2021 Best Practices Study

Adapting to a Rapidly-Changing Environment

Internal Perpetuation Best Practices

but most likely won’t achieve the intended results. Let’s see how each of these strategies is likely to affect an agency’s BCR:

1) While increasing profit margins may be a great strategy overall, it is unlikely to improve the BCR, as a higher agency valuation will offset enhanced cash flows.

2) Hiring more producers will eventually widen the pool of available buyers, lessening the load for individual buyers. This will likely decrease the BCR because investments required to hire and develop producers will generally reduce distributions/bonuses available to buyers. 3) While increasing down payments on buyer notes technically improves an agency’s BCR by reducing payments on perpetuation notes, equity payments are simply accelerated and the underlying equity affordability remains unchanged.

The All-Important Fourth Pillar of Agency Perpetuation

Fortunately, other strategies will improve the BCR, enhancing equity affordability to buyers. These strategies focus primarily on the fourth pillar of internal perpetuation, an Effective Transfer Mechanism:

4) 5)

Secure or provide financing over longer time periods. Rather than eight years, consider 10+ years. Many industry banks (InsurBanc and others) now provide much longer-term financing than was previously available. Internal financing can also be extended to enhance affordability.

Reduce interest rates to IRS- approved minimums on agency or seller-financed notes. Take advantage of historically low interest rates when drafting buyer notes.

Increase profit distribution percentages to shareholders, helping ease buyers’ cash flow worries. Tread carefully when increasing distributions levels, as an agency still needs to make necessary growth investments (book purchases, producer hiring, tech improvements).

The adjusted example below highlights how implementing a mix of these three strategies can produce a higher BCR, ultimately increasing buyer affordability and enabling an agency to achieve its internal perpetuation goals.

2021 Carried Forward

2021 Adjusted

Value as Multiple of EBITDA

9.0x

Value as Multiple of EBITDA

9.0x

Down Payment

10.0%

Down Payment

10.0%

Years Financed

8.0

Years Financed

12.0

Interest Rate

3.0%

Interest Rate

3.0%

Profits Distributed

80%

Profits Distributed

85%

Pre-tax, First Year Buyer Coverage Ratio

Pre-tax, First Year Buyer Coverage Ratio

73%

110%

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