ACG - Agency Consulting Group

The PIPELINE

A national monthly newsletter for agency principals dedicated to agency management topic

THE CONTINGENCY BUY/SELL AGREEMENT

Few agents do a proper succession or perpetuation planning until the time gets closer to retirement. Those agents that planned ahead have successors or perpetuators in place and basically need to execute the mechanics of a change of ownership to fund their retirements and to continue the businesses that they have spent a career building.

Most, on the other hand, face a bleak reality. Their children are off on other careers. Their employees do not wish or are not capable of perpetuating their agencies. The acquirers in the area are circling like sharks, tightening the circle every year in expectation of the agency owner’s need for a buyer. They’re playing musical chairs with your business.

The process of forming a succession plan or a perpetuation plan can be grueling and emotionally stressful if you don’t prepare for it early. But inertia is a powerful force and the agent who is only 49 and feels that he has plenty of time to plan for the future soon finds the age of 60 and not prepared for a future after the agency. A few ticks of the clock and he’s 65 and either wants to do something else or has health issues or other priorities that demand a career change.

We invite you to call us as early as you can stand the thought that you won’t last forever and we’ll help you form a succession and/or perpetuation plan that will ease the tradition, whether at 60 or at 80.

But whether you are part of the “well planned” group that has a successor or a perpetuator or the “I do not have” group, EVERY AGENCY OWNER must face the possibility of an untimely tragedy whether getting HIT BY A TRUCK on the way home today or facing a medical emergency.

WHAT HAPPENS TO YOUR AGENCY IF YOU GET HIT BY A TRUCK literally or figuratively? What happens if you die? What happens if you don’t die – but cannot manage your agency any longer?

A Contingency Buy/Sell Agreement, either within your agency or with another agency owner, can solve the problem of business continuation and of achieving the businesses proper value in the event of your death or disability –without obligating you outside of the two conditions of the Agreement, Death or Disability.

DEATH

O.K, your problems are over. You got hit by a truck and you’re gone. But your family no longer has your financial support. Your clients are up-in-the-air about the future of their insurance support. Your staff are like zombies, going through the motions every day, without your direction and leadership. How long before your competitors are picking at your clients offering to “help” them through the transition? How long before your clients, knowing you are no longer there to support them, find other avenues to protect their assets? And how quickly will the wolves appear at your family’s door pledging to “help” but taking financial advantage of the situation?

A Contingency Buy/Sell Agreement solves the problem of dealing with a value drain in the event of the death of an owner. If you have other owners (or potential owners) in the agency, execute the contingent buy/sell with them.

The contingency Buy/Sell states that in the event of your death, they will take over the control of the agency the next day and continue to operate it to support your clients and staff. A key man insurance policy is executed (that the successor in the agency pays for) that will mature in the event of your death and pay your estate the FULL VALUE of your agency (without a discounting for the sudden death of an owner).

If you have no back-up in your agency (another owner or owner potential), a Contingency Buy/Sell Agreement is executed with another agent, either one with the same need for contingency perpetuation or someone you trust and respect. The execution of the Agreement is sufficient insurable interest that each participant can cross-purchase life insurance on each other to be executed in the event of the death of either party.

If you don’t know someone who fits this bill, ask your most trusted carriers for suggestions. It is in their enlightened self-interest to match agents to protect their books of business as well as the agents’ assets.

While most agents don’t have proper succession or perpetuation plans most of us do have plenty of life insurance. We often don’t have that life insurance because we are as concerned as we should be about our families. Sometimes that insurance is purchased for the banal reason that our insurance companies required more life contracts and we ended up getting it on ourselves. Whatever the reason, we have lots of life insurance that will mature for our families. But does that mean that our agencies, often the greatest asset we have, bears no value if we die prematurely? Regardless of the amount of insurance you have to benefit your family, the Contingency Buy/Sell can still pay your estate for the value of your business, as well.

A Contingency Buy/Sell can provide your family the funding that it should receive for the value of your business. It allows for an orderly transition of your agency to the next generation and supports the staff and clients to avoid a mass exodus of either in the event of your death with no plan in place.

The second major part of a Contingency Buy/Sell Agreement is to take care of your asset in the event of your total and permanent disability. Like it or not, we are seven times more likely to be disabled than to be killed in an accident. While an accident can kill you, your own body reacting to physical stress can cause illness, stroke, or heart attacks that can lay you low, even though it doesn’t kill you.

Many agencies can continue through an owner’s illness for a short period of time. But unless you have your succession and perpetuation plan in place for this situation, the Contingency Buy/Sell Agreement can act to save the value of your agency in this situation, as well as it does in the event of death.

DISABILITY

Disability is a more insidious problem than death. In the event of a total and permanent disability, it is likely that the owner (or his guardian) will need continued income to sponsor the owner’s care and welfare. Some agency owners think that their agency will simply continue to pay them during their absence, even if it is permanent. However, if the owner is the sole owner of the agency, the erosion of clients the potential loss of employees and the loss of direction of the agency would cause a degradation of the agency’s capability to continue paying the owner and would soon cause reality to change the agent’s plans. Not only would the financial benefits diminish quickly but the value of the agency would likely degrade quickly, as well. If the owner has partners, a longer term of continuance is a potential, but it is unfair to the remaining owners to be expected to continue to support a non-participating owner ad infinitum.

Many fewer of us have disability insurance than life insurance. However, the agency (or the contingency buy/sell partner) could (and should) purchase disability insurance that can begin to pay for the disability of an owner. However, it is unlikely that most owners can achieve enough disability insurance (or cheaply enough) to replace the total compensation that the owner takes from the agency (even the after-tax amount since most disability policies are not taxable).

The Contingency Buy/Sell Agreement terms would cause the remaining partner (or selected successor) or the agent selected to be the contingency owner, to trigger a buy-out of the disabled owner at a point in time a) defined by a disability policy, b) at a pre-defined period as agreed to by the participating owners, or c) at the determination of the disabled owner (or his guardian). The buy-out would continue the compensation of the owner (in excess of any disability insurance payments) for a prolonged period of time, but the payments would become a payout (subject to capital gains instead of payroll taxes) instead of direct compensation.

The benefit to the owner is a continuing income stream to support him through his disability. The benefit to the agency is that it would not suffer a financial strain to purchase the disabled owner since the payments would not cost the agency more than the owner had been taking otherwise (and likely less if disability insurance was in place). Whether the new owner is another existing owner of the agency, an internal successor or an external selected contingency buy/sell partner, the obligation of the new owner would be to continue the structured purchase of the disabled owner’s stock through a continuation of same level of financial support that had been the agent’s compensation until the full value of the agent’s stock is exhausted.

The disabled agent’s financial needs continue through the payout. The agency is not required to exhaust or acquire financial support to provide for the buy-out. The new (or remaining) owner is obligated to continue the payments through the buy-out period. And, should the disabled owner pass away, the life insurance in effect would then trigger the final buy out for the owner’s estate.

Using this method of a Contingency Buy-Sell Agreement makes sense for most agency owners. It does NOT obligate them to transfer ownership of their agencies to anyone for any other circumstance besides death and disability. Any structured succession or perpetuation plan can still be executed (or not) based on the owner’s decision. However, this program provides SLEEP INSURANCE to every agency owner who wants to provide for his family or estate, his clients and his employees in the event of a crisis situation.