Agency Perpetuation Planning Checkup

AGENCY PERPETUATION PLANNING CHECKUP

This article is for the 70% of all agencies that now have perpetuation plans. Even though most agencies have plans for the future, some of them need to rethink the process. If it has been more than a year since you created your perpetuation plan, it's time for a checkup.

Over the past year, the insurance industry has changed dramatically. Legislative changes now allow new players into the insurance agency business. This development increased the value of some agencies, but the value of others has declined.

The new legal structures of some agencies have changed the value and consequences of selling them. New taxes are the most obvious changes that affect the agency perpetuation.

Because so many things can change in the course of a year, you should review your perpetuation plan. Start by asking yourself: What parts of my plan need attention?

People: Have the players in your agency changed? Do you have any promising young staff to consider? Can the individual(s) you've chosen to develop help your agency grow? Can the selected individual(s) create and manage a profit? How long do you want to maintain control? Would you like to be involved until you retire? You might retire a year earlier than planned to see if your person(s) can perpetuate the agency.

Now that you've decided who and when, do you have a training process for helping your replacement(s) to carry on with your perpetuation plan? I recommend a five-year training program to teach your successors everything you know.

Valuation: Is the buyout price in your perpetuation plan still realistic? The days when an agency was valued at two times its revenue are long gone, but I still encounter agencies using this valuation formula. Recent studies appraise agencies sold for guaranteed cash to a knowledgeable buyer as being worth between 1.1 and 1.5 times their revenue, depending on many different factors. The multiple is probably near 1.25.

Recently, banks' interest in buying agencies has raised the asking price, but this won't last. The first wave of acquisitions were sweetheart deals, but common sense will soon prevail, and banks will pay only what an agency is worth, regardless of their desire to enter the insurance industry.

Funding: Many perpetuation plans pay attention to the details, but overlook funding for the buyout. Do your perpetuation documents include provisions for death? Disability? Retirement? The agency must provide Key Person insurance to prepare for such unexpected departures.

Tax Considerations: Buyers and sellers have different tax considerations. What's good for the seller is seldom best for the buyer. Because of the new capital gains tax laws, most sellers prefer to sell their stock in the agency.

Agency owners with 'C' corporations who are contemplating the sale of expirations should consider the current 60% tax rate on such transactions. The capital gains tax laws might lower this figure to 57%, which isn't much more attractive. There are other better ways to sell the agency.

Once you have reviewed the questions we have posed regarding people, valuation, funding, and tax considerations, seriously consider revising your perpetuation plan. If you expect to pass the agency along internally to key employees or family members, your stock's selling price must be reasonable or your successors won't be able to meet their purchase obligations.

Here's some final remarks on perpetuation:

1. Don't make ownership transfer an emotional issue; treat it just like any other good business transaction.
2. Get the facts, make the decisions, and take action.