There are many reasons owning your own insurance agency makes sense. However, what does TRUE ownership look like? Do you really know if you own your book of business or not? Read your MGA, franchise, or cluster group contract. Not all contracts are created equal, and you may not own all you think you own.
What is ‘ownership’?
When you own an insurance agency, you receive commissions for the business you write both first year and any renewal years. The second and more interesting part of ownership is the ability to sell your book someday for a multiple of annual revenue, either net or gross. It may look something like this:
The multiplier is not a set figure if you sell on the open market. This factor is dictated by the market and is generally somewhere between 1.5 and 3.25 times annual revenue. As you can see, this can be a VERY attractive way to grow a ‘nest egg’ for your retirement years as an owner!
BUT, true ownership can get tricky if you are part of an independent agency cluster or franchise. Many contracts require you to sell your book at a pre-determined (usually lower) multiplier, back to the franchise or group! In fact, I know of one franchise that requires selling back to them for .75 times the annual revenue! So, in the example above, that means receiving $187,500 rather than $625,000 for your hard-earned book of business.
What happens when I leave a group or franchise?
Another way that a lack of true ownership can affect an agency owner is when leaving a group or franchise before retirement. Some cluster group contracts can charge up to 20% of annual revenue if you ever want to leave their group and take YOUR customers with you. In the example above, if you wanted to leave a group like this with a $2MM premium book of business, it would cost $50,000. I have heard of agency owners cutting six-figure checks to leave a group and keep their customer base!
True ownership also matters when carriers award profit-sharing bonuses. Our group shares bonuses with our group members at up to 75% in favor of the member agency. Many MGA organizations and other groups out in the marketplace share 0%. This is how many of them generate a large portion of their annual revenue. If you want to understand more about Profit Sharing Bonuses and how they work, read my article here.
Questions to ask before joining a group, cluster, or franchise:
1. If I gain access to a carrier through your program, do I participate in profit-sharing bonuses from carriers?
2. Is there a penalty or ‘fee’ if I ever decide to leave your group?
3. What if I want to sell my book of business, can I sell it on the open market? Or do I have to sell back to you at a pre-determined rate?
*For a full list of crucial questions to ask, see THIS article.
Don’t sign a contract or use a third party for market/product access without knowing the answer to some of these crucial questions!