Planning for succession can be highly rewarding if you have the right people behind you. It can be downright dangerous if you don’t. Al Diamond reviews the difficulties that can surface when owners presume that their desires and expectations would become the reality of the future.
A number of years ago we visited a family-owned agency in which both mother and father were involved. When we asked them about their perpetuation plan, they proudly pointed to their two daughters, who were freshly involved in the family business. They planned the succession of their daughters into ownership. As with many such businesses, the owners presumed and assumed that their desires and expectations would become the reality of the future. They simply didn’t consider other perpetuation possibilities, even to weigh their potential against the “plan” that they considered so obvious.
This denial often results in opportunities lost that could have benefited the owners, their families, the agency, and its customers more than the original “plan.”
In this case, over the years we had the opportunity to speak to the agency owners several times when mergers, sales potential, and association with financial institutions were available to them. Each time, the parents, from an emotional standpoint, resolved to pass the agency to their daughters — to provide them a good living, as it had to the parents. There’s no way of knowing how the other offers would have played out since they were dismissed out of hand.
We recently received a call from one of the daughters. It seems that the parents are ready to retire and want to pass the agency to the two daughters equally. We hadn’t been involved in the agency operations and had never had the opportunity to know the daughters. Here’s the story that the daughter told us:
“Neither my sister nor I had any desire to get into the agency business, but my parents insisted that they needed us when we graduated from college, and the pay they offered us was good. My sister especially enjoyed the freedom she got from the position in the family business. She still has no particular love for the insurance business or for dealing with clients, but has developed a good grasp of automation in the office. Meanwhile, I was a CSR and producer, while backing up my mom and dad in the management of personnel and company relationships. I’ve earned my CIC, CPCU and will have my CLU this year. I’ve been active in the association and know a lot of other agents. I have ideas about how to change the agency, but neither my parents nor sister want to hear about them. The fact that we still have few local competitors has kept us profitable, and our loss ratio is always good, so we seem to do better financially each year. My sister calls me a workaholic, but that’s because she likes coming in late and leaving early.
“Now my parents want to give us the business equally. I love my sister and my parents, but I have done much more to assure the success of the business than my sister has. I feel that, without my parents as arbiters, my sister will take advantage of me and the situation, leaving me with most of the work and taking half of the proceeds. I don’t know what to do. My parents won’t accept my idea of buying out my sister. They think that I’m being greedy. They think that my sister does more than she actually does, and she feels that she should have half the agency because she has put in as much time as I have.”
The sister called me because she felt that her parents trusted me; she wanted to know if she had any other way out besides leaving and going to another agency or starting her own agency.
I won’t tell you the end of this story. Unfortunately, this wasn’t the first, and won’t be the last, time that I’ve run across similar situations. This type of agency succession problem can resolve itself in a number of ways, none of which satisfies all of the parties involved.
Can you, for a moment, imagine your trusted family doctor bringing in their child on to take over the practice? What would happen if the child had little or no interest or talent in medicine? Dad can put a great deal of pressure on offspring to follow in his footsteps. A college curriculum might point out this deficiency — or it might not. I certainly wouldn’t want to become the patient of one of these succession doctors.
The point is that your agency provides both means of earning a living for you and an asset that should provide you a return when you retire or decide to sell. There’s a huge difference between treating a business as a way of supporting your family and lifestyle and becoming so emotionally involved that the business becomes the reason for living, rather than a good way of supporting your lifestyle. In this example, the parents invested a revenue-generating business with their dreams of the future for their children. They never considered the possibility that the children might not want to be in the business or that they might not be good in it. They couldn’t accept that the equality that they had in the business might not fit their daughters’ situation, and they certainly weren’t objective in their view of their daughters’ performance.
GOAL SETTING AND GOAL GETTING
The key to succession of any family business is to set and monitor objective, realistic, and measurable goals for the next generation every year. Measure, note, and discuss whether or not these goals have been accomplished, and why or why not. If the next generation are missing their goals every year, why would you think that they could independently become more successful once they had control of the business? Setting, monitoring, and discussing goals and results every year will indicate the ability of the successors to manage objectives within the organization. Hopefully, this will prove that they’re capable of managing when the parents are out of the picture.
However, owners and the next generation must learn to accept the fact that not all agents’ children are cut out to become insurance professionals. This “Goal Setting and Goal Getting” process is perfectly suited to any agency employees who expect to become owners. Not only will they prove their skills and successes to the owners and to themselves, but also any agency with annual objectives will naturally become more successful than the “seat-of-the-pants” agencies that still abound in our industry.
ALTERNATIVES
The most difficult time in a “Succession vs. (outside) Perpetuation” issue involves the ongoing investigation and analysis of alternatives to the generational succession plan.
- Under certain circumstances, an agency sale will bring more secure funds to the retiring owners than they would get from turning the agency over to a generation that might deteriorate, rather than grow the business.
- Regardless of asset value, many agents’ children would make very reasonable employees, but lousy owners. In these situations, a merger or sale could accomplish the objective of cashing out the asset, while still gainfully employing the children.
- We’ve consulted on many mergers in which former competitors come together because one of the owners is the likely successor to the other, whether or not other offspring of either participant is involved.
- If you have no successors — or if you recognize that your expected successors (family or not) won’t be able to maintain the agency’s integrity — you can strengthen your perpetuation plan by acquiring a talented producer, manager, or even a smaller agency that has quality owners.
- Investigate every acquisition and association opportunity. Even if you and your successors agree on the future of the agency, look at every deal offered. You always have the right to say no, but you can’t evaluate your situation and value if your head is firmly buried in the sand whenever an offer passes by.
CONCLUSION
Planning for succession can be highly rewarding if you have the right people behind you. It can be downright dangerous if you don’t. The emotional rewards of passing your agency to your next generation is very satisfying, as long as that generation desires and shows the talent to do the job. If not, you’re committing an egregious blunder that will affect your children for their entire (hated) career.
Turning your agency over to successors, children or not, can and will damage the value of the asset (to the point where the expected value could never be attained), the customers who have grown to trust you, and the successors themselves, when they realize that they can’t handle the load. In our experience, these “new” owners who don’t have the sales personality of their predecessors, and/or lack the management and personnel skills to handle a business become embittered as the business deteriorates and end up blaming everyone and everything else for their dismal results. Whenever you see agency owners pointing out in different directions (companies, disloyal customers, direct writers, banks, the economy, etc.) as the cause of their problems, look further into their management styles, capabilities, and history. You’ll probably find that the true cause of their problems lies in the mirror of their own failures.