The APT (Agency Perpetuation Tool) is an unusual way of allowing a very specific type of agency owner to perpetuate his/her agency in a way that will pay substantially more than the value of the agency in cash to the seller but cause the buyer (or agency) to pay substantially less than the agency’s value in cash payments to sponsor the perpetuation.
Sounds too good to be true?? We thought so, too, until the designers of this concept spent several days explaining it to us in sufficient detail to allow us to understand how it works. The best way of explaining it in brief is to illustrate a situation and how the APT could be used to solve a problem.
I have an agency that Al Diamond and Agency Consulting Group, Inc. values at $1,500,000 (or at $2.5 MM or at $3.5MM)
I want to transition it to the next generation who has no money to buy it.
I have time and don’t need or want to retire for another 5-10 years.
How can the APT work for me?
The Concept: The value of the seller’s asset (or stock) is split between a deferred segment based on the payout value of the APT program designed and tailored for the specific seller—and — a standard stock (or asset) sale.
Example: if your stock is worth $1 MM, the APT section of the buyout (based on a $5MM life insurance contract) could sponsor $700,000 of the value, paying the owner $75,000/yr. for 15 years beginning in 10 years – a premium of 61% on his value. The standard buyout (in this example) will be for the remaining $300,000 of stock value payable (beginning whenever is most appropriate) between the start date of the sale and the start date of the APT buyout.
HOW THE STANDARD BUYOUT WORKS:
Whether now or whenever the new and old owners want to begin the buyout, the owner sells a percentage (30% in our example) of the agency to his next generation, payable in monthly installments over either a specific period of time — or — over a period of time that will take the payments to the start date of the APT payments (to allow for a continuous long-term “annuity-like” payment to the owner).
HOW THE APT SECTION WORKS:
The concept is that a percentage of the stock value is purchased in a deferred payment manner, sponsored by life insurance that permits the agency to pay MUCH LESS in cash than it would in a standard sale. It will then pay the seller MUCH MORE than he would otherwise get in return for the opportunity to begin the payments at a point in the future (often dove-tailed with the payments on the balance of the value of the agency stock).
HOW THE CONCEPT IS BENEFICIAL TO THE AGENT:
Since the payments on the APT section of the buyout don’t start until a period 6 – 10 years away (remember, the rest of the stock is being purchased and paid for in the meantime), the build-up of value in the life insurance permits the agency to draw down (to pay the seller) a regular amount over a much longer period of time while still keeping the death benefit intact to sponsor the continuing payments (or a final cash buy-out) in the event of a death claim.
1. We purchase a large amount ($5MM or more) life insurance on you through our life carrier relationships. The eventual payout to the seller (a fifteen year payout (secured) beginning in 6-10 years that is sponsored by this policy will buy a substantial amount of the stock from the seller.
The balance of the value of the seller’s stock less the value of the APT buyout is sold by the seller to the agency (or to specific buyers) at a point in time (now or in the future) at an established value (based on Agency Consulting Group, Inc.’s agency value).
2. We finance the annual premiums on that life insurance with loans from our banking relationships.
a. The policies are of a very special type in which the annual premiums are fully vested with cash value in the life policies each year. Those policies become the collateral for the loans, so the banks are satisfied that they are fully collateralized.
3. All the agency is responsible for is the interest payments on the loan.
a. The first few years of interest can be taken care of by the commissions that YOU will earn from the sale of the life insurance.
b. Several more years of interest payments can be relieved if you also refer a few of your clients to AISG for the same succession planning process as you are implementing.
c. With a few successful referrals, the agency ends up paying NO INTEREST AT ALL until the insurance policy matures sufficiently to pay for itself.
d. After 5-6 years, the insurance policies mature to generate enough cash to pay for the interest and the program becomes self-sufficient.
4. After 6-10 years the selling participant begins to draw a steady amount of cash for 15 years that amounts to a substantial premium over the remaining value of the agency.
THE KEYS TO SUCCESS IN THE APT:
1. The seller (or a buyer) must have sufficient assets ($3 – $4 MM or more) that would make the underwriters happy that the life insurance amount is warranted by the personal asset values.
2. The seller can’t need the value of his agency asset immediately. This program will pay the seller substantially more than the traditional value of the agency, but will do so in an annuity-like program over a long period of time. Unlike annuities, if the seller dies, the payments continue to his wife/estate (or can be paid off from the life insurance proceeds).
3. The seller must want to do a “friendly” agency perpetuation that will simultaneously give him (more than) the value of his business and cost the agency and his successors less in cash than a traditional stock transfer.
4. The best scenario for the agency is the use of the APT for clients as well as for the agency because that would offset even more of the running costs (the annual interest payments) until the life insurance policies mature sufficiently to pay for itself.