Today's Viewpoint: A MarshBerry Publication


Control your own destiny by choosing a perpetuation strategy that helps build a stronger company, one with greater value, and potential ownership opportunities for its employees.  

As the life cycle of a privately held insurance brokerage progresses, owners inevitably ponder “what’s next?” – knowing an eventual transition of ownership will take place. Questions begin to surface around the various routes available to preserve the firm’s legacy. Many, however, fail to consider a more crucial question: Have  shareholders and/or leadership positioned the firm from a financial, cultural and organizational standpoint that maximizes shareholder value and sustains the firm’s legacy?

Many owners have not. Perpetuation is a continual series of activities and transactions, not a single event. It is the perpetual process that can give long-term sustainability to a company by gradually and continuously transitioning ownership to the next generation. It requires a defined plan that includes details about people, commitments, value, cash flow and funding. Without this process, owners are often confronted with the hard reality of selling the firm, not because they want to, but because they have failed to make perpetuation the ultimate lifestyle choice. Consequently, owners are left navigating a vast valuation gap that limits the available routes a brokerage can take to continuing a firm’s legacy.  

How to transition the business at the time of succession may be a difficult decision for the owner, but here are some (but not all) of the more common considerations and potential routes to help inform the decision.

Route 1: Control Your Destiny – Internal Perpetuation

Most brokerage owners want to perpetuate internally, which passes the ownership (and the legacy) on to family or other key leader(s). Yet, few take the necessary steps to ensure internal perpetuation can be a reality. Why? The vast majority of insurance agents and brokers are complacent and have become satisfied with the status quo of recurring revenue and highly controllable margins. The irony is that many of the characteristics that breed complacency are also the characteristics that make the insurance distribution industry attractive to buyers.

Owners choosing the internal perpetuation route should consider implementing a plan that drives predictable, profitable organic growth (PPOG) so internal buyers will accept the risk of leverage. This includes crafting an intoxicating sales culture that consistently achieves new business equivalent to 20% of prior year commission. This also means operating at a sustainable pro forma margin to ensure that the valuation delta (the difference between a firm’s internal value and the value that an external strategic buyer would pay) is as small as possible. It’s important to reinvest in the firm through identification and empowerment of a next generation leadership team that performs at a level where owners will want to “hold paper.”

One specific option for internal perpetuation is implementing an Employee Stock Ownership Plan (ESOP) trust. An ESOP generally distributes ownership among all employees, as opposed to other stock transfer methods that involve select employees. The owner receives cash for their shares and employees get financial interest in the stock that is held by the trust. Some benefits of ESOPs include:

  • allowing owners to maintain a legacy;
  • the tax treatment allows owners to potentially maximize post-sale, after-tax proceeds;
  • it provides flexibility for the sale process, allowing for an exit strategy that happens over a period of time.

One challenge of an ESOP is the structure can be rather complex, requiring significant planning and legal counsel, with ongoing costs related to plan maintenance. But often owners find that the tax deductibility and other benefits associated with this model are very attractive. ESOPs are highly regulated and should be approached carefully.

Route 2: Explore Strategic Alternatives – External Perpetuation

If a brokerage owner is unable or unwilling to invest in an internal perpetuation plan, then considering a sale of the organization to a private equity-backed firm, broker, independent brokerage or financial institution can be a viable option. With external perpetuation, the cultural characteristics of the buyer and the valuation of a firm will be the largest areas of focus for the seller. While the current uncertainty in the economic environment plays a role in valuations, the insurance distribution industry is an incredibly attractive investment and has a long history of resiliency. 

Selecting the right buyer, with the right cultural characteristics, is crucial to the success of sale. You can think of the universe of buyers along a spectrum ranging left to right from autonomous to more structured (x-axis) and top to bottom from robust resources to nominal resources (y-axis). As the number of interested buyers looking to invest in insurance distribution increases, so does the chances for sellers to find near-complete cultural compatibility. Buyers are focusing on potential targets who they believe can make them better and help give them a competitive advantage. PPOG is still the greatest differentiator for buyers coupled with next generation leadership and strong organization reinvestment.

Next, understanding the valuation delta is equally important. “What’s my firm worth?” is one of the first questions asked when owners consider a sale. Fair market value, in the broadest sense, is the price at which a business could change hands between a hypothetical willing buyer and seller, with no external pressures. These “pressures” are stripped from the equation, and what is left is a number that’s subjective and impacted by a firm’s position at a given place and time. That’s why there is often a large valuation delta between fair market value and strategic value creating an intoxicating pull for owners to strongly consider this route, especially in periods of escalated valuations. 

Route 3: Do Nothing

Hear that? That’s the ominous sound of a can being kicked further down the road. This is a default (and an easy) strategy, but it may not yield the best results. This path could result in a significant internal vs. external valuation gap. In this common scenario, profit distributions are prioritized over reinvestment which creates a shrinking asset. Employees become disinterested because of lack of opportunity and clarity about what the future holds and attracting and retaining top talent can become a challenge. Eventually, the firm will likely sell at a discount because there is no internal market and nothing that materially differentiates the firm from its peers.

Have a Successful Perpetuation Plan

In any aspect of life, transition is not an easy thing. The simple truth is that at some point, transition will occur. You can choose to embrace inevitable change and prepare for it – or allow it to dictate your path. For owners of a privately-held business, an eventual transition of equity will take place and they must ask themselves the critical question: Have the shareholders and/or leadership positioned the firm from a financial, cultural and organizational standpoint to maximize shareholder value and sustain the firm’s legacy?

A strong leader will deliver a message that the perpetuation process is designed to build a stronger company, one with greater value, and potential ownership opportunities for its employees. It’s time to control your own destiny while you still have an active choice in its future.

If you have questions about Today’s ViewPoint, or would like to learn more about how MarshBerry can help your firm determine its path forward, please email or call Kyle Hoeft, Vice President, at 616.723.8428.

Investment banking services offered through MarshBerry Capital, LLC, Member FINRA and SIPC, and an affiliate of Marsh, Berry & Company, LLC, 28601 Chagrin Blvd, Suite 400, Woodmere, OH 44122 (440) 354-3230

Determining the Right Path for Perpetuation – A FocalPoint Webinar

Join Kyle Hoeft on Thursday June 8 at 1:00 pm ET/ 10:00 am PT as he explores the available options for brokerages looking to control their own destiny and determine which path is right for the future of their firms. Register today for this exclusive FocalPoint webinar!

Contact Kyle Hoeft
If you have questions about Today's ViewPoint, or would like to learn more about how MarshBerry can help your firm determine its path forward, please email or call Kyle Hoeft, Vice President, at 616.723.8428.

MarshBerry continues to be the #1 sell side advisor in the industry (as ranked by S&P Global). If you're considering selling your firm, we are the best choice to help you through the complicated process. If you don't hire MarshBerry, hire a reputable advisor that can help you navigate one of the most important business decisions you will ever make. You will be much better off having an advisor in your corner that knows the industry than trying to do this on your own.