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Although insurance agencies are not always family affairs, the 2024 insurance landscape reveals that between 50% and 70% of agencies are family-owned.
When the time comes to pass the torch along to the next generation or put the company up for sale to an outside buyer, the process of selling a family insurance agency includes several unique aspects that merit their own analysis.
The following article details those aspects and our team provides first-hand insights to make the transition process easier for sellers. We do not provide a detailed overview of the M&A process (readers can find this breakdown in "How To Sell: Insurance Agency M&A, Step-By-Step"), but focus instead on the changes specific to selling a family insurance agency.
Changes in the Valuation Process
Valuation is the first formal step in the M&A deal process, taking place once the seller has gathered all their preliminary documents and made any necessary changes to the company's internal structure to make it more profitable. Performing a valuation involves a team of experts (typically from the seller's M&A advisor, but sometimes a hired third party) that detail the provided documentation and establish the agency's overall worth, expressed as some multiple of EBITDA or, much more rarely, revenue.
The valuation process has a few additional considerations when selling a family insurance agency. In particular, sellers should be aware of:
Family Reputation as an Asset. Like many other companies, family-owned insurance agencies build their business based on the proprietor’s reputation. A family-owned agency, however, may find that reputation is influenced by someone indirectly involved in the business, which may challenge or benefit the company when it comes time for valuation.
Family-specific financial arrangements. Inter-family loans, unpaid salaries, or shared equity structures may complicate future sales. In particular, inter-generational buy-sell agreements may give family members the opportunity for priority purchase or determine a valuation method that differs from the industry standard and affects the market value.
Take, for example, a small agency with about $2M EBITDA considering a sale. They operate in a small town where they are well-known and well-liked by the local population, who make up a good deal of the agency's clientele. Their EBITDA might be adjusted as follows:
Selling a Family Insurance Agency: Family-Specific Adjustments
Factor | Adjustment | EBITDA |
Start | None | $2M |
Strong Community Ties | ↑ 10% Premium | $2.2M |
No clear succession plan | ↓ 12% Discount | $1.96M |
Family employees receive low salaries below market standard | ↑ 15% Premium | $2.24M |
For simplicity, we are limiting this table to just a few changes and keeping the percentages added or subtracted to whole numbers, but it highlights just a few family-specific factors that can lead to a valuation tipping one way or another.
Changes in Marketing & Review
Most often, selling a family insurance agency places a greater priority on the legacy of the business. Sellers want to ensure that the buyer’s intention for purchase aligns with the original agency goals, which can sometimes limit the pool of potential buyers.
When taking your agency to market, a few important considerations to keep in mind include:
Clarifying Your Core Values. Make early efforts to get family members on the same page about your priorities as a group. Create a “buyer criteria checklist” that details the qualities of your ideal buyer, and use it to evaluate prospective offers.
Incorporating Values into Your Pitch Deck. In most cases, prospective buyers determine their interest in your agency based on the pitch deck developed by your team and provided to them by your advisor. Including information about the importance of your agency’s values will help attract your ideal buyer while weeding out others.
Determining Your Desired Post-Closing Involvement. When selling a family agency, buyers will likely want to retain key team members (“Why purchase Smith Insurance if clients don’t get access to Smith?” etc.). Determine from the beginning how much you or others want to be involved in the agency post-closing.
By the same token, selling a family insurance agency entails a greater degree of buyer research (on the seller’s part) to ensure that the buyer supports a company culture that reflects your agency’s legacy. In particular, we recommend requesting case studies from promising buyers, which offers them an opportunity to provide examples of past acquisitions in which they made efforts to preserve the seller’s agency.
Changes in Final Negotiations
Following the buyer’s due diligence, their teams will meet with your advisors to discuss the contract’s final terms.
Family Member Interests
Owners selling a family insurance agency often face multiple stakeholders, which can lead to conflicting interests at closing. Sellers who anticipate this potential problem when selling their agency should take care to:
Have early conversations with family members about the prospect of selling.
Discuss early buyouts of minority stakeholders to eliminate potential conflict when selling.
Be prepared to make additional considerations upon closing to accommodate family members who do not sell.
The best advice in this situation is to work directly with your M&A advisor and estate planning advisor to ensure a smoother transition prior to the deal process itself.
Unique Payment Structures & Tax Implications
On average, sellers are often looking for a “lump sum” payout, upon which the entirety of the payment is delivered when the papers have been signed. Selling a family insurance agency, however, typically involves payment structures including:
Earnout: Installment payments based on the performance of the agency post-closing.
Milestone: Installment payments based on the passage of time (i.e., monthly, quarterly, or annual payments)
Family agency sellers typically prefer these models because both 1.) allow for an overall larger payment over time and 2.) enable sellers to retain equity in the agency post-closing. The amount involved in these structures depends on the size of the agency, but the following table provides some averages based on our information pulled from the SF index:
Common Deal Structures When Selling a Family Insurance Agency
Earnout | Payout (Quarterly) | |
SMB (~$2M EBITDA) | $50,000-$100,000 | $150,000-$250,000 |
MidMarket (~$10M EBITDA) | $250,000-$500,000 | $750,000-$1,250,000 |
Enterprise (~$50M EBITDA) | $1,250,000-$2,500,000 | $3,750,000-$6,250,000 |
Finally, selling a family insurance agency often involves estate, inheritance, and capital gains taxes, all of which can affect the deal’s outcome. Because the rate of these taxes varies by state, it’s somewhat outside the scope of this post, however, we strongly recommend speaking with an expert prior to beginning your deal process.
Best Practices When Selling a Family Insurance Agency
Based on our experiences selling family insurance agencies, our team recommends the following advice for anyone starting this process.
Consider How the Legacy of the Business Will Continue. Most often, the legacy of the agency is paramount when selling a family insurance agency. In these cases, involved family members should sit down early and agree upon their shared goals for the transaction.
Think Long-Term. Preserving the agency's legacy often limits the number of buyers in the pool, resulting in a lower offer. Families that hope to continue making money from the agency post-closing should focus on an earnout payment structure that bases the seller’s payoff on the agency’s performance.
Expand Your Team. While having an M&A advisor is crucial for your sale (see more below), selling a family insurance agency often involves a larger team. Estate planners, tax advisors, and M&A attorneys are more relevant for handling your sale.
Have an Experienced Advisor On Your Team
In addition to the advice above, the core advice we give all our clients is to work with an experienced partner when selling a family insurance agency. On average, self-represented agencies made 30% less in 2023 deals than those with professional representation, and agencies considering the future of their legacy have even more to lose than money.
The teams at Sica | Fletcher have extensive experience helping clients sell their family agency, increasing the likelihood of a higher payout, a secure legacy, and a more positive transaction experience overall. Contact us here or use the information below to speak with one of our principals directly.
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
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