Hello everyone, I've enjoyed reading some of posts on this forum and appreciate the level of knowledge many of you bring.
I have a question and appreciate any advice you can give.
I'm staring my 7th year as a producer with a small independent agency (age 34), my primary focus has been on the commercial P&C side, but I also write a fair amount of personal lines and health ins. The owner of our agency is in the process of writting a contract allowing me some ownership in the agency. I really look forward to this next step in my career. I'd like some advice about what type of contract I should expect to see. The gross commisions my accounts bring to the agency is about 20% of our total gross commissions.
Is it realistic to think I'll get some credit for the new accounts I've been able to generate? Are most producer buy-in contracts based on future production scales with an option to purchase additional shares with owner profits?
Thanks in advance for any and all advice.
Producer buying into an agency, question.
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producer0317
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Re: Producer buying into an agency, question.
you should give some more detail,
such as, is the agent going to retire soon, will you be buing the entire agency down the road?
such as, is the agent going to retire soon, will you be buing the entire agency down the road?
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producer0317
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Re: Producer buying into an agency, question.
The owner is in his early 50's and want to cut back his office time considerably, and yes, I will be buying the entire agency in the future. Thanks.
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producer0317
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Re: Producer buying into an agency, question.
Looking for some advice. Any Producers out there who've had the same opportunity or Owners care to share their thoughts or experiences? Thanks in advance.
Re: Producer buying into an agency, question.
Hey Producer0317, here are a few things to consider... I'll assume that you've been HERE for the past seven years, and have a great relationship with both the seller and the clients. Anything short of that and it won't work as well.
Any contract to purchase / Sell the agency should accomidate both of you. If you have been paid properly as a producer for the 20% of the cash-flow you claim, the accounts should belong to the agency principal in full, not you. I know "paid properly" is a subjective term... but he's the guy that has the investment in the business up to this point and the accounts belong to him alone.
That said, a proper valuation should be completed... NOW. Use this agreed-upon figure as you go forward... I highly suggest using a third-party appraiser skilled in agency valuations for this. You, or the seller will need to pay for this, but you'll both feel right about the values as you go forward.
The actual buy-in can be done by a timely transferral of stock if you are incorporated. Now that you know what it is worth, you can purchase a portion up-front, or pay for shares as you go from current earnings. Once you approach the 50% ownership mark, the seller will want to transfer the remaining shares and take a note back if you cannot afford to pay cash.
I found when I purchased my agency that the expirations can be depreciated over a 15-year period, and my accountant suggested that I pay for them over a 15-year time frame. It may be different with stock, though, so check this out. Remember the appraiser I mentioned earlier... he probably knows the ins & outs of this part of the transaction, too.
Anyway, properly designed, the transfer will allow you to buy the agency out of cash-flow if you increase the commissions as you go. Just remember to also enter a properly FUNDED Buy-Sell agreement with the seller until the deal is totally done! And, good luck!
Wayne Lunday, LUTCF, CLU, ChFC
Any contract to purchase / Sell the agency should accomidate both of you. If you have been paid properly as a producer for the 20% of the cash-flow you claim, the accounts should belong to the agency principal in full, not you. I know "paid properly" is a subjective term... but he's the guy that has the investment in the business up to this point and the accounts belong to him alone.
That said, a proper valuation should be completed... NOW. Use this agreed-upon figure as you go forward... I highly suggest using a third-party appraiser skilled in agency valuations for this. You, or the seller will need to pay for this, but you'll both feel right about the values as you go forward.
The actual buy-in can be done by a timely transferral of stock if you are incorporated. Now that you know what it is worth, you can purchase a portion up-front, or pay for shares as you go from current earnings. Once you approach the 50% ownership mark, the seller will want to transfer the remaining shares and take a note back if you cannot afford to pay cash.
I found when I purchased my agency that the expirations can be depreciated over a 15-year period, and my accountant suggested that I pay for them over a 15-year time frame. It may be different with stock, though, so check this out. Remember the appraiser I mentioned earlier... he probably knows the ins & outs of this part of the transaction, too.
Anyway, properly designed, the transfer will allow you to buy the agency out of cash-flow if you increase the commissions as you go. Just remember to also enter a properly FUNDED Buy-Sell agreement with the seller until the deal is totally done! And, good luck!
Wayne Lunday, LUTCF, CLU, ChFC
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producer0317
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Re: Producer buying into an agency, question.
Wayne, thank you for the great advices. Yes your assumptions are correct, I have been with the agency for 7 years, and yes I feel he has compensated me very fairly for the business I've produced. I also agree with your statement about "the accounts, up to this time belong to him". I've always tried to view our producer/owner relationship from his standpoint as well; hoping to someday be in that position. Overall I think things have worked out very well for both, and from what he tells me, he feels the same way.
I'm a little hesitant to bring up the idea of a third party evaluation without first seeing his proposal. Like I mentioned, I feel he's been fair with me in the past and I have to reason to believe he won't continue to be fair moving forward. I'm concerned with offending him if I bring up the idea of an evaluation to soon. I think for now I'll continue to do a little research on my own regarding agency valuations and wait to see what he proposes.
Thanks again.
I'm a little hesitant to bring up the idea of a third party evaluation without first seeing his proposal. Like I mentioned, I feel he's been fair with me in the past and I have to reason to believe he won't continue to be fair moving forward. I'm concerned with offending him if I bring up the idea of an evaluation to soon. I think for now I'll continue to do a little research on my own regarding agency valuations and wait to see what he proposes.
Thanks again.
Re: Producer buying into an agency, question.
Producer0317...
The idea of asking for a qualified 3rd party to help can be brought into a conversation tactfully. You might mention that you "read something" in a Trade Journal, and share a story about how an agency owner didn't get a fair price for his agency. There are other stories equally as bad for the buyer, as you might imagine.
When I bought my agency 11 years ago the seller was adamant about the price and would not budge. I was new to the acquisition idea and didn't ask the right questions. Sound Familure? Well, this agency didn't cost too much, and it had huge potential for the right person, so I agreed to his deal. My wife & I jumped in with both feet and paid his price of 3.5 times last-year's commissions, (not counting the contingencies), then decided we didn't like his location so we bought a better location, too. We put 20% down and paid the remainder off, with interest, over the next five years.
After I put this deal together I talked with my CPA only to find I should have discussed this with her first! Even though we paid it off in five years, as the seller wanted, we could not depreciate out the purchase that quickly. I paid income taxes on $60K each year that went straight to the seller! We survived it, but like I said in my earlier post, I would not try to do it that way again. The only way we kept our heads above water was to dramatically boost the accounts / premium coming in the door. We took the agency from $800K of premium to $2.5 mil in those 5 years. Now the pay-off is that I still have the purchase deduction but not the expense.
So, my long-winded advice can be summed-up like this... find a tactfull way to do it right, you'll both appreciate the outcome knowing he got a fair value and you didn't get taken advantage of. We're talking tens of thousands of dollars here if you are even a few percentages off!
OK, I'll shut-up now and wish youthe best!
Happy new year!
Swymmer
The idea of asking for a qualified 3rd party to help can be brought into a conversation tactfully. You might mention that you "read something" in a Trade Journal, and share a story about how an agency owner didn't get a fair price for his agency. There are other stories equally as bad for the buyer, as you might imagine.
When I bought my agency 11 years ago the seller was adamant about the price and would not budge. I was new to the acquisition idea and didn't ask the right questions. Sound Familure? Well, this agency didn't cost too much, and it had huge potential for the right person, so I agreed to his deal. My wife & I jumped in with both feet and paid his price of 3.5 times last-year's commissions, (not counting the contingencies), then decided we didn't like his location so we bought a better location, too. We put 20% down and paid the remainder off, with interest, over the next five years.
After I put this deal together I talked with my CPA only to find I should have discussed this with her first! Even though we paid it off in five years, as the seller wanted, we could not depreciate out the purchase that quickly. I paid income taxes on $60K each year that went straight to the seller! We survived it, but like I said in my earlier post, I would not try to do it that way again. The only way we kept our heads above water was to dramatically boost the accounts / premium coming in the door. We took the agency from $800K of premium to $2.5 mil in those 5 years. Now the pay-off is that I still have the purchase deduction but not the expense.
So, my long-winded advice can be summed-up like this... find a tactfull way to do it right, you'll both appreciate the outcome knowing he got a fair value and you didn't get taken advantage of. We're talking tens of thousands of dollars here if you are even a few percentages off!
OK, I'll shut-up now and wish youthe best!
Happy new year!
Swymmer
Re: Producer buying into an agency, question.
I was in a similar situation as you described when I was buying into the agency and providing a perpetuation option for my partner. I would agree with Wayne Lunday that having the proper valuation and deal structure are critical to success. I used Mystic Capital to help me http://www.mysticcapital.com was pleased with how it worked out, although there are other firms out there who can help as well.