Bilateral Contracts for Agency Perpetuators

As agency owners age they must decide whether the businesses they worked so hard to build will be sold or perpetuated internally. We often hear about agencies whose assets are purchased and merged into larger concerns. This may have been according to the agency owner’s plan or it may have occurred because the owner had no internal successors. However, the majority of independent agencies are still internally perpetuated to benefit the seller, the agency staff, and customers and, of course, its new owners. Whether an agency is perpetuating to family members, staff members or to young talent brought into the agency with the purpose in mind that they will be the next owners of the business, the transition of an agency from one generation to the next must be treated in a more business-like manner than such transactions in the past.

The Horror Stories Don’t Have to Occur

We have heard and shared in many stories over the years of agents who desired to retire but couldn’t because they didn’t trust the new owners to carry on the agency and were frightened of the prospect of business failure and the reduction of their asset value if the senior owner left. We have also seen situations in which the new owners were perfectly capable, but the senior owners found it comfortable to continue in place collecting profits after their useful productive careers were over. Neither of these scenarios is right or palatable and both can be avoided.

The Purpose of Bilateral Contracts or Agreements

For many years we have supported the establishment of bilateral contracts for agency perpetuators that spell out the obligations of the perpetuator to qualify for succession and of the agency to the successor-owner. The primary concern of most retiring owners is that they achieve a fair value for the agency that helps the owner continue his lifestyle in retirement. While many agents have wisely invested to assure comfort after retirement, no owner willingly undervalues his largest asset, the business that the agent has built over his career. However, most agency owners we have encountered care as much for the continued stable success of the business after their tenure is done. Unless the retiree is planning on leaving the area, their friends are their customers and their staff is like family. They will still see them all after retirement and don’t want to hear that the agency is not performing to the retired owner’s standards.

A contract, formal or informal, identifies the targets for a perpetuator to show the senior owner that the new owner is ready to assume control and will carry the agency forward in at least as competent a manner as the retiring owner. Once a successor is identified there is usually a period of several years during which the management and ownership responsibilities are transferred and during which certain milestones are expected to be achieved to prove to the senior owner that the new owner is ready to assume the mantle of leadership. That Plan carries measures of success, milestones that must be achieved in order to qualify the perpetuator for ownership.

Most often the milestones of success are growth (revenue and customer), customer and carrier relationships and the assumption of management roles and responsibilities. Whether the new owner is a family member, a staff member or someone new to the agency hired for that purpose it is wise to identify the markers of success that would qualify the person for ownership, speed up or slow down the transition of ownership. In agencies that don’t have ready successors within five years of an owner’s planned retirement we see new staff hired or merged into the agency with the expressed purpose of transitioning ownership. Producers, managers, and merger candidates that do not have a reason to join an agency, find a different perspective if they know that they are to become the new owner of the agency upon the senior owner’s retirement. Their only question is, “When will the blessed event occur?”

The bilateral contract helps take the guess-work out of that decision since the transition will be on a date-certain OR when the markers of success are achieved. If the potential owner cannot reach the levels required by the retiring owner to convince him of the management capabilities of the prospective owner, the senior owner can still make other arrangements for the disposition of the agency. In some cases the retirement is delayed until the senior owner is convinced by the achievement of the success markers that the new owner is ready to assume control. In other cases the agency owner must accept that his child, relative, staff member or new hire is not capable of assuming a successful ownership transition and will look to a merger or sale to accomplish his retirement goal.

Happily, most transitions do occur and another problem that is overcome by a bilateral contract is when a retiring owner determines that the efforts of the new owner makes it beneficial for the senior owner to delay retirement in favor of continued asset build-up. It is tempting to delay retirement if the stress of management is alleviated and the agency is performing admirably led by the new manager.

Just as the bilateral contract defines the requirements of ownership on the new owner, it also defines the mandate for the transition if the markers are completed early or on time. In many cases a time element is inserted into the agreement that forces some decision at a date certain. This avoids the ‘forever transition’ that never seems to occur to completion. The bilateral nature of the contract is a safeguard for the prospective owner as well as to the retiring owner. The successor knows what must be done to accomplish the goal of ownership. The senior owner also understands that if the markers are achieved, the transaction commences.

Make Any Transition Agreement No Less Than Two Years

I often recommend that the transition be no less than two years.

If the transition is to a relative or to a staff member who has been with the agency for a while, this transition period is used to indoctrinate the employee into the new role that (s)he will assume as owner. If the successor is new to the agency two years is sufficient to determine if the new employee has the culture and confidence of the agency and agency owner to assume the mantle of ownership and control.

In accordance to the agreement, either ownership transition must occur, a termination of the ownership potential must occur or a decision must be made to extend the contract for no more than one year to finalize the decision by a date certain.

The No-Fault Divorce Clause

If the markers are achieved, the ownership transfer MUST be accomplished or the successor has a grievance against the agency owner. But sometimes it just doesn’t work out! Whether the success markers are never achieved or the new employee and the agency realize that their cultures are not aligned, when that occurs we recommend a No-Fault Divorce clause that either returns the employee to his/her status before the decision was made to make him an owner or, if the employee was brought in with the expectation of ownership transition, that the separation of the employee not harm the prospective owner.

No one hires a manager/producer or conducts a merger for perpetuation purposes with the idea that it will fail. However, sometimes it simply doesn’t work out. When that happens, make sure the employee is made whole again including the agency’s efforts to have him appointed with the agency’s carriers that he probably allowed to lapse into the agency’s contracts. At the worst, continue to renew all his business as he writes his own new business outside of the agency after his termination. The goal is to either have a successful ownership transition or to separate and remain friends acknowledging that circumstances did not permit the ownership transition to occur.

If you would like assistance in the establishment of a Succession or Perpetuation Plan, call Agency Consulting Group, Inc. at 856 779 2430.