Make perpetuation planning a normal part of managing your agency.
Perpetuation planning. What a morbid thought! It means you’re going to die, retire, become disabled or, God forbid, give someone else the reins to your life’s work!
If you’re like most agents, you’ll simply avoid planning for perpetuation until: (1) After your first heart attack; (2) when you’re six months away from retirement; (3) when you become ill enough to know that someone else has to take over; or (4) when you’re finally fed up to the gills with the cycles, carriers, or ingrate clients who leave you after they assured you that they would never move.
However, a growing number of agents are realizing that perpetuation planning is as much a part of the profitable operation of their businesses as having Life insurance without intending to die.
Perpetuation planning while you’re in your 40s or 50s can help assure you of keeping your highly motivated employees (including children) who might otherwise look to greener pastures. The fact is that business continuance depends on prudent, and timely, planning: Strategic planning, financial planning, management succession planning, and personnel development planning. This can’t be done in a month or in a year. A successful perpetuation plan should be written years in advance. It needs to be changeable as conditions (and people) change. It’s a living, breathing document that’s updated annually.
A mature attitude toward succession and perpetuation will make it less of a shock and more of a normal part of business life as changes occur.
STRATEGIC PLANNING
Schedule the future and progress of your agency, including perpetuation and succession planning and all of their components. Many agents forget that succession is a normal part of business operations. If treated in this way as a part of the agency’s strategic and tactical plans, it will lose its emotional edge.
The greatest problem that people have with succession and perpetuation is that they don’t want to think about breaking the business (and personal) routine that defines their being. However, as with every emotional event in our lives, a business transition is easiest to accomplish when you make it part of an ongoing process and plan.
FINANCIAL PLANNING
An agency perpetuation plan allows you to plan the finances and corporate structure of the business for the easiest perpetuation with the best tax implications for both the buyer and the seller. Working with your consultant, accountant, and/or tax attorney, you can realign the form of company you operate to make the financial burden on the next generation less onerous, while still enjoying an “annuity” type payout that assures you of receiving fair value for the agency that you have built and nurtured. You can implement a wide variety of organizational changes (given sufficient time) to minimize the stress on the next generation and/or provide the highest return of assets to the selling generation.
If you don’t want organizational changes, planning makes the sell-down (or sell-out) more feasible with no surprises. Internal perpetuation should include terms that are acceptable to the seller and manageable to the new owners. Life insurance is essential for crisis transition. For instance, we recently assisted an agency in a transition that will permit the selling owner to remain in the agency (their desire), while the ownership and direction of the agency transitions to the next generation over a long (15-year) period. The payments to the owner will supplement their ongoing income and be used for investment and other purposes. The length of time involved makes the obligation to the agency minimal each year. If something extreme happens to the former owner, a lump sum payment (or payment replacement) will come from Life and Disability insurance. Meanwhile the former owner is not “forced out” (their fear) and will still benefit from the growth and increased value of the agency during the long-term buy-out.
In another instance, the second generation created a new entity to service the book of business of the retiring agent. This made for a transparent movement of business over time because the retiring agent’s accounts would eventually experience retention loss while the new agency’s business was all theirs.
You can implement a wide variety of financial and organizational activities to meet the buyer’s and seller’s needs.
MANAGEMENT SUCCESSION PLANNING
Do you remember all the mistakes and missteps you made while you were learning how to manage your agency? Do you want the next generation of owners to go through that experience, too?
To avoid this situation, begin transitioning clients and management duties during the five years before the ownership change takes place. First, this permits you to see if the “young bucks” are up to the task and, if not, to retrain them accordingly. Second, it allows you to tend to the more important things in life while the prospective new owners deal with the mundane and/or difficult crises that occur. This transition should include responsibility for management reporting, systems, carrier relationships, and personnel, as well as giving the prospective owners greater visibility with the agency’s important customers.
Transitioning while the current owner remains fully functional and responsible for the agency’s results is the best form of “checks and balances.”
PERSONNEL DEVELOPMENT PLANNING
We all hope/pray/expect that our offspring (or young producers and managers) will know how to manage our agency if something were to happen to the “boss.” But what if they don’t? The bitter truth is that many agencies that sell or merge do so within a few years after they finish paying for the agency from the previous owner. If the owner is lucky, they’ll receive the full value expected from the agency. But nothing can ease the feeling of anguish when a proud agency owner sees their namesake dissolve because they entrusted it to incompetent successors.
Just because Junior bears your last name doesn’t mean that he’ll be as able an agent as you. It’s up to you to test your next generation thoroughly to assure that they’re capable of running your agency. Too many family ties have been severed because the parents couldn’t take the hard steps needed during their control of the business, only to see it dissolve (as they feared) when they turned over control to a new owner who wasn’t suited to carry on the business.
During the five years before you retire (or transition ownership even if you’re not retiring), test your successors in these key agency management disciplines:
· Customer relationships
· Carrier relationships
· Employee relationships
· Knowledge of the computer system
If the prospective owners lack skills in one or more of these areas, train them so that they will have the ability and experience to manage your agency when the time comes for them to assume control.