The Challenge of Perpetuation

By Insurance Journal

Agency principals are getting younger, but not fast enough. A recent analysis found that of the 2,700 principals in Independent Insurance Agents of Texas (IIAT) member agencies, 5 percent were under 35. While that doesn’t seem impressive, it is better than the paltry 1 percent of the principal population that fell into this category two years ago. Even with this improvement, nearly half of the principals in the study were 55 or older. These statistics highlight a looming question in many agencies today. How will ownership succession take place?

The question is most important for agency principals and yet also important for employees, vendors, insurance companies, agency stockholders and even customers who should all be concerned about business succession plans, commonly called agency perpetuation. The premature death of a principal can devastate an agency business, but so can failure to have a clear succession of management in a retirement transfer.

How many agency principals have waited until close to retirement age to tackle the issues of perpetuation only to find that family members weren’t interested, employees had not been trained to take over the reins and no third party was standing around with a checkbook? In too many cases, the result is that the principal hangs on too long to an asset that becomes a personal liability as agency value drops.

A recent survey by the Academy of Producer Insurance Studies found that 40 percent of agency principals don’t have a written perpetuation plan. There are good reasons for this omission. The issues of management succession and ownership perpetuation are among the most challenging in any privately-held business. It’s not just a question of about how much the business is worth. The process of developing a plan requires that a host of assumptions be made about the future, and adjusted periodically. A buyer must be located or developed internally, who shares the objectives and goals of the seller. A plan of succession must be developed in as much detail as possible. Funding for the buy-out and the tax implications of the sale must be agreed to. Finally, the agency principal must be willing to give up control and ultimately ownership, regardless of his or her personal situation at the time the plan is implemented.

Perpetuation is as much about enhancing agency value as it is about a written plan. If profits are stripped from the agency by owners and producers without reinvestment in the capital needs of the agency, the owner may find he or she can’t compete in the market to attract buyers. If you plan to sail the ocean, you must be willing to pay for a well-maintained ship, because the risks of setting out with a derelict vessel are too great. The agency principal who reinvests income in agency growth, employee development and technology solutions will ultimately find more buyers willing to pay a higher price.

Few principals in their day-to-day fight for profits can pause long enough to devote attention to this complex subject. But there are resources to help the agency principal. The Academy study mentioned above is an excellent resource for preparing your plan. Maximizing Agency Value II includes sample agreements, valuation formulas and information about what other agents are doing. You can order this publication from the Academy by calling (800) 526-2777. The 1998 Best Practices study, Best Practices in Business Perpetuation and Management Succession, still provides a good overview of the process and includes the added value of describing how other, small privately-held businesses transfer ownership. You can obtain this publication from the Independent Insurance Agents & Brokers of America (800) 221-7917.

Don’t overlook the services of a consultant in this area. Professionals can help establish the value of the agency, suggest changes that will increase that value as the principal approaches retirement,
and even help in the negotiated agreement between buyer and seller. A few thousand dollars invested up front could return the principal
10 times that much when the buy-out begins. Whatever you do to address perpetuation in your agency, do it today. You’re not getting any younger.

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