Internal Agency Perpetuation in Fearful Times
by Tom Doran, August 2008
National Underwriter
"Fear makes the wolf bigger than he is." -- German Proverb
What a year. What an industry. What a time to be working for an independent insurance agency. What a time to be trying to perpetuate the ownership of your agency internally.
The challenges facing the business today are many: a brutally soft P&C market, the prospect of nationalized healthcare, a dull economy, potential increases in capital gains tax rates, contingency arrangements still under attack, a lack of young talent coming into the industry … on and on and on. You can’t swing a dead cat these days without hitting an industry expert who will tell you that our better days are behind us, that the future of our industry is bleak and that it is time to sell your agency. Get out while the getting is good!
And yet, are things really that bad? There is no doubt there are material challenges facing our industry, but is it really any different than in past times? Think back to the massive challenges the industry has faced over the past several decades:
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The prospect of nationalized healthcare under the Clinton administration
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The emergence of the Internet and the fear that it would displace insurance agents as consumers gained direct access to insurance carriers, negating the need for the insurance “middleman”
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The widespread emergence of banks-in-insurance
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The significant reduction of insurance carriers to consolidation
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Soft P&C market conditions for 16 of the past 20 years
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Eliot Spitzer’s attack on contingency income
Things got so bleak that in 1995 the Wall Street Journal ran a front-page article entitled “Under the Gun – Insurance Agents Fight An Intrusion by Banks, But Other Perils Loom” in which independent agents were dubbed by various industry experts to be “going the way of the milkman” and “the buggy-whip makers of today’s economy.” Sound familiar? Thirteen years later, the industry has not only survived these challenges (and more), but it has prospered greatly.
I met a few years ago with an agent in early 50’s who sold his agency to a national broker in the late 1990’s, largely because he believed the negative press regarding the shaky future of the industry at that time. In light of the fantastic run the industry has enjoyed over the past decade, he deeply regrets his decision to sell. He recognizes now that his decision was based on a flawed and somewhat unfounded fear of the future of the business.
I have heard it said that the independent insurance industry is a little like the cockroach – all but impossible to kill. Recent history would seem to support that statement. I am aware of only two agencies over the past two decades who effectively went “out of business” – one due to fraud and the other to incompetent management. Even in trying times, this is indeed an incredibly resilient industry.
This is not to imply that our industry does not face significant challenges – it does. Times are tough. But history would seem to indicate that times are often (usually?) tough for this industry. And somehow, we get through it time and time again. Today’s challenges will be met and replaced tomorrow with new ones. To quote the Talking Heads – “Same as it ever was...”
There may be many, many excellent reasons for you to sell your agency, but we at Reagan Consulting are simply not of the opinion that pessimism regarding the long-term prospects for the industry should materially influence your decision-making one way or the other.
For agencies willing to prepare for it, internal agency perpetuation remains a highly-viable alternative to selling out to a third-party buyer. The fundamentals of successful internal agency perpetuation remain unchanged, even in today’s tough environment:
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Wide-spread agency ownership among multiple generations
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A reasonable valuation methodology (an independent appraisal of value is best)
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Reasonable terms and conditions for both buyers and sellers of agency stock
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An ongoing commitment to planning for perpetuation events well in advance
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Frequent communication regarding buyer and seller expectations within the shareholder group
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Attracting the best and the brightest people the industry has to offer via meaningful agency ownership opportunities
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Continual leadership & management development (preparing the next generation)
Of the doom and gloom that seems to permeate this business at times, David Hales, one of the industry’s first and most revered management consultants, once quipped, “It looks like this industry is going under. As a matter of fact, it has looked that way for the past 25 years. Don’t you believe it!” For independent insurance agencies committed to hard work, innovation, adaptation and investing in people-development, the future looks great!