Life happens and you are getting a divorce. As you are negotiating the settlement terms, your spouse’s attorney is requesting the value of your insurance agency because it is subject to the division of assets 50/50.
While your personal life is being turned upside down, it is not ideal that you may have to pay a non-owner 50% of the value of your agency. Let’s break down how this will impact your value and potential next steps.
How Divorce Impacts Agency Value
There are two potential impacts, operationally and strategically, on the value of the agency. Let’s discuss operations first and then move to the strategic impact.
First, with operations, it depends on whether the spouse works in the agency. In many family agencies, it is commonplace for the spouse to play an important role in the agency – office manager, producer, CSR, bookkeeper, etc. If so, that could impact the dynamics of the operation and hinder growth. If the spouse works in the agency, develop an amicable plan as quickly as possible to exit the non-owner spouse out of the agency. Second, if the spouse does not have a role in the agency, then the impact moves to strategic value on the agency. This will depend on whether the couple entered into any pre-nuptial agreements prior to the marriage. While we all aspire for marriage to be a bond that lasts until death, the reality is that is no longer the case. The US divorce rate is estimated at 50%, 41% for first marriages and 67% for second marriages. Studies estimate that small business owners have a divorce rate of 43-48%.
In addition, Fortune Magazine published an article in 2024 that stated, “1 in 20 business owners have shut their doors due to the financial strain of a divorce. Three in five reported decreased mental well-being and motivation at work, and 35% of owners had to rely on outside help, such as family and friends, to keep their business afloat. For business owners experiencing divorce, 57% say their company has taken a financial hit, and 70& couldn’t focus on their work the same way.”
We do not know what the rate is for independent agency owners specifically, but based on anecdotal experience we would venture a guess it is pretty close to the national statistics. Agency ownership is a high-stress endeavor that takes immeasurable amounts of time to achieve success. The pride of ownership has many striving for excellence, at the expense of other relationships.
Therefore, we strongly advise all family agencies with multiple owners or those who are planning to perpetuate to the next generation have pre-nuptial agreements that remove agency ownership or value from joint marriage ownership. Having a pre-nuptial agreement creates open communication at the start of the marriage about the agency ownership, financial stability for the agency in the event of a divorce, and a simpler divorce if things go sour.
If you have done this, then the impact of divorce on y our agency should be minimal; if not, keep reading.
What Should I Do Next?
First, make sure you hire a good divorce attorney, because whether this is amicable or not, the division of assets will have an impact on the strategic value of your agency. You should seek out a divorce attorney that has experience dealing with dividing business ownership assets, as this will likely be one of the key sticking points in the dissolution.
Second, get an independent fair market valuation of your agency with a valuation analyst that has experience as an expert witness in this type of matter, like IA Valuations. is it possible that the agency is the biggest financial asset between the couple, and could be a point of contention in the divorce proceedings, therefore you want to be prepared by working with a valuation analyst that has experience in these situations.
Also, be sure to work closely with the valuation analyst on all of the factors that could affect the value. There are up to 27 factors that IA Valuations assesses in determining value – based primarily on past financial performance and future projected earnings. Those are impacted by a number of factors, including: growth, profitability, loss ratios/contingencies, staffing, carrier relationships, expense management, and many other factors.
How the agency performs and reports on these factors will be a plus or minus in terms of the agency’s value. Working closely with the valuation analyst to ensure every ongoing and one-time expense is properly accounted for will impact value. This is a tedious process, but one that ensures an accurate value is given to the agency and will help you avoid a contentious debate over the value of that agency.
No divorce attorney is going to accept an estimate from the agency owner as to the value of the agency. A quick Google search from a divorce attorney is going to provide a compelling reason why to require a third-party professional to complete a valuation of the business. Being proactive with this and selecting the firm will not impact the integrity or independence of the process or valuation but it will help you scrutinize the report and information required to complete the valuation.
Conclusion
While no one enters marriage with the prospect of divorce, the statistics are real, and it may affect you. While we do not have data on the divorce rate for independent agents, we know that as business owners in a sales-based profession, it can be a highly stressful environment, particularly the past 5 years with COVID and the hard market. You or your perpetuation plan may find yourself in a divorce situation potentially wreaking havoc on the success of the agency.
Divorce is one of the most stressful events in life. Knowing that, as a business owner and risk advisor, you should prepare yourself for every scenario. Whether you are splitting from a life partner or a business partner, understanding your risks in the relationship and options of how to minimize the impact on your agency is a phone call away to IA Valuations. If you are considering this or other questions related to your agency value, please contact IA Valuations CEO Jeff Smith at jeff@iavaluations.com.
By: Jeff Smith, JD, CIC, CAE
About IA Valuations and Agency Link – Founded in 2017, the IA Valuations team has performed over 300 valuations to independent insurance agencies across the U.S. Our advisors have 25+ years of experience guiding agency owners on maximizing their agency value, planning, and legal needs for ownership transition. In addition, IA Valuations has provided perpetuation planning, financial modeling and business planning for independent insurance agencies. Finally, IA Valuations has advised dozens of agency owners on selling their agencies through our Agency Link process. Agency Link is a platform that connects buyers and sellers together to further the growth and strength of the IA system. To learn more about IA Valuations, please visit IAValuations.com or contact@iavaluations.com.
The information provided in these documents is general in nature and shall not be construed as personal legal, tax or financial advice for your situation. Please contact@iavaluations.com to discuss your personal situation.
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