What will happen to your insurance agency when the principal retires or can no longer run the agency?
This is an important question for every independent insurance agency owner to consider. The answer to this question is the agency’s perpetuation plan.
Perpetuation planning is becoming a pressing issue as many agency principals near retirement age. The research team at Liberty Mutual surveyed more than 1,100 independent insurance agency team members for the 2023 Agency Growth Study, including more than 450 agency principals and owners. Of the principals surveyed, 40% were older than 60, and 20% were older than 65. Half of the principals surveyed said their agency will experience a major change of ownership in the next 10 years.
However, perpetuation planning is not just about retirement. Unforeseen circumstances could force agency owners of any age to step back from leading the agency. A clear, well-documented perpetuation plan can help protect the agency, staff and clients if something unexpected happens.
In this report, we’ll explore key findings about agency perpetuation from the 2023 Agency Growth Study.
Every successful independent insurance agency will eventually be sold, merged or handed off to a successor.
Proactive perpetuation planning is about making sure that the agency’s future is protected, no matter what succession path is taken. It’s about aligning priorities, ensuring valuations are maximized, and that a plan is put in place that allows an agency’s legacy to continue on in a way that is beneficial for employees, for customers, and for everyone with a current or former ownership stake.
As more agency owners approach retirement and M&A plays an increasingly important role in the industry, strategic perpetuation planning is also becoming increasingly important for both individual agencies and for the overall health of the independent agency system.
The challenges of insurance agency perpetuation
There are many different options for selling or perpetuating an independent insurance agency, but they boil down to two main methods: internal perpetuation or external sale.
The 2023 Agency Growth Study found that internal perpetuation is the most popular plan among agency owners. But with the insurance industry facing a talent shortage, finding and developing successors can be difficult. Even when a family member is taking over the business, successful internal perpetuation requires careful planning and ongoing mentorship years in advance of the principal stepping away. In the 2022 Agency Universe Study, principals listed a lack of available talent as their top obstacle to the future of their agency ownership.
Agency owners who can’t perpetuate internally often opt to sell. In the last few years, selling was an attractive option. Mergers and acquisitions reached an all-time high in 2021, and an influx of private equity buyers gave agency owners more options to sell and to do so for higher multiples.
However, M&A activity has significantly slowed in the face of economic uncertainty. Markets are quickly changing, and agency owners may not have as many offers and options to sell – especially those who own small P&C-focused agencies.
Whether planning to sell or hand the agency off to internal talent, it’s important for agency owners to know their options and have backup plans. Insurance agency perpetuation plans will likely shift and evolve over time, but it’s never too early to start planning. Taking a long-term view can help owners identify their goals for the perpetuation process, maximize the value of the agency and develop future agency leaders.
Half of agencies anticipate an ownership change in the next 10 years
Just over half of agency principals anticipate a major change in agency ownership within the next 10 years. Slightly less than a third of principals anticipate ownership to remain the same for more than 10 years, and 16% aren’t sure about future ownership plans.
Agency staff members are less likely to know about plans for agency ownership – 47% of those in non-principal roles said they don’t know when there will be a change in ownership.
Anticipated timing of major ownership changes
Agency perpetuation plans differ from the reality of agency acquisition
Most agencies have some sort of perpetuation plan in place. Nearly 70% of agency principals said they have a plan for who will take over the business. The most common perpetuation plan is for children or family members to take over the agency – 42% of principals who expect an ownership change in the next five years are planning for a family member to take over.
Other perpetuation plans differ depending on the size of the agency. Agencies with more than seven employees are most likely to plan for other principals to buy out a departing owner or principal’s interest. Agencies with fewer than seven employees are more likely to consider selling to an outside party.
However, there is disconnect between how agencies plan to perpetuate and the reality of how people become agency owners. When we asked agency owners and principals how they came to run the agency, 53% said they started the agency from scratch. Just 17% took over from a family member.
Agency perpetuation plan
The path to ownership for principals
Developing future insurance agency leaders
While many agency owners want to keep their agency in the family, family members aren’t the only option for internal perpetuation. And there’s no guarantee that the identified family member will want to perpetuate the agency – especially if they’re not currently working in the insurance industry.
Hiring great staff members of varying ages and investing in leadership development can give agency owners more options for internal perpetuation. Our 2023 Agency Growth Study found that more than half of Millennial and Gen Z agency employees (those under 41 years old) and about a third of Gen X employees (42-57 years old) aspire to lead an agency one day.
Providing leadership development can help agencies attract top talent. Millennials and Gen Z listed “inspiring leadership to provide mentorship and career guidance” at the top of their list of characteristics they look for in an ideal employment situation, with 62% saying it was one of their top priorities.
However, only 42% of younger employees said their manager is actively developing them for leadership. And, as explored in our report on women in independent insurance agencies, agency owners may be overlooking promising female employees who could be great candidates for succession. Only 38% of women working in frontline roles said their manager is actively developing them for leadership, compared with 55% of men in the same age group. Perhaps as a result of this, women are significantly less likely than men to say they are excited about their future in their agency.
Hiring and developing talent is a worthwhile investment no matter the future plans of the agency. Owners hold a wealth of industry knowledge – more than half of the agencies that plan to perpetuate in the next five years have had the current leadership in place for more than 20 years. Mentoring future generations and passing on that knowledge is a key part of supporting the future of not just the individual agency, but the independent insurance agency system as a whole.
Click here to read about agents’ experiences and advice for internal perpetuation.
My advice would be to give young leaders nuggets of ownership early on.
I would have loved to have been, like, a .05% equity owner in the company and then be in shareholder meetings and have a seat at the table.
I think if the young leadership team can taste it early, it’s incentivizing. It also makes them prove that they are ownership material. If you give someone a taste of what ownership is, you’ll figure out if that person’s really an owner and really believes it’s about the company first.
Best practices for increasing agency value
The 2023 Agency Growth Study found that agencies that plan to perpetuate in the next five years are less focused on growth and less likely to use digital tools than agencies with a longer timeline for perpetuation.
Though it may be tempting for leaders to take their foot off the gas as they prepare to transition out of ownership, this may be detrimental for agency valuation.
Investing in technology can help agencies keep costs low, attract new customers, and boost client retention. For owners who want to sell, these are important factors in maximizing the value of an agency and attracting potential buyers. For those planning to perpetuate internally, this will help ease the transition and set future leaders up for success.
5 ways to maximize your agency's value
As more agency owners approach retirement age and fluctuating markets limit sales options, it’s more important than ever for independent insurance agency owners to think through what will happen to their agency when they no longer work there.
It’s never too early for agency owners to start planning for agency perpetuation. A perpetuation plan can help protect the agency in an unexpected event, ease leadership transitions and set the agency up for future success.