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Perpetuation Planning from a Young Agent’s Perspective

Explore perpetuation & planning, agency valuation, accessing capital, and post-transaction considerations from a young agent's perspective. Learn the steps, valuations, and tax implications in the M&A market.

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Perpetuation Planning from a Young Agent’s Perspective

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  1. Perpetuation Planning from a Young Agent’s Perspective July 21, 2015

  2. Background David Tralka President & CEO, InsurBanc David W. Tralka has more than 25 years of experience in banking and financial services. Mr. Tralka is responsible for keeping the bank focused on being an innovative provider of financial products and services for the independent agency community. Mr. Tralka brings a wealth of experience and leadership to the helm of InsurBanc. As a seasoned banker, his career is distinguished by an extensive tenure at Merrill Lynch where he served in a number of senior management positions including President of Merrill Lynch Bank and Trust in Princeton, NJ, and Chairman of Merrill Lynch Community Development Company. 2

  3. Today’s Discussion • Why are we here? • Where are we in today’s M&A market? • A Young Agent’s Perspective • Perpetuation & Planning • Agency Valuation • Accessing Capital • Post Transaction 3

  4. M&A Activity 2012-Now • Activity picked up in the latter part of 2013. • 2014 was a sizzling pace with 375 deals announced. 2015 may exceed 2014’s record level. • Through April, 2015, 148 deals announced. • Buyers are hungry, aggressive and enabled. Buying earnings potential. • Money is historically “cheap” 4

  5. Interest Rate Environment and Its Impact • Persistent low rate environment driving equity markets – public broker stock value high – currency helps drive premium prices • Low rates for debt capital when available – increases buying power • Stress test for rising rates – reverses trend for capital and equity valuation. • Timing the market is difficult but lead indicators are everywhere 5

  6. Availability of Capital & Liquidity • Low rate environment—drives activity • PEG Buyers are flush with Liquidity • The Credit Crunch is Over? Banks are getting aggressive but not in this space. • Agencies still viewed as a Specialty borrower 6

  7. A Young Agent’s Perspective 7

  8. A Young Agent’s Perspective 2014 Agency Universe-Future One Survey 8

  9. A Young Agent’s Perspective 9

  10. Buyers vs. Sellers Perspectives Differ If you are a Buyer – due diligence, technology platform, staff, company relationships, access to capital If you are a seller - Personal goals, tax considerations, maximizing agency value, timing, intangibles, quality of buyer 10

  11. First Steps • Consider the agency you are working at? Is there a chance to become part of the succession plan? • What will you have to offer? Concentrate on building a book of business, establishing carrier and client relationships, client retention 11

  12. First Steps Do you know… • the agency’s worth • the owner’s drivers of value • the goals/plans of the owner • that the goals match your desires Recognize the process requires attention and takes time! 12

  13. First Steps • Are your personal finances in order? Good credit and repayment history is an indictor of your ability to obtain financing 13

  14. Agency Perpetuation Planning • Seller’s Alternatives: • Sell to a Related Third Party – Internal Perpetuation • Colleagues/Partners/Family • Producers/Management • ESOP • Merge with another Agency • Sell to an Unrelated Third Party • Competitor/strategic buyer • PEG/Roll-up/ Financial buyer 14

  15. Agency Perpetuation PlanningInitial Considerations • Start before you think you have to – 5 years • Self-assessment • Honest with Yourself • Your Role & Identity in an organization • Emotions and Decision-making • Are You a Qualified Buyer? • Personal Financial Condition • Your Management skill set • Colleagues vs. Employees • Post transaction life • Consequences of Inadequate Planning 15

  16. Agency Perpetuation Planning • Your Willingness /ability to assume risk and debt • Viability of perpetuation plan or buy-sell • Size of debt structure required • Sustainability of post-transaction agency • Retention of staff/clients/appointments • Goals of Seller re: intangibles 16

  17. Tax Considerations • Tend to be seller concerns • Legal & Business Structure • Asset Sale • Stock Sale 17

  18. Valuing the Agency - Earnings • Determine Pro Forma Profitability. • Understand the mechanics of the income statement. • Determine an Appropriate Deal Structure. 18

  19. Valuing the Agency - Earnings • EBITDA aka Cash Flow • Adjustments for: • Executive compensation to market levels. • Producer’s comp to the Buyer’s level. • Normalize contingents. • Eliminate owner’s perks and other expenses. • Consolidation savings. Sometimes up-front. Who gets this value? 19

  20. Valuing an AgencyDrivers of Value • Brand/Reputation • Quality of Leadership • Quality of Staff • Continual Investments in Producers • Current from a technology perspective • Specializations • Restrictive Covenants This will give the appraiser an idea of the Quality of Earnings. “All Earnings are not created equal” 20

  21. Myths of Multiples • Integrity of available transaction data • Timing and context • EBITDA v. Revenue model • Public buyer v. Private buyer • Banks always cause a problem • Transaction size and structure • “CCM” aka Country Club Multiple • Believe nothing you hear 21

  22. Accessing Capital - Sources • Sellers • Banks • Personal Resources of Buyers • Other Institutional Sources/Some Combination of the Above 22

  23. Financial Preparation • Considerations on the Buy – Side • Personal financial situation • FICO Scores • Personal liquidity • Personal leverage • Risk appetite of your spouse/partner • Short term sacrifices for long term success • Tax returns- PFS – Clarity and organization 23

  24. Financial Preparation • Considerations on the Buy – Side • Quality of financial reporting • Cocktail napkin statements • Quality of agency management reporting • Operating profitability v. contingency profitability • Being in Trust • Operating trends over multiple years/cycles • Agency Real estate if applicable • Market leases • Ownership structure • Appraisals • Agency Valuation Reports 24

  25. Structuring a Deal • 100% Seller Note • 100% Bank Financing • Structured Transaction Bank/Seller • Notes/Mezzanine 25

  26. Deal Terms and Conditions • Loan Duration • Rates • Security and Collateral 26

  27. The Banker’s Perspective • Pro Forma Financials with Assumptions • Management Resumes • Contracts/Covenants • Basis of Valuation 27

  28. The Banker’s Perspective Traditional Industry Challenges • Lack of Tangible Assets on Balance Sheets • Managed Bottom Line • “Thin” Net Worth • Specialty Borrower • Lack true understanding of Enterprise Value 28

  29. The Banker’s Perspective • EBITDA & Debt Service Coverage • Adequacy of Working Capital • Adherence to Fiduciary Responsibilities • Skin in the Game • Realistic Assumptions? 29

  30. The Banker’s Perspective Financial Information • 3 Years FYE Statements • Management System Reports • 3 Years Tax Returns • Interim Financial Statement • Personal Financial Statement/Principals • 2 Year Tax Returns/Principals • Projections with Detailed Assumptions • Operating Account Statement/Analysis 30

  31. The Banker’s Perspective Key Financial Indicators • Trust Ratio • Current Ratio • Cash Flow/CMLTD (Debt Service Coverage) • Cash Flow/ LTD (Leverage) • Expense Management 31

  32. The Banker’s Perspective Business Analysis • Breakdown of Business Lines • Markets and Carriers • Retention Experience • Loss Ratios • Contingency History 32

  33. Perpetuation Case StudyFast Track Perpetuation Plan Agency Snapshot • Founded in 1886, fifth generation of owner • $10MM in premium • $1.4MM commission revenue • 50% personal and 50% business lines • 9 employees including 3 producers 33

  34. Perpetuation Case StudyFast Track Perpetuation Plan Perpetuation Plan Seller • Purchased agency in 1998 • Decided to perpetuate to the current Vice President of the agency and developed a solid perpetuation plan in 2011 34

  35. Perpetuation Case StudyFast Track Perpetuation Plan Perpetuation Plan Buyer • Joined the agency as a producer in 2002 • Groomed to become owner, gradually took on responsibility for carriers and client relationships. • Became Vice President in 2008 35

  36. Perpetuation Case StudyFast Track Perpetuation Plan The Challenge • A solid perpetuation plan was put in place in 2011 and no set date was established to execute the plan. • However, the owner was diagnosed with a terminal illness shortly thereafter and passed away in February of 2012. • Executor of estate requested a change in the finance structure • The perpetuation plan needed to be expedited along with a quick change in the finance structure. 36

  37. Perpetuation Case StudyFast Track Perpetuation Plan The Challenge • The buyer contacted the agency’s bank to execute the transaction, but they lacked the understanding of the industry, the agency’s financials and the overall situation. They required lengthy explanations before considering the proposal. 37

  38. Perpetuation Case StudyFast Track Perpetuation Plan The Solution • The buyer then contacted InsurBanc who was able to respond quickly under the tight timeline and offered a solid proposal within weeks of the initial meeting. 38

  39. Perpetuation Case StudyFast Track Perpetuation Plan The Structure • $3MM agency price • 2x commissions • $1,500M 7 year term loan • $1,500 seller note, subordinated • Security interest/Pledge of stock • $25M demand line of credit for general working capital. 39

  40. Perpetuation Case StudyFast Track Perpetuation Plan Points of Emphasis • Developed internal talent for succession • Well-crafted perpetuation plan absorbed shock of unforeseen circumstance • Well-run Trusted Choice Best Practice Agency • Utilized local, trusted advisors • Ultimate capital accessed by multiple sources 40

  41. Planning Ahead for a Transaction Seek Out the Advice of Professionals • Industry-Specific Consultants • Accountants • Attorneys • Bankers 41

  42. New Generation of Owner Now that you’re an owner, continually work to build value! • Management skills • Financial understanding • Developing and diversifying book of business • Institute drivers of value • Operational efficiencies • Staff and staff training • Recruiting producers • Producer development 42

  43. Concepts to Remember • Prepare to borrow before you need it. Attend to your own personal financial picture. • Open dialogue with the seller make transactions go smoothly . • Agencies are all unique and each M&A requires an independent approach. 43

  44. Questions & Answers 44

  45. Thank you! David Tralka 860-674-2300 dtralka@insurbanc.com

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