Don’t let a “Retire in Place” owner or employee sabotage agency perpetuation.
Much of our work at Agency Consulting Group, Inc. involves agency perpetuation. We help families transfer ownership to employees, merge agencies, and sell them at the most favorable price. One of the stumbling blocks in this process is an employee or owner who wants to “Retire in Place” (RIP) — to be relieved of the pressures of (pick one or more):
• management
• dealing with companies
• dealing with customers
• selling
• paperwork
• change
However, they’ll graciously stay on to “help with the transition.” How do you deal with an owner or a key employee who desires to stay with the firm while taking less responsibility? How do they affect the morale, value, and cash flow of the agency as it changes to a new set of owners? Your answer can spell the difference between success and failure of short or long-term perpetuation.
In the case of an employee, the answer should be clear. Regardless of the person’s value over the years, their future compensation should depend on their value to the agency in the future — not in the past. Although this sounds obvious, it’s not easy for loyal owners who feel that they owe a lot to employees who’ve been with them for many years. This loyalty doesn’t extend to the new owners, who won’t want the liability of maintaining an employee who served the old owners well, but is no longer as productive.
The solution is to define the productive value of an employee’s role in the transition. If a producer decides to RIP, they might fit into the role of Account Executive, responsible for maintaining a book of business, but no longer expected to generate new business. This is certainly a valued role, but not as valuable as that of a producer. Adjust the compensation level accordingly.
A CSR who decides to RIP might be qualified to process business, but no longer wishes the responsibility of customer contact. Give them the opportunity to remain a viable and valued employee, but at an adjusted compensation. In both cases, the agency accommodates the employee’s desire to diminish their role, but not at an excessive cost to the agency.
A more prevalent problem involves employees, or an owner, who feels that they’ve “paid their dues” and wish to maintain their compensation level and status, but without doing the job for which they were paid in the past. No agency can afford to maintain “dead wood” in the employee ranks, regardless of past service. After all, the employee or owner was paid for their past service.
The greatest impact on the agency from an RIP employee or owner involves the morale of the remaining employees. Sooner or later, they’ll feel cheated because they’re doing the work, while the employee or owner continues to be paid without the responsibilities that formerly came with their job. This can’t be permitted.
The agency owner can take a pay cut and replace his efforts with a new employee hired for that purpose. However, employees will react far better to a working and productive owner than to someone they perceive as RIP, living off the efforts of the others.
Another part of the RIP problem involves an owner who remains with the agency after a sale in order to “transition” the accounts. If this person isn’t productive and active, the new owners and employees will perceive them as RIP.
The simplest approach in the case of a buyout is to retain the owner for a specified transition period, which relieves the pressure of carrying their salary ad infinitum. This is usually an excellent idea because the owner can help renew some of their business under new ownership.
How do you deal with a partner who just wants to “scale down,” perhaps by selling stock? This person must correlate any change in their work efforts with a change in compensation, regardless of the agency’s ownership. An owner should be paid for what they’re doing now, not for what they’ve accomplished in the past. The reward for their past efforts lies in the enhanced value of the assets they’re selling. If the scale-down coincides with the sale of the owners stock, the new owners must be sure that the selling owner will reduce their efforts, rather than coasting. This will require a detailed new job description.
An owner or employee who has Retired in Place will have a negative effect on your cash flow because, in effect, you’re paying someone without an appropriate return on your investment. Unfortunately, many buy-outs and acquisitions include an employment agreement that legally binds the agency to payments, while lowering the value of the business by the gross amount due in the agreement. This won’t create a problem, as long as the agreement supports an active, valuable employee. However, if the agreement supports an RIP, the new owners will suffer the double whammy of lowered cash flow and reduced value.
Finally, an RIP will certainly affect the agency’s morale. Imagine a busy office with one individual having few or no responsibilities. In the best case, they’d remain invisible while everyone else is working. In the worst case, they could disrupt the office with socializing or with pet projects that yield no return for the business. Whether the individual is a family member, partner, or a key former employee, the other employees will know that they’re being carried. This will lower morale and create frustration.
CONCLUSION
If an ownership transfer might create an RIP problem in your agency, control the situation by defining the value of the retiring owner. They’ll receive their past value in the business through a payout of the stock. Determine their future value to the firm by defining the duties and responsibilities that they’re willing to assume or maintain. A job description and measurable objectives will go a long way toward resolving potential problems before they arise.