a good return on the effort and time he or she has put into the business. Nevertheless, the plan also needs to consider the successor – it cannot be one-sided.

Vital elements that should be incorporated into the plan include how control is going to be passed onto the succession team, tax minimisation for the seller and the buyer, the flexibility of the plan, the funding of the buy/sell agreement, and the role of outside financing.

For an agency perpetuation, a strategic lending partner will assist you in working out the financing structure details. You may consider going down the direction of a traditional bank, but they have proven to be an effective capital source for agency perpetuation transactions. This is because they tend to ask for significant tangible assets, which is something insurance companies don’t usually have. This includes the likes of equipment, plant and property. As a consequence, you may need to pledge personal collateral and assets such as your home, which is something you, no doubt, won’t want to do.

Did this answer your question?