For many generations, agencies have tried to perpetuate their ownership in a variety of ways to avoid (not evade) taxation while passing the agency’s ownership to the next generation of family owners.

Gifting of stock by parents to children is one way to pass ownership if you have the time to do so. Virtual annuities to reward parents for the rest of their lives has also been effectively used and Agency Consulting Group, Inc. has several ways of doing this that protects both perpetuators AND successors if done properly. Allow us to consult with both generations and we can establish the best way of evolving a “friendly” succession plan that accomplishes the goals of rewarding the perpetuators for their hard work while avoiding the penalties of double taxation to the successors for taking over the business that they helped build. Please allow us a few years (five is best) before the event to properly establish all of the rules and guidelines that will make this type of program work.

However, the advances in medical technology continue to increase lifespans for many people. If we take care of ourselves, we are more likely to reach our Nineties and beyond. While that is wonderful for our longevity and desirable for the enjoyment of our lives, it also proposes problems that we have begun to see crop up within long-term perpetuation plans. Agency Consulting Group, Inc. Succession Plans avoids these traps by setting time limits within the scope of the annuity stream. But we have been asked to try to alter self-made perpetuation plans that omitted these limitations and are now seriously affecting agencies to the point of their financial collapse.

Here’s what happens:

Jr. tells Sr. that when he is ready to retire, he will earn a certain amount (equivalent to his financial need in retirement) every month for the rest of his life – and sometimes through his wife’s life, as well. The automatic assumption is that the agency revenue will either remain stable or grow under Jr’s leadership as it did under Sr.’s ownership. Jr. is gifted stock over time and accepts Sr.’s stock basis (the amount over which capital gains will be due when Jr. eventually sells the stock).

Then several major clients disappear, retire, or sell lowering the agency’s revenue base. Unless Jr. reneges on his agreement with Sr. (undesirable at best and financially harmful to Sr. at the least) the agency is now expending operating income it cannot afford to sponsor the retirement of an departed owner who may live to his nineties and beyond.

Sr. and Jr. love each other and wish no harm to the other, but are both in untenable situations that may be legally binding. What to do?

When Agency Consulting Group, Inc. is involved in setting up a perpetuation plan of this type several triggers are included that limit the liability of the agency. We clearly delineate the value to be transferred to the retired owner and identify the requirements of the new owner that will allow the agency to fulfill its obligations and remain financially stable.

1. Liquidity Audit – This tool is immediately put into place to measure the agency’s ability to meet its obligation (the payments to the retired owner). While few agents pay sufficient attention to their Balance Sheets, this tool, if properly used, tell us the agency’s ability to meet its immediate financial obligations EVERY MONTH. Like our physical health, we rarely become seriously ill overnight – factors are triggered that ‘erode’ our health – and our business’ financial health – over time. The audit, done monthly, tracks the trending of the agency’s financial ability to meet its obligations.

2. Agency Valuation – While most family businesses don’t mind stretching the value of the agency to make sure the retired owner is properly taken care of, it becomes a ridiculous exercise if the agency’s payment schedule stretches to several TIMES the value of the agency in the payout to the retiree. A valuation done at the time of the transition allows both perpetuator and successor to understand the current value at the time of the transition. A baseline value can be established that identifies the minimum and maximum value that will be transferred over time.

3. Strategic Plan for Growth – in succession planning situations that continue to fund the prior owner through consulting agreements, annuities (virtual or real), deferred compensation agreements, etc. the successor takes on an obligation that will burden the agency with a long term expense. This only makes sense if the agency grows sufficiently to sponsor the successor’s lifestyle and career regardless of the continuity of the obligation to the perpetuator. A Strategic Plan developed and executed for the successor assures the successor and perpetuator, alike that the agency will not become a Maintenance Agency, simply continuing the pre-existing book of business and eroding as little as possible every year. The growth plan will act to assure the payments to the perpetuator AND evolve a stronger agency and lifestyle for the successor.

Tips to the Wise:

1. Whether you use a consultant or “Do It Yourself”, make sure you insert minimums and limitations to the duration of the agreement. Otherwise you may find yourself so generous that you can’t afford to stay in business. You will understand that problem when you find yourself paying out twice or three times the value of the business in a long-term succession plan to a nonagenarian or centenarian. It is, in reality, using the value of Jr.’s perpetuation income to sponsor Sr.’s on-going lifestyle 30 or 40 years after retirement. At some point the foundation of the agency will erode sufficiently to force it to be sold.

2. Establish a retention percentage that allows the agency to continue making payments as planned to the perpetuator. The loss of a few large accounts can erode the agency’s ability to sponsor the future compensation to the old owner.

3. Faith of one generation to another is emotional and commendable. Actual creation and achievement of agency goals and objectives (Strategic Planning) takes the emotion out of the formula and illustrates the financial requirements needed to satisfy the retirement goals of the perpetuator and the need for a strong earnings capacity of the successor. Plan and execute even if the prior generation owner did not.

Call Al Diamond at 800-779-2430 to further discuss your agency’s Succession and Perpetuation Plan (