One of the most critical issues facing the Independent Agency System is the need to transfer stock and plan for the smooth transition of ownership. Without a perpetuation plan, the departure of senior owners often creates a financial hardship for new owners who are left with significant debt service or poor preparation to run the business. This document by Sharon Cunningham should help get your plan started.
As I travel across the country, I find few agencies with written perpetuation plans. I’d advise agency principals who don’t have a perpetuation plan to start now. If you don’t have a plan, you might find yourself, when the time comes, wondering how you’re going to retire. Even though you have interested internal candidates, they might not be able to give you the price you feel your agency is worth. A prospective buyer might want to buy the book of business only, on a retention basis, leaving you with a great deal of the risk. The payout scenario they offer might require you to finance your retirement — a situation you might not have planned for.
Waiting too long to develop your plan could force you to spend valuable time seeking out and evaluating buyers. And once the word gets out that your agency is up for sale, you might not have the energy to handle both making the deal and running day-to-day operations. So the agency’s value might dwindle while you wrestle with the headaches of liquidating a business.
It’s also important to understand that acquirers are looking at how much profit flows through to the bottom line and how much more they can generate after stripping away the redundancies. You need to ask yourself if a potential purchaser will see value in your business. As you make spending decisions, ask yourself if these choices will enhance profitability, and, thus, the value of your agency. You’ll want your agency to be as valuable as it can be in the outside market — and that means making a commitment to professional management practices, sound financial management, growth, and profitability.
However, there’s another factor to consider. Astute buyers are looking for more than higher revenues. An acquisition should enhance the carrier mix, add talent or expertise in a particular area, expand the marketing territory, etc. I see potential buyers turning down acquisition opportunities that don’t meet their strategic objectives. Because you can’t assume your agency will be attractive to every potential buyer, you’d be wise to develop a plan for internal perpetuation.
A good perpetuation plan will help you achieve both your personal and professional objectives. You’ll need to determine your retirement needs, your target date, and what role, if any, you’d like to play in the agency after you retire. Once you’ve determined your needs and wishes, consider the needs of your agency. A perpetuation plan should encompass every facet of agency management because they’re all necessary to maximize value and to prepare your successors. Creating the plan will require you to assess the people, procedures, finances, assets, and operations of your agency.
Although succession planning is critical to internal perpetuation, this aspect often receives less attention than the valuation formula and buyout. People should form the core of your perpetuation plan. It’s critical to identify the right people to assume the leadership roles. Their skill sets and personalities should mesh and complement the other managers on the team. They should have the ability to gain the support and respect of the staff. As you bring them along, you’ll need to nurture and guide them to assume the different leadership roles in the agency. You’ll have to be open and communicative, inviting them to help resolve problems.
As agencies grow in value, the successors might not be able to afford the buyout — which means that the senior owners must be prepared to help their successors financially. One way is to try to focus on methods that use pre-tax dollars to fund agency perpetuation. You might allow smaller investments to be made as books of business reach certain plateaus. You might also discount the stock value of an individual buyer’s contribution to the agency’s overall increased value. This approach gives younger partners an incentive to invest.
You could also spell out bonuses as part of the overall compensation package, restricting a portion of bonus compensation for investment in the agency. An Employee Stock Ownership Plan (ESOP) would allow employees to become future owners to the extent that the plan invests in agency stock. Because management owns the rest of the stock, they’d still maintain day-to-day control over the agency.
It’s wise to seek out a perpetuation consultant, such as BMG, to value the firm, offer perpetuation options, and assist with succession planning. You should also seek advice from your bankers and CPAs, who can offer insights for planning acquisitions of both tangible and intangible assets, as well balancing the agency’s financial and tax structures against the desires and needs of its investors. You might want to consult with more than one CPA as they balance business needs against estate planning goals. Have your legal counsel develop or review your documents to make sure they support the plan.
Finally, the best advice I can give is, 'if you don’t have a plan, resolve to get one started.' If you have a plan, make it a point to get things reviewed and make sure you’re on track. Perpetuation plans are roadmaps for the agency. Just as new roads are built and maps are updated, so perpetuation plans need updating as laws and people change. Don’t hesitate to ask for help — and before you know it you’ll have your plan in place!