Factors Impacting Agency Valuations | Sell-side M&A Keeping it in the Family: Ways to Transfer Agency Ownership Internally

An agency's book of business is often its most valuable asset. As agency principals near retirement, maximizing that value through a strategic internal sale or transfer is crucial. Yet navigating the dynamics of transactions between an agency, its employees, and shareholders can be complex.

This guide will explore the three most common types of internal agency transactions, examining their key mechanisms, operational impacts, and tax and legal considerations. A successful internal transition not only benefits the parties involved but helps sustain the agency's future.

Let's explore some key strategies and best practices to inform your approach.

Types of Internal Agency Transactions

1. Sale to Employee or Family Member

Selling an agency internally often involves selling below market value, creating affordability challenges for the employee or family member buyer. The seller usually holds a note from the buyer, who may have limited collateral outside the agency's value.

This can complicate the seller's ability to fully retire, as they remain tied to the agency's success and may need to step back in if the buyer defaults. With limited resources, the buyer may struggle to make payments, especially in economic downturns. Proper structuring and contingency planning are essential.

2. Gifting Stock

When agency owners gift stock to a family member, they must navigate IRS regulations to avoid penalties. Gifts over the annual exclusion amount require adherence to gift tax rules and may necessitate a professional agency valuation for compliance.

Without following proper procedures, such as potentially filing a gift tax return, there could be implications for the giver's lifetime federal gift tax exemption. Consulting with a tax professional is advisable to ensure all obligations are met.

3. Sale of Stock to Existing Shareholder

Transfers of stock between existing shareholders or partners should be governed by an agreement outlining scenarios like death, disability, retirement, or termination, alongside the agency's valuation process and payment terms.

For LLCs, these details are specified in the Members Operating Agreement. The agreement provides clarity on how to handle a shareholder leaving the company, determines share value, and specifies the timeline and structure of payments. It creates transparency and expectations around ownership transfers.

Operational Impact of Internal Sales

Internal sales typically lead to minimal operational changes, allowing the agency to maintain its established identity, employees, compensation, benefits, client relationships and carrier appointments. Business continues as usual, which can be a key priority for many agency owners. The continuity provided by an internal sale can be highly valuable.

Conclusion

The three main types of internal agency transactions each have their own nuances and requirements. Whether selling to an employee or family member, gifting stock, or transferring shares to an existing owner, it is critical to follow proper legal and tax procedures. Compliance helps avoid penalties and ensures a smooth transition.

Well-executed internal sales allow agencies to preserve their identity and relationships while transitioning ownership. The key is understanding the mechanics of each approach and properly structuring the transaction.

With careful planning and execution, internal sales can provide a sustainable path forward that meets the needs of all parties and positions the agency for continued success. Seeking professional guidance can help navigate the complexities and achieve the best outcome.