Over the last several years, businesses of all industries were in a “perfect storm” when it came to the struggle of accessing credit. Agents and brokers who needed extra capital to grow through acquisitions, hiring, refinancing agency debt to improve cash flow and meet other strategic objectives often couldn’t get funding. What’s more, aging owners who were ready to perpetuate found themselves in a quandary as chosen successors with plans to buy into ownership experienced similar, if not greater challenges.
Myth: Successions involving successors are typically successful.
A reality about borrowing is the trouble buyers have when attempting to purchase an agency as part of a succession plan. Existing owners usually want a large sum of cash up front in order to have sufficient funds for retirement. Often, these industry veterans set their sights on having a family member, long-time manager or thriving producers take over what they’ve worked so hard to build. Not only does this approach allow them to see the continuation of their vision and legacy, it also helps them provide great opportunities to the people who’ve demonstrated a commitment to the business. Unfortunately, those dreams are often unrealized.
It is difficult for individuals without cash or sizeable assets to get traditional bank financing. Even for those chosen professionals who are well-suited to take over a business and ensure its growth and future success, the one thing that stands between them and ownership is financing. With nontraditional lenders, however, successors have opportunities to secure financing that might not exist with banks. Because the future commissions of the agency to be purchased are used as collateral —and sometimes with more reasonable cash amounts due at loan closing —family members and other buyers can obtain commercial financing to see the succession plan come to fruition.
The awareness of viable financing options has probably never been more important to the insurance industry than it is right now. As a majority of agency principals are closing in on retirement and prefer an internal succession, owners and future would-be owners need to know about succession loans, management recapitalizations and other financial products that are available to help keep the agency channel alive and strong through transfer of ownership.
Even the most sophisticated and financially sound insurance businesses may be surprised if they are denied a commercial loan by a traditional bank. Despite the lending models that persist in making financing a challenge, owners should be encouraged. Whether they decide to pursue a loan with a traditional bank or a niche lender, both will look for evidence that the agency owner has the ability to pay off the loan as well as personal and business financial strength and integrity. If they choose to pursue a loan with a niche lender, the projected cash flows from renewal commissions will be key to collateralizing a loan and the amount owners can potentially borrow will depend less on personal assets and more on such factors as the anticipated volume of renewal commissions, the types of insurance products they sell, the insurance carriers’ financial strength ratings, and the owner’s FICO score.
Although securing capital may still pose challenges for insurance agents and brokers looking to the future, there’s relief in knowing they can find and secure realistic debt that’s properly structured to position their business for long-term success.