Financing the Future:

How to Approach a Lender about Your Perpetuation Plans

By Robert J. Pettinicchi

You’ve put all that effort into formulating a perpetuation plan for your insurance agency. Now it’s time to execute it. And that may require some additional financial resources.

Fortunately, there has never been a better time to realize the maximum value of your agency. Not only are lending rates and capital gains tax rates still at historic lows, but specialized lenders are willing to recognize the true value of your book of business — thereby unlocking more potential capital.

To seize these advantages, however, independent agency owners need to be savvy about what lenders will expect from them — and about what they can and should expectfrom a lender.

What Lenders Expect from Agencies

Well-crafted perpetuation plan. One of the first things any lender will evaluate is the soundness of your perpetuation plan. It should be designed as a win-win for both the selling generation and the successor generation. On the one hand, the plan should allow the sellers to achieve their retirement goals of reaping a solid return on the many good years they’ve invested in the business. On the other hand, the plan should enable the successor generation to achieve its business goal of purchasing a growing agency that has many good years yet to come.

So before you approach a lender, you’ll want to review your plan to ensure it addresses such key elements as: 1) how taxes will be minimized for both the buyer and seller; 2) how control will be passed on to the succession team; 3) how the buy/sell agreement is funded; 4) what flexibility the plan allows; and 5) how you propose to finance the plan. A strategic lending partner can even help you work out the details for this financing structure.

Adequate collateral. Of course, all lenders factor a business’ collateral into their loan decisions. But not all lenders define “collateral” the same way. Traditional banks typically require hard collateral and tangible assets to justify business loans. Problem is, insurance agencies rarely have significant tangible assets. So when a traditional bank scans your three-years worth of financial statements, they may not see any business assets of loan worthy value. So they may require you to put up the house or other personal collateral.

But specialized lenders who truly understand the needs of insurance agencies will define “collateral” more broadly. At InsurBanc, we look beyond an agency’s tangible assets to see its intangible — yet still very real — value. We take into account the history of the agency, the relative stability of its cash flow, the strength of its client relationships, and the ongoing potential of its book of business. So the key is finding a bank that really understands how ndependent insurance agencies operate.

Valuation. Most traditional banks estimate an agency’s value as a multiple of its previous years’ commissions. But this equation only takes into account historic values. At InsurBanc, we understand the future potential represented by an agency’s accounts receivables, even though those renewals may be months away. In evaluating an agency’s borrowing potential, we also take a close look at retention rates to see how likely that agency can continue to generate consistent commissions from their existing client base.

Mix of business. An agency’s mix of business is often just as important as its volume of business. So the more diverse the book — across agency clients, business lines and insurance carriers — the more favorably specialized lenders will likely view that book. We look for agencies that aren’t overly dependent on one carrier or a small group of clients.

Cash flow. Lenders will also want to review your agency’s cash flow. At InsurBanc, we recognize that insurance agencies often have more reliable cash flows than other midsized businesses. Why? For starters, they don’t have to “reinvent” themselves every year, since they deliver a service that individuals and businesses depend on year in and year out.Secondly, they are able to generate free cash flow from ongoing commissions.

Efficient operations. As you well know, the key to maximizing revenues in the independent agency system is to minimize expenses. So lenders who understand the insurance industry will be eager to partner with agencies that have been diligent in running their operations efficiently. Those are the agencies that will truly be able to command a premium when it comes time for valuation and sale.

What Agencies Should Expect from a Lender

Industry knowledge. As you’ve seen, the better the lender understands the nuances of the independent insurance agency, the more likely they’ll be to understand the true value your agency represents.

Expert consultation. A good deal should offer you more than a good rate. It should also come with exceptional services. The advice and guidance of a qualified consultant or lender can be essential to identifying opportunities and avoiding costly errors. Some banks attempt to attract customers by touting their understanding of the business owner’s industry. But in the banking world, insurance expertise is difficult to find — yet essential to seek.

Flexible solutions. Cookie-cutter lending approaches rarely work for any business; they certainly never fly with insurance agencies. Agency entrepreneurs should look for lenders who can be fair and disciplined in their analysis — yet flexible and creative in their solutions. For example, InsurBanc recently worked with an agency whose retiring principals had each financed various amounts at different times for different terms and different interest rates. To streamline the perpetuation plan, we helped them consolidate their financing into one payment that reflected the same terms and the same rate. For another agency, InsurBanc structured lower loan payments in the first 30 months to allow the new owners to build working capital more quickly and to concentrate more of their assets on business growth in the early years of their agreement.

So don’t miss out on an opportunity to realize the value in your agency without having to sell out to an acquiring bank or to a competing agency. The key is to find a lender that can understand your real needs — and appreciate your true worth.

Robert J. Pettinicchi is chief lending officer of InsurBanc, a federal thrift dedicated to providing banking products and services to Independent Insurance Agents. Additional information about the Farmington, Conn.-based bank is available at www.insurbanc.com. 1.866.467.2262

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