Discussions about the perpetuation of family-owned agencies often assume that the offspring always buy out the parent's interest and that the main challenges are finances, taxes, and various emotional issues. But the matter can be further complicated when the age difference between Senior and Junior is too great to allow the reins to be passed directly from one generation to the next. Couples nowadays wait longer and longer to have children, so sometimes Junior isn't ready to take over when Senior wants to retire.
In my consulting practice, our clients in this situation generally fall into one of two categories: (1) Junior is already in the business and is certain to become the perpetuator but isn't old or mature enough to take over, or (2) it's too early to tell whether Junior will go into insurance and have the ability to perpetuate the business. In these situations, Senior wants to keep the business going by bringing in valued associates from outside the family while keeping some options open for Junior.
Consulting in these situations is challenging, to say the least. This isn't a task for consultants who don't have plenty of experience, patience, and empathy. Here are some insights my firm has gleaned from its experiences:
- Under a successful arrangement in which Junior is the known successor, the unrelated associate usually doesn't assume true ownership control. The associate might be a stockholder or partner and/or have a phantom stock benefit, and might for a time serve as president or CEO with substantial operating authority. Senior keeps the controlling interest, although retired or semi-retired, and later transfers it to Junior in a planned transition. Such an arrangement isn't a piece of cake, but with the right people and plenty of forthright communication, it frequently works.
- A greater challenge arises if Junior has no career goals yet. Senior contracts to sell a controlling interest to the valued, unrelated perpetuator, with the provision that if Junior becomes a full-time licensed employee of the firm, Senior will make Junior a minority stockholder with the absolute right to buy the associate's interest at his or her retirement. There's no reason that this can't work, but plenty of reasons that it doesn't. It's not that the deal crashes and burns after it's struck-sometimes everyone agrees to a deal in principle but then trips over the hurdles that crop up in the nitty-gritty negotiations.
- Accept the fact that sometimes the deal fails. If Senior can't make the mix of personalities work, something has to give-the hoped-for retirement date, the guarantee for Junior, or the services of the highly-valued, unrelated associate.
If you're going to try a perpetuation plan that sandwiches an unrelated generation of management between two generations of family, two things are crucial: candid communication and guidance. Don't sweep things under the rug to protect someone's feelings. Get the help of one or more experienced advisers who'll give objective input on crucial issues of economics and management capability.