While “nothing is certain but death and taxes,” did you know that you are seven times more likely to be disabled prior to death than to die suddenly while owning your business? What will happen to your agency in the event of either sudden death or disability?
The vast majority of insurance agencies in the U.S. are still privately owned by a single person. Many remaining agencies are owned by two individuals. What happens when an owner dies, or worse yet, becomes totally and permanently disabled… and lives??
Hopefully, partners have Buy/Sell Agreements between them, sponsored by life insurance, which will transfer ownership of the agency from one owner to another in the event of an unforeseen demise of one of the owners. No partnership or multiply-owned LLC or Corporations should go without disability insurance on the owners and a written definition of “total and permanent” disability that would trigger a mandated buy-out of the disabled owner by the remaining owners. That definition and a disability buy-out is not to be taken as a threat, but as a means of paying the disabled owner for his interest in the agency in order to sponsor his rehabilitation and care and allowing the remaining owners to make decisions and sponsor their own future plans without the involvement of a non-participating owner. It is a protection device for both the disabled owner and the remaining owner. Otherwise the disabled owner might find himself without compensation owning stock in a business that has no obligation to ever buy him out. Or the remaining owners might find themselves trapped in perpetuity by a majority partner who continues to be compensated for the remainder of his life without being productive enough to sponsor that compensation. A disability buy-out usually coincides with short-term and long-term disability insurance and might provide for continued compensation and ownership until a mutually agreed-upon period of total and permanent disability has expired.
However, the purpose of this article is directed toward the agencies owned by a single individual. If the agency has any form of internal perpetuation the contingency of the death or disability of the current owner must be covered in a legal agreement that defines which staff members will purchase the agency and how. With that agreement in place, the agency could sponsor key man life insurance for the principal with the agency as the beneficiary and owner. This is much simpler if the agency is a corporation or LLC. That key man insurance could be used to buy out the interest of the owner from his estate should he die. The agreement should permit the next principal to purchase at least one share of stock, thereby making that new principal the primary owner of all outstanding stock in the agency. Of course, the new principal could buy more stock, but why buy more with after-tax dollars if one share makes him the only voting principal? When a new successor arises in the agency, more stock can be bought from Treasury Stock to assure majority ownership by the key principal. The agency will pay the premiums for the key man policy and will either sponsor that expense or will cause the next principal’s compensation to be decreased by that amount in order to compensate the agency for what will be that employee’s benefit in the event of the death of the current owner.
An agreement should also be in place for the condition of disability of the principal to avoid the conditions illustrated above when a successor is already in place in the agency.
But what happens when the principal in an agency is the proverbial “Lone Ranger?” He may literally be alone or may have a small or large staff, but no one is capable or desirous of succeeding the agency principal if he should die or become disabled.
If the agent in question is truly alone, and he knows no other friendly or competent agents in the area, we suggest that the principal create a document that directs Agency Consulting Group or someone else well versed in the valuation and sale of insurance agencies. We can assume control of the agency with the express purpose of selling the business on behalf of the principal’s estate in the event of his death, or on behalf of the principal in the event of his total and permanent disability. Unfortunately, there are still many agents who are expert at their trade, who make a good living, but only interact with their clients and carriers, having little close personal contact with other agents. Their demise or disability could be disastrous for their agency retention and value, causing a ‘fire sale’ that brings much less value to them or to their estate than warranted by the revenue or quality of the agency.
On the other hand, many agents have formed close personal relationships with other agents in the area, whether competitors or not, to the degree that the other agent can be trusted to assume control over the principal agent’s business if something unforeseen happens to the principal agent. If that is the case, either a “One-Way” or a mutual Contingency Buy-Sell Agreement should be created that would cause one agent to purchase the other in the event of death or total and permanent disability and, potentially, to assume management control over the agency to service and retain its customers during a temporary disability, or during the period dictated before a disability is determined to be “permanent.”
Whether “one-way” or mutual in nature, a buy-sell justifies the insurable interest that permits one agent to purchase a life insurance policy on another in order to sponsor a death benefit buy-out. The Buy-Sell Agreement would also act just like an acquisition agreement and dictate the terms of a payout if required in a disability situation to make a payout possible by another similar-sized agency.
Succession Planning is the continuation of your business from the inside using staff already within your organization. Perpetuation Planning is the achievement of the appropriate value for your agency using a buyer outside your agency. One form of Succession Plan operates with known staff members. Another can search and hire your eventual successor. In a Perpetuation Plan, you may either pre-identify the potential buyer and create a plan of acquisition and sale in the event of your demise or disability or simply indicate your desire in the perpetuation of the agency should something unforeseen happen to you. We at Agency Consulting Group, Inc. can assist you with both Succession Plans and Perpetuation Plans, either helping in every step or just creating and implementing specific parts of the Plan.
Of course, over 40 years of experience with independent insurance agencies has taught me that every agency is a little different. The guidelines explained in this article should NEVER be implemented without legal representation that can tailor the agreements to the specific needs of the agency in question, its current owner and its future potential owners. And another caveat: we are not attorneys, nor do we purport to offer legal advice. These guidelines should be used in conjunction with legal representation to accomplish the needs of the agency principal in a contingency buy-sell agreement.
Whether you are a single-owner agency or not, if you would like assistance in the creation of Succession and Perpetuation Plans for your agency, call us at 1-800-779-2430. We will work with you to create the Plan and guideline that you can give to your attorney to express how the succession or perpetuation of your agency is to occur in the unforeseen circumstance of the death or disability of one of the owners. We will work with your attorney to assure that your plan of action is triggered by the Agreements executed for the purpose.