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While insurance agency buyouts make up a relatively small portion of the activity we see as an M&A firm, the Sica | Fletcher team does provide counsel on a considerable number of such transactions. Using the data we’ve compiled from those experiences, we’ve developed a beginner's guide for co-owners who may be considering a buyout.
The sections below will detail:
Reasons for Insurance Agency Buyouts
In our experience, we often see insurance agency buyouts occur for one of several reasons:
Common Reasons for Insurance Agency Buyouts
Far and away, retirement and succession planning are the two most common reasons for insurance agency buyouts. Typically, one or more partners is ready to leave the company and enjoy the fruits of their labor, so the others offer to buy them out to take over their share of the company.
Beyond this factor, the reasons for considering a buyout become more particular and more hostile, requiring a different approach to the process as a whole.
Whatever the reason, prospective buyers should consider a few critical factors before beginning the buyout process in earnest:
Do you have the means to buy out your partners? As stated in the introduction, it’s highly unlikely that you alone will possess the funds to complete a buyout. Even insurance agency buyouts conducted on an earn-out basis (i.e., smaller payments over time) will demand a larger initial payout than most individuals have on hand. Before getting started, you should have some idea of who you might want to work with and what goals you want to pursue for the buyout.
Do you have an advisor on retainer? Working through a larger financial institution requires adding additional members to your team (e.g., M&A attorney, exit planning, estate planning), but the most important is your M&A advisor. These professionals act as your central liaison throughout the deal process, ensuring that transactions occur with the highest degree of good for all parties involved.
With this in mind, let’s look more closely at insurance agency buyouts, starting with the process itself.
Types and Key Players
Although there are a few different types of insurance agency buyouts, all of them (more or less) tend to follow a singular process:
Valuation → Review Buy-Sell Agreements → Negotiations → Regulatory Approval → Closing
These steps are mostly the same as standard M&A transactions, which we’ve covered in terms of insurance agency valuations and the deal process in total. The following sections detail the most unique step in insurance agency buyouts - reviewing your buy-sell agreement - as well as common types and key players in the buyout process.
Reviewing Your Buy-Sell Agreement
The buy-sell agreement for your company is a critical document when considering an insurance agency buyout because it determines:
Payout Method. What the agency can be sold for.
Valuation Method. How the value of the agency is determined.
Trigger Events. Specific terms under which the agency is allowed to be sold.
Funding. How the buyout is allowed to be funded.
Therefore, it’s important to have a good understanding of what the buy-sell agreement contains. These agreements are often written in complex legal jargon, so having your M&A advisor look over these documents with you is a universally good idea to smooth out any differences in interpretation.
The following table offers a layout of the most common sections of a buy-sell agreement, what they pertain to, and what they might be called in your agreement, since the actual terminology may vary from document to document.
Buy-Sell Agreements: A Breakdown
Section | Description | Also Called… |
Valuation of the Business | A determination of valuation method (e.g., asset-based, income-based, market-based) and how often the company can be revalued | "Valuation Methods" "Business Valuation" "Determination of Value” |
Funding | A detail of the funding sources used for the buyout (e.g., insurance policies, bank loans, personal funds) as well as any necessary security provisions for the funding | "Funding Mechanisms" "Purchase Price Funding" |
Trigger Events | Includes the types of events (e.g., death, retirement, resignation) as well as how other co-owners are to be informed of them | "Buyout Events" "Conditions for Sale" |
Payment Terms | When and how the buyout occurs, as well as any interest/penalties/adjustments in the event of delayed payments | "Terms of Sale" "Payment Conditions" |
Rights & Obligations | Details pre-emption rights (right of first refusal) for remaining co-owners as well as duties of departing owner(s) (e.g., non-compete agreements, transition assistance) | "Owner Obligations" "Rights of Remaining Owners” "Obligations upon Trigger Events" |
Legal & Tax Considerations | Ensures that any buyout complies with applicable laws and regulations as well as any existing contracts affected by ownership changes | "Legal Considerations" "Tax Implications” "Regulatory Compliance" |
Exit Strategy | Details any necessary succession planning as well as the operational impact of the buyout on day-to-day processes | "Exit Provisions" "Continuity Planning" "Succession Planning" |
Dispute Resolution | Determines how disputes between varying interpretations of the agreement are to be resolved | "Conflict Resolution" "Arbitration and Mediation." |
Your buy-sell agreement effectively sets the boundaries for insurance agency buyouts, determining everything from how the agency is valued to intellectual property designations to post-buyout integration. When working through these restrictions, having an experienced M&A advisor on your team allows you to make the most out of any limitations that apply. If you are interested in learning more about how Sica | Fletcher examines buy-sell agreements, you can reach out to our team here.
Common Types of Insurance Agency Buyouts
Generally speaking, insurance agency buyouts have two approaches and four types. The two approaches are:
Friendly. Both parties enter into the insurance agency buyout with the cooperation of management and the Board of Directors
Hostile. The buyer makes the offer directly to the shareholders without the cooperation of the Board of Directors or management
Along with these two approaches, a wider range of different types of insurance agency buyouts occur on a regular basis. The table below details the four most common types of insurance agency buyouts, including their typical use case and desired outcome, based on our experience of advising them.
Common Types of Insurance Agency Buyouts
Buyout Type | Description | Use Case | Typical Outcome |
Leveraged Buyout (LBO) | Conducted using borrowed money, typically on behalf of a financial buyer (i.e., a PE firm) | Instances in which buyers do not have significant capital available | High-risk, high-reward buyout due to increased debt despite potential for high returns |
Management Buyout (MBO) | Total or near-total acquisition by existing managers | Allows managers to control a company upon the exit of the former owner(s) | Managers assume both the benefits and risks of agency ownership |
Family Buyout (FBO) | One or more family members buy out the others in a family-owned business | Estate planning or dispute resolution through restructuring of ownership | High potential for personal conflict, but helps clarify succession disputes among family members |
Employee Buyout (EBO) | Employees secure a majority stake in a company, thus determining its future actions | Preventing closure or layoffs, dissolving workplace disputes | Employees gain control of the company but assume the risks of ownership |
Understanding which of these groups best describes your situation can help determine your course of action. For example, those interested in family buyouts should speak with their advisors about developing a more fleshed-out succession plan, while a leveraged buyout places greater emphasis on assessing the overall financial stability of the company.
An M&A advisor will be able to provide these insights on their client’s behalf - the next step for owners considering a buyout is making sure that they have the proper team assembled.
Key Players in Insurance Agency Buyouts
Insurance agency buyouts can seem simple on the surface; one owner sells to the other. The reality, however, is that buyouts involve an extensive process. They require the input of several highly skilled individuals, all working in concert to effectively oversee property transfer from one owner to another.
To get started, here’s a quick roster of who you should have on your team:
Insurance Agency Buyouts: Who’s Involved?
It’s important to remember that you are not required to provide all of these professional specialists. Sica | Fletcher’s advisory team, for example, has accountants, consultants, and legal experts prepared to handle your agency’s valuation and review your buy-sell agreement. In addition, an experienced M&A advisor will have access to a large network of buyers (and sellers), and, as their client, they will extend to you their access to prospective financial backers.
That leaves the internal team to consider - the agency employees who will be actively working on the buyout. The size of specific teams may vary, but the most common members include:
Insurance Agency Buyouts - Internal Team Structure
Member | Role | Tasks |
Management | Align the buyout with your long-term goals | Lead negotiations and maintain shareholder contact |
Finance | Company liaison for agency valuation | Prepare financial documentation and assess the impact of the buyout |
Legal | Works with advisor to ensure compliance with federal, state, and local law | Creation and evaluation of contracts |
HR | Manage workforce relations and maintain a steady internal structure | Employee liaison, negotiation of severance and employment contracts |
IT | Maintain data integrity and secure online correspondence | Ensure secure data transfers |
Marketing | Manage carrier and client relations through the buyout | Inform clients and partners about the buyout, handle public relations |
It’s important to consider when information is released to certain groups. Although we maintain that an open communication policy is best (more below), that information should only be shared with relevant groups and according to a schedule that fits the overall schedule of the buyout. Releasing information too soon may result in mass feedback that the team is unprepared to handle, so it’s important to retain a small team of trusted partners.
Considerations for Stakeholders
A poorly managed buyout can result in shareholders selling their shares as they lose faith in the future of the agency. Even in less extreme scenarios, shares may be devalued as the public increasingly loses confidence, which can pose long-term challenges for the agency when raising capital. It’s imperative throughout the course of insurance agency buyouts that the goodwill of shareholders is secured.
The fundamental rule of thumb here is to ensure that all shareholders feel like they have a solid investment. Some easy steps to foster reassurance include:
Keeping employees in the loop and confident. Changes in management often lead to employee uncertainty about their future with the agency, so it’s critical to get them on your side from the start. Establish open lines of communication with employees, informing them early on of any structural changes to roles or departments and bringing them in on the process wherever possible.
Maintaining strong client communications. Clients who are unsure about the future of their policy following a buyout can pose a threat to the agency’s financial stability. Provide clients with clear feedback about any changes that might come about and establish pathways for them to provide you with feedback in return.
Secure carrier relationships. Carriers will look closely at any legal ramifications of a buyout to see how they might affect the relationship with your agency. Take time to reassure them that these relationships are secure and work with carrier liaisons to strengthen those relationships.
Have documentation demonstrating the benefits of the buyout. As for shareholders, detailed presentations that accurately depict the positive financial impacts of the buyout will assure them that your mind is on the future iteration of the company and how it can maintain any goals set by the current management.
A common thread running through all these considerations is the importance of keeping open lines of communication. Employees, clients, carriers, and shareholders alike want to know what the plan is for an insurance agency buyout; making sure they have that peace of mind will help preserve and possibly even increase the value of an agency’s shares, putting buyers in a better position post-closing.
Insurance Agency Buyouts Require a Trusted Partner
Comprehensive though this article is, it barely scratches the surface of everything involved in an insurance agency buyout. One of the best things that a partner, even one with experience, can do is to consider working with an M&A advisor to help oversee the process and ensure the best possible payout. The team at Sica | Fletcher has helped hundreds of insurance agencies at varying degrees of scale oversee a transfer of management. You can reach out to our team using the contact information below or through the contact page of this site.
About Sica | Fletcher: Sica | Fletcher is a strategic and financial advisory firm focused exclusively on the insurance industry. Founders Michael Fletcher and Al Sica are two of the industry's leading dealmakers who have advised on over $16 billion in insurance agency and brokerage transactions since 2014. According to S&P Global, Sica | Fletcher ranked as the #1 advisor to the insurance industry for 2017-2023 YTD in terms of total deals advised on. Learn more at SicaFletcher.com.
Contact: Mike Fletcher
Managing Partner, Sica | Fletcher