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Insurance Agency Ownership Perpetuation. Tom Doran. Reagan Perpetuation Studies. Insurance Agency Ownership Perpetuation. T wo Excellent Options:. or. External Perpetuation. Internal Perpetuation. The Four Pillars of Internal Perpetuation. Healthy Operation. Reasonable Sellers. - PowerPoint PPT Presentation

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Insurance Agency Ownership PerpetuationTom Doran

CONFIDENTIALCONFIDENTIALInsurance Agency Ownership PerpetuationReagan Perpetuation Studies

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CONFIDENTIALInsurance Agency Ownership PerpetuationInsurance Agency Ownership PerpetuationTwo Excellent Options:

InternalPerpetuation

ExternalPerpetuationor3CONFIDENTIALInsurance Agency Ownership PerpetuationThe Four Pillars of Internal Perpetuation4

Healthy OperationReasonable SellersAble BuyersEffective Transfer MechanismCONFIDENTIALInsurance Agency Ownership PerpetuationThe Four Pillars of Perpetuation5Healthy OperationReasonable SellersAble BuyersEffective Transfer MechanismCONFIDENTIALInsurance Agency Ownership PerpetuationProfitability6EBITDA Margin (% of revenue)% of IndustryValue at 6.0x EBITDA (expressed as a multiple of revenue)Less than 10%21%Less than 0.6 x10% to 20%35%0.6 x 1.2 x20% to 30%26%1.2 x 1.8 xGreater than 30%18%Greater than 1.8 xCONFIDENTIALInsurance Agency Ownership PerpetuationGrowth is EssentialGrowth provides buyer purchasing powerGrowth influences the EBITDA multiple, which impacts valueGrowth means viability

7CONFIDENTIALInsurance Agency Ownership PerpetuationThe Four Pillars of Perpetuation8Healthy OperationReasonable SellersAble BuyersEffective Transfer MechanismCONFIDENTIALInsurance Agency Ownership PerpetuationAccept Internal Valuations9Are Sellers in Your Firm Willing to Take a Discount to a Third-Party Valuation?CONFIDENTIALInsurance Agency Ownership Perpetuation7 yearsFinance the Deal10Are Sellers receiving cash at close or are they financing the deal?MEDIAN DOWN PAYMENT12.5%MEDIAN FINANCING PERIODCONFIDENTIALInsurance Agency Ownership PerpetuationTime Share Sales Appropriately11Current WASA53.8WASA in 10 Years56.7Assumes sales at age 65 and no sales to younger employees*CONFIDENTIALInsurance Agency Ownership PerpetuationThe Four Pillars of Perpetuation12Healthy OperationReasonable SellersAble BuyersEffective Transfer MechanismCONFIDENTIALInsurance Agency Ownership PerpetuationAssessing Financial Ability13BUYER COVERAGE RATIO

Buyer Ownership Distributions or Bonuses Buyer Principal & Interest Payments First-year metric: Does not contemplate growth in the business Pre-tax metric: Taxes on ownership bonuses or distributions not included Down payment not factored into the calculationCONFIDENTIALInsurance Agency Ownership PerpetuationThe Buyer Coverage Ratio14Is Your Firms Buyer Coverage Ratio 100% or Higher?CONFIDENTIALInsurance Agency Ownership Perpetuation100% Buyer Coverage Ratio Free Ride155% of $5 million firm$25,000 down Annual out-of-pocket tax expenses of $8,700

3% of $15 million firm$45,000 downAnnual out-of-pocket tax expenses of $15,700

Out of Pocket Costs (BCR = 100%)Typical Buyer ProfileAge 37Highly compensated ProducerRisk tolerantPlays well with others

CONFIDENTIALInsurance Agency Ownership PerpetuationWhat Does a Buyer Transaction Look Like?16MEDIAN DOWN PAYMENT10%MEDIAN FINANCING PERIOD8 yearsMEDIAN BUYER COVERAGE RATIO100%CONFIDENTIALInsurance Agency Ownership PerpetuationThe Biggest Challenges to Finding Buyers17CONFIDENTIALInsurance Agency Ownership PerpetuationThe Four Pillars of Perpetuation18Healthy OperationReasonable SellersAble BuyersEffective Transfer MechanismCONFIDENTIALInsurance Agency Ownership PerpetuationIndustry Use of Transfer Mechanisms19What is Your Firms Primary Transfer Mechanism?CONFIDENTIALInsurance Agency Ownership PerpetuationHow Do the Pieces Fit Together?20CONFIDENTIALInsurance Agency Ownership PerpetuationWhy remain independent?Because this is an incredibly resilient industry The future has never been brighter for creative and innovative brokersThe best talent in the industry follows the equity opportunities available at most independentsUnparalleled quality of lifeBecause the economic rewards are sizeable

21CONFIDENTIALInsurance Agency Ownership PerpetuationRecoveryAgency values have increased during every economic period in past 2 decadesHardMarketThe Great Soft MarketTheLeverageBubble6.9% Annual Growth Rate

9.4%Annual Growth Rate

10.6%Annual Growth RateTheGreatRecession22CONFIDENTIALInsurance Agency Ownership PerpetuationFocus on operating results to support a robust internal valuation and distributable earningsHiring and developing of young professionals (aka buyers)Plan for it, dont assume it will simply happen

Keys to remaining Independent

23CONFIDENTIALInsurance Agency Ownership Perpetuation1998 Business Insurance Top 10024As of 7/19/99

Who has not changed hands?CONFIDENTIALInsurance Agency Ownership Perpetuation1998 Business Insurance Top 10025As of 7/19/99

Who has not changed hands?CONFIDENTIALInsurance Agency Ownership PerpetuationWhy Sell to a Third-Party Buyer?26CONFIDENTIALInsurance Agency Ownership PerpetuationValuation Realities*Reagan Value Index and Reagan Consulting analysis27CONFIDENTIALInsurance Agency Ownership PerpetuationDeal activity scorecardNotes: 1Through 12/15/13Source: SNL FinancialMost active buyers list unchanged, but deals down by halfBuyer2012 Deals2013 Deals1Hub2918Confie Seguros1817AssuredPartners2716Arthur J. Gallagher6012Fidelity National Financial78Brown & Brown165Marsh Agency145USI125Total1838628CONFIDENTIALInsurance Agency Ownership PerpetuationAcquisition market share by type of buyerSource: SNL Financial, Includes North American DealsPrivate Equity from last to first29CONFIDENTIALInsurance Agency Ownership Perpetuation

Keys to successful perpetuation internal or external30CONFIDENTIALInsurance Agency Ownership PerpetuationMaximizing Valuation and Marketability - Start with a solid foundationRestrictive AgreementsLegal StructureOwnership of Assets and Exit StrategiesAlign Ownership InterestsPeople InvestmentSales Culture31CONFIDENTIALInsurance Agency Ownership PerpetuationBuild carefully to achieve desired resultsConcentration RiskMinimize Long-Term CommitmentsMarket CompensationClean Financial StatementsCareful Long-Term InvestmentsMaximize ProfitabilityAdvisory TeamRestrictive AgreementsLegal StructureOwnership of Assets and Exit StrategiesAlign Ownership InterestsPeople InvestmentSales Culture32CONFIDENTIALInsurance Agency Ownership PerpetuationTo access Reagans Private Ownership Study, visit our webpage atwww.reaganconsulting.com33

CONFIDENTIALInsurance Agency Ownership PerpetuationTom DoranSenior Vice President & PrincipalTom joined Reagan Consulting as a consultant in 1993 and became a principal in the firm in 1995. He holds an undergraduate degree in Computer Information Systems and a Masters of Business Administration from Georgia State University. Before joining Reagan Consulting, he worked in the computer industry, both as a software developer and as a management consultant. Toms areas of expertise include merger and acquisition representation, agency valuation, ownership perpetuation planning, agency valuation enhancement and strategic planning facilitation.Tom is a regular contributor to Reagan Consultings industry studies and is frequently published in various insurance industry publications. He also speaks on a regular basis to industry trade groups and associations on a wide variety of topics concerning the insurance distribution system.

404.869.2534tom@reaganconsulting.com34CONFIDENTIALInsurance Agency Ownership Perpetuation

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