Every successful independent insurance agency eventually faces a critical question: What’s the plan for perpetuation? Ensuring a smooth internal transition requires careful planning, strategic financial structuring, and collaboration among stakeholders. One of the most important steps is having a documented perpetuation plan. Agencies with such a plan tend to command higher value because they demonstrate clear intent, strong leadership, and well-defined succession steps.
Exploring Internal Perpetuation Strategies for Transferring Agency Ownership
If you're considering transferring ownership to family members or key employees, there are several internal options to explore. Most agencies use a blend of methods to optimize both financial outcomes and the long-term stability of the business. Below are five practical internal perpetuation strategies:
- Gifting: Gifting stock is a common option when transferring ownership to family. In 2024, the IRS allows gifts up to $18,000 per recipient without triggering tax liability. A married couple can jointly give $36,000 to each child or family member annually, gradually transitioning ownership without requiring large upfront payments.
- Stock Bonus: A stock bonus involves awarding shares to key employees. While the value of the stock is considered taxable income to the recipient, it is tax-deductible for the agency. This approach rewards top performers and brings them into ownership, even if they lack the capital to purchase shares outright.
- Stock Redemption: In this approach, the agency repurchases outstanding shares and retires them as treasury stock. This reduces the total number of shares and increases the ownership percentage of the remaining shareholders. One challenge is that the agency must use after-tax dollars to fund the redemption.
- Personal Buyout: Buyouts can be funded through personal savings, bank loans, or seller-held notes. Bonuses tied to agency performance can help employees accumulate the funds to purchase shares. Bank loans can be secured with the agency's book of business, while seller notes offer flexible, often lower-risk repayment terms over time.
- Combination Approach: Many agencies use a mix of gifting, loans, and seller financing. This allows future owners to show commitment ("skin in the game") while making the transition financially manageable. It's essential to assess whether buyers are bankable and have access to the necessary resources.
There's no universal formula for agency perpetuation. The best path forward depends on your team, finances, and long-term goals. Consulting with advisors will ensure a strategy that fits your agency’s unique situation.
AAI is a business development support network for independent insurance agency owners looking to gain invaluable guidance, training, and technology to grow their Agency. AAI offers personalized programs specific to your agency’s background and needs, not a one-size fits all approach. We give agents the resources and support to succeed to grow bigger and more efficiently. Contact us today to discuss how.