Nothing lasts forever. That’s a truism we’ve all heard over and over again. It’s also one that a lot of insurance agency owners ignore. We encounter many owners who see their agency as an ATM. They use the agency to fund their lifestyle and treat it as an endless source of cash.
Eventually, these owners have to perpetuate or sell their agency. When that time comes, we always hear the same phrase. ‘I can’t afford to sell.’ These owners can’t afford to sell, but they can afford to continue their lifestyle.
I Can’t Afford to Sell
The truth is they ‘can’t afford’ both. They failed to plan for a future without their agency to refill their pockets. They expected it to last forever. Now they have two choices, give up the lifestyle now or risk losing everything later. It doesn’t have to be this way.
You can avoid this trap if you plan effectively. Planning is not about how much you earn, it’s about how much you spend. If you spend everything you earn, what will happen when you stop earning?
No matter how much you try to fight it, that day will come. You will not be an agency owner for all of your life. Sooner or later you will retire.
Ignoring the Inevitable
Agency owners who ignore that inevitability will be left with no savings and a valuable business that they can’t afford to sell. They get stuck between a rock and a hard place.
Best Advice We Have Ever Given
In its simplest terms, a sale trades future cash flows for an upfront payment. As an example, a deal with a 7 multiple will trade 7 years of future cash flows for a guaranteed upfront payment. It also trades ordinary income for a capital gain. The business risk transfers to the Buyer. If you are 55 years old, you can’t expect a sale to fund your lifestyle for the rest of your life if your current expenses equal the agency’s current cash flow. This is what you should do. Unfortunately, we see very few agency owners that are willing to execute on this strategy.
- Pay yourself as an employee and not as a business owner. If you are a producer, pay yourself as a producer on your new and retained business.
- If you are not a producer, base your compensation on a market salary that you would be required to pay to another party.
- Use the remaining cash flow of the business to fund your retirement. Continue to do this until your portfolio is sufficient to fund a large portion of your retirement income. The sale will fund the remainder.
- Hire a professional money manager now. They will help you manage your assets and instill some discipline.
- Never forget that it is not about how much you earn, it is about how much you spend. You can make adjustments to your lifestyle and you can spend less.
You don’t want to be one of those agency owners who can’t afford to sell at 55 when their agency is at its highest value and then become an owner who can’t afford to sell at 65 because they can’t afford to retire. I’m sure that this isn’t an original concept, but wealthy people got that way because they lived under their means. They didn’t live up to their means and they certainly didn’t live beyond their means. Just because your agency is very profitable doesn’t mean that you have to spend those profits today.
It is never too early to start planning for your future and your retirement, but not all plans are pulled off seamlessly.
Insurance Agency Valuations
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 insurance agency valuations for those who qualify. Click below to apply.
