Latest / The Buyer & Seller Podcast with Fexingo: Business Brokers, Exits, and Private Sales Explained / How an Insurance Broker Passed the Business the Family Way
Transcript
- Lucas: Luna, when you hear the phrase 'selling a business,' what comes to mind first? Luna: Honestly? A competitive auction with private equity firms circling, maybe a strategic buyer swooping in, big check at closing. Lucas: Right. That's the sexy version. But the data tells a different story. According to the International Business Brokers Association, about 30 percent of all private business sales are internal — meaning the buyer is already inside the company. Luna: Thirty percent? That's higher than I would have guessed. Lucas: It is. And the success rate for those deals is significantly better. One study from the Exit Planning Institute found that internal transitions have a five-year survival rate north of 70 percent, versus closer to 50 percent for third-party sales. Luna: Wait — survival of what? The business itself? Lucas: Exactly. Whether the business is still operating independently under new ownership five years later. Internal buyers already know the culture, the customers, the messy operational details that don't show up in a CIM. Luna: So why don't more owners go that route? If it's stickier, why chase the PE check? Lucas: Three reasons. One: price. Internal buyers rarely pay top dollar because they can't — they're employees, not institutions. Two: complexity. You have to structure a deal the employee can actually afford. Three: ego. Some owners want the trophy of a big-name acquirer. Luna: Okay, let's get concrete. Do you have a real example? Lucas: Yeah — a regional insurance brokerage in Ohio. Let's call them Mid-State Insurance. Owner was sixty-four, wanted to retire, had one top producer — a guy named Dan — who'd been there fifteen years and wrote 40 percent of the policies. Luna: So Dan is obviously the internal candidate. Lucas: Right. But Dan doesn't have eight figures of liquid capital. He's a producer, not a financier. So the owner structured a five-year earn-out with a seller note. Luna: Walk me through the numbers. Lucas: The business was valued at about $4 million — roughly two times its annual EBITDA of $2 million. Standard for an independent agency. The owner wanted $3 million upfront and a $1 million earn-out. Luna: Dan couldn't do $3 million cash. Lucas: No. So they restructured: $500,000 cash from Dan — he had savings and a home equity line — plus a $2.5 million seller note at 6 percent interest over seven years, and a $1 million earn-out tied to client retention targets. Luna: So the owner is basically acting as the bank. Lucas: Exactly. And that's the core mechanism of an internal sale: seller financing. According to the Pepperdine Private Capital Markets Project, roughly 80 percent of all private business sales under $5 million involve a seller note. Luna: What's the typical terms on those notes? Lucas: Five to seven years, interest rates between 5 and 9 percent, often with a balloon payment at the end. And they're almost always subordinated to any senior debt the buyer might take on. Luna: Subordinated meaning the bank gets paid first if things go south. Lucas: Right. The seller takes the most risk. Which is why the earn-out is so common in internal deals — it aligns incentives. In Mid-State's case, Dan only pays the extra million if he retains at least 85 percent of the book each year. Luna: And does he? It's been — what, three years? Lucas: As of our latest check, retention is at 89 percent. Dan's been able to service the note from the agency's free cash flow, and the owner is getting regular interest payments while deferring a chunk of the capital gains tax. Luna: Tax deferral — that's a big piece. You can structure an installment sale under Section 453 of the tax code, right? Lucas: That's right. If the seller receives payments over multiple years, they only pay capital gains tax on the portion of each payment that represents profit. Spreading the gain can keep them in a lower bracket. Luna: So in Mid-State's case, if the owner's gain is, say, $3 million, instead of paying 20 percent on all of it in year one, he pays that rate on each installment as it comes in. Could save him hundreds of thousands. Lucas: Easily. And there's another angle: the step-up in basis. When Dan eventually sells the agency, he'll get a step-up on the assets he bought, which can reduce future capital gains. Luna: But there's risk on the seller's side beyond just not getting paid. If Dan runs the business into the ground, the collateral — the business itself — might be worthless. Lucas: That's why most seller notes are secured by the business assets and sometimes a personal guarantee from the buyer. In Mid-State's case, the owner also required a key-person life insurance policy on Dan, payable to the seller. Luna: Smart. So the owner is protected if Dan dies. Lucas: Exactly. And Dan gets the benefit of the owner staying on as a consultant for the first year — smoothing the transition with clients. That's another common feature: a consulting agreement that keeps the seller involved part-time. Luna: Okay, let's talk about pricing. You said internal buyers pay lower multiples. How much lower? Lucas: The IBBA's Market Pulse Report shows that in 2025, for businesses under $5 million, the median multiple on internal sales was 2.8 times EBITDA, versus 3.4 times for third-party sales. That's roughly a 20 percent discount. Luna: So the owner trades about 20 percent of the sale price for a higher probability of closing and a better post-sale outcome. Lucas: That's the trade-off. And for many owners, especially those who care about legacy, that's worth it. You know your employees keep their jobs, the culture stays intact, your name doesn't get gutted. Luna: But what about the employees who aren't the buyer? Do they usually know what's happening? Lucas: In Mid-State's case, yes. The owner was transparent from the start — told the whole team that Dan was buying the agency. That actually helped retention, because people knew who they'd be working for. Luna: Contrast that with a private equity sale where employees often find out the day the deal closes. Lucas: Right. And that uncertainty can trigger departures. Internal transitions have a much smoother cultural handoff. Luna: Is there a size threshold where internal sales stop making sense? Like, you're not going to sell a $50 million company to the CFO. Lucas: Generally, the higher the price, the harder it is to find an internal buyer with enough capital. The Pepperdine data shows that above $10 million, internal sales drop to under 15 percent of transactions. At that point, you're looking at family offices or PE. Luna: But for Main Street businesses — the ones doing $1 million to $10 million in revenue — internal succession is a very real option. Lucas: Absolutely. And it's often the best option for the employees and the community. There's a reason SBA loans specifically favor employee ownership transitions. Luna: The SBA has a program for that? Lucas: Yeah, the SBA 7 loan can be used for internal succession. In 2025, about 12 percent of all 7 loans were for business acquisitions, many of them internal. The maximum loan amount is $5 million, and the buyer typically needs 10 percent equity. Luna: So Dan could have used an SBA loan instead of a seller note? Lucas: He could have, but the owner preferred a seller note because of the tax deferral. With an SBA loan, the owner gets all cash upfront but pays full capital gains tax that year. Luna: So it's a personal tax planning decision. Lucas: Exactly. And that's the thing about internal sales — they're highly customizable. You can mix cash, seller notes, earn-outs, consulting agreements, even equity rollover. Luna: What about the downside for the buyer? Dan is now deeply in debt to his former boss. That's psychological pressure. Lucas: It is. And the relationship changes overnight. One day this person is your mentor, the next day they're your creditor. Some internal buyers struggle with that dynamic. Luna: How do you mitigate it? Lucas: Clear boundaries. The consulting agreement should have a fixed term and scope. The seller should not have a board seat or veto power. And the buyer should have their own advisory team — a lawyer and an accountant who aren't the seller's. Luna: In Mid-State's case, did Dan have his own advisors? Lucas: He did — a local CPA who specialized in business transitions. That CPA negotiated the earn-out targets and ran the tax projections. It cost Dan about $15,000 in advisory fees, which is typical for a deal this size. Luna: Worth it. Lucas: Absolutely. The worst internal deals happen when the buyer uses the seller's lawyer and accountant, essentially waiving independent advice. Luna: So if you're an employee considering buying the business where you work, what's your first step? Lucas: Hire your own team. Then get the financials audited — or at least reviewed by a third party. You need to know the real EBITDA, the real customer concentration, the real liabilities. Luna: And if you're the owner thinking about an internal sale? Lucas: Start grooming a successor early — ideally three to five years before you want to exit. Give them profit and loss responsibility, introduce them to key clients, let them manage a budget. You want the business to sell itself through their performance. Luna: That's the opposite of the 'don't let anyone know how much you make' mentality. Lucas: Right. Transparency is critical for an internal sale. The buyer needs to trust the numbers, and the seller needs to trust the buyer's ability to run the show. Luna: So far we've talked about single-employee buyers. What about a group of employees buying together? Like an ESOP? Lucas: ESOPs are a whole different animal — they're employee stock ownership plans, which are technically a retirement plan that buys the company. They're more complex and expensive to set up — legal fees can run $100,000 or more — but they offer huge tax advantages. The seller can defer capital gains entirely by reinvesting in qualified replacement property. Luna: Is that common? Lucas: In larger deals, yes. According to the National Center for Employee Ownership, there are about 6,500 ESOPs in the US covering 14 million employees. But for a $4 million agency like Mid-State, it's probably overkill. Luna: So the sweet spot for a simple internal sale is probably $1 million to $10 million? Lucas: That's the zone where seller financing works, where the buyer can realistically come up with 10 to 20 percent equity, and where the business generates enough cash flow to service the debt. Below $1 million, it's often just an asset sale with a small note. Above $10 million, you start needing institutional capital. Luna: And the success rate for those deals — seven out of ten survive five years. That's a pretty compelling stat. Lucas: It is. And when they work, they create a powerful incentive for the next generation of leadership. Dan, for example, is now building equity in a business he already loved. He'll probably sell it to his own top producer in fifteen years. Luna: The cycle continues. Lucas: That's the beauty of internal succession. It's not just an exit — it's a handoff.