July 21, 2015. David Tralka President & CEO, InsurBanc David W. Tralka has more than 25 years of experience in banking and financial services. Mr. Tralka.

Perpetuation Planning from a Young Agent’s Perspective

July 21, 2015

David TralkaPresident & 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.

Background

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http://www.independentagent.com/Resources/StaffDevelopment/YoungAgents/

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

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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”

M&A Activity 2012-Now

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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

Interest Rate Environment and Its Impact

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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

Availability of Capital & Liquidity

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52% of Young Agents have a very optimistic outlook on their career

81% of young agents consider insurance to be a permanent career

•2014 Insurance Journal Young Agents Survey

34% of Young Agents feel very confident ownership dreams will come true


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25-40 41-45 46-50 51-55 56-60 61-65 66+

12%

8%

12%14%

18% 18% 18%

Age of Principals with 20%+ Ownership, 2014

2014 Agency Universe-Future One Survey


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1/3 of agency owners hoped to sell to family members•2012 Survey of Agent-Carrier Relationships

1/3 of agencies and brokers will change hands in the next 15 years.•A.M. Best, July ‘14


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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

Buyers vs. Sellers

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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

First Steps

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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!

First Steps

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

First Steps

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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

Agency Perpetuation Planning

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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

Agency Perpetuation PlanningInitial Considerations

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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

Agency Perpetuation Planning

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Tend to be seller concerns

Legal & Business Structure

Asset Sale

Stock Sale

Tax Considerations

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Determine Pro Forma Profitability.

Understand the mechanics of the income statement.

Determine an Appropriate Deal Structure.

Valuing the Agency - Earnings

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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?

Valuing the Agency - Earnings

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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”

Valuing an AgencyDrivers of Value

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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

Myths of Multiples

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Sellers

Banks

Personal Resources of Buyers

Other Institutional Sources/Some Combination of the Above

Accessing Capital - Sources

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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

Financial Preparation

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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

Financial Preparation

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100% Seller Note

100% Bank Financing

Structured Transaction Bank/Seller

Notes/Mezzanine

Structuring a Deal

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Loan Duration

Rates

Security and Collateral

Deal Terms and Conditions

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Pro Forma Financials with Assumptions

Management Resumes

Contracts/Covenants

Basis of Valuation

The Banker’s Perspective

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Traditional Industry Challenges

Lack of Tangible Assets on Balance Sheets Managed Bottom Line “Thin” Net Worth Specialty Borrower Lack true understanding of Enterprise Value


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EBITDA & Debt Service Coverage

Adequacy of Working Capital

Adherence to Fiduciary Responsibilities

Skin in the Game

Realistic Assumptions?


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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


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Key Financial Indicators

Trust Ratio Current Ratio Cash Flow/CMLTD (Debt Service Coverage) Cash Flow/ LTD (Leverage) Expense Management


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Business Analysis

Breakdown of Business Lines Markets and Carriers Retention Experience Loss Ratios Contingency History


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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

Perpetuation Case StudyFast Track Perpetuation Plan

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Perpetuation PlanSeller

Purchased agency in 1998

Decided to perpetuate to the current Vice President of the agency and developed a solid perpetuation plan in 2011


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Perpetuation PlanBuyer

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


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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.


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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.


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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.


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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.


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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


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Planning Ahead for a Transaction

Seek Out the Advice of Professionals Industry-Specific Consultants

Accountants

Attorneys

Bankers

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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

New Generation of Owner

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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.

Concepts to Remember

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Questions & Answers

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Thank you!David [email protected]


July 21, 2015. David Tralka President & CEO, InsurBanc David W. Tralka has more than 25 years of experience in banking and financial services. Mr. Tralka.

Documents

agency value

agency owners

independent agency community

agency universefuture

debt capital

carrier relationships

company relationships

client relationships