Internal Perpetuation Versus External Sale: How Do You Choose?
Deciding on the future of your business may be the most important decision you make in your life. It will have an effect on your family’s future, the futures of your employees and the futures of your clients. When you decide on how you want to perpetuate your business, it’s important you make that decision for the right reasons.
There are many factors involved in this decision; it can be difficult to know where to start. To help you out we’ve compiled a list of factors that demonstrate the similarities and differences between the two choices. This is not an exhaustive list, but it should provide some food for thought.
This is the most straightforward issue in this decision. You need to decide on the financial importance of the value of your agency. An external sale will always provide a higher valuation than an internal perpetuation. An internal perpetuation’s valuation can be anywhere from 25% to 40% lower than the value you will achieve in a third party sale. You just need to decide how much your financial future relies on the value of your agency.
As an insurance agency owner, you understand the value of trust. Trustworthy agents are most likely to claim the bigger accounts and trustworthy employees tend to take over in internal perpetuations. If you’re deciding on how to perpetuate your agency, trust will be a factor. With an internal perpetuation, you know you must pass the business to someone you trust. That trust should be focused on a single individual. Strong management groups are important, but a single leader is critical. If you don’t see the next “You” in the management group, internal perpetuations can be challenging.
At some point in your career, you’ll start thinking about legacy. You will start to consider the agency you will leave behind. When you’re planning an internal perpetuation, you have more control over your legacy. You can choose a successor and plan the future with them. You don’t have the same control with an external sale. Like finding a buyer you trust, you can find the buyer who will protect your legacy. When you identify the kind of legacy you want to leave, you can work to find the right buyer for your agency.
Both internal perpetuations and external sales require long-term planning. The best advice we can give any agency owner is to run your agency like you’re going to sell it tomorrow. Whichever perpetuation type you have in mind, you should start planning for your agency’s future now. The earlier you start to plan, the more control you will have.
Most agency owners will want some form of closure or finality when they perpetuate their business. When you’re out of the business, you want to stay out. In an external sale, you can effectively plan your exit. You agree on a value and payment plan with your buyer and then decide when you will retire. With an internal perpetuation, it can be a bit more complex. Employees can rarely afford to buy an owner’s shares outright, so the value is usually paid through future earnings. That means you still have a real interest in the success of the business long after you’ve officially left the company. If earnings are reduced, you may need to get back involved to enhance the chances of payment. This is never a pleasant situation.
Whichever of these factors is most important to you, an argument can be made for either external or internal perpetuation. The important thing is to make the decision for the right reasons and to start planning now.
It can be hard to know what to expect when you decide to leave your business. There are 3 common scenarios that occur when you internally perpetuate your agency – there is the ideal situation, the one which faces some challenges and the one that seems destined to fail. Contact us to see how we can help you achieve the best outcome.
As a firm, we believe answering the question “How much is my agency worth?” is part of our responsibility and the foundation of a great working relationship – even if that is further in the future. Because of this we, unlike most firms, offer free insurance agency valuations for those who qualify. Click below to apply.