OWNERSHIP, PERPETUATION, AND MANAGEMENT
by John Jaques
The succession of ownership and management for your organization for the mid and long term is as important to your firm as current profits. Whether you're independently owned or part of a national broker, here are three keys to ownership, management, or perpetuation planning:
- Book of business continuation. Existing key accounts, centers of influence, carrier relationships, business relationships, and new account production must all survive the retirement, death, or disability of the current owners and executives.
- Management or leadership continuation. Decision making, the management of processes, problem solving, strategic planning, business planning, and the leadership vision of the firm must survive the current owners.
- Financial continuation. The buy/sell agreement among owners, the owners' compensation structure, the agency's operating cash flows, and existing debt service must all be able to support the timely and planned buyout of the shareholders over time.
Many agencies don't have these three perpetuation keys in place, even if they have three owners aged 50, 40, and 35. Performance in each area is as crucial as having the bodies in place. Also, branch offices of national brokers still require perpetuation planning, since the national broker takes care only of the financial side of perpetuation and not the first two areas noted.
To prepare for successful perpetuation, your agency should have:
- Two or more current stockholders
- Two producers for every owner who holds 25% or more
- A secondary management or supervisory team (department managers or supervisors) behind the owners
- A buy/sell agreement in place between the owners, providing a price under 1.5 X commissions (1.25X is more appropriate) and calling for no more than 10% downpayment and a 10-year note
- Nonpiracy agreements in place with all owners and producers (to protect the business' value)
- A structured compensation plan for executives or owners (based on activity and performance)
- A deferred compensation plan, stock options, or a stock appreciation rights (SAR) plan to help retain key people and begin to spread equity over a wider base
- Prepared annual budgets, a one-year business action plan, and a three-year strategic plan
Overall, internal perpetuation potential is measured by how well the firm is run as a business, rather than depending on a collection of individuals who are 'self-employed at a high level.' Start working these concepts into next year's business planning now.