It would seem to be easy to create a succession plan if an agency has a sibling or siblings in the business or even if the agent has younger partners who know the insurance business and expect to be the next generation to own the agency once you retire. But a HUGE number of agents don’t have children in the business and are “Lone Rangers,” having managed their business on their own since starting the insurance business or became owners. What do they do?
Many agents with successors in place are not so sure that their successors can manage the business as well as the older agents or sufficiently enough to assure the older agent a secure retirement payout. What do THEY do in this very sensitive situation?
Until now the “Lone Rangers” simply sought the highest price from a buyer and sold out. That has been the simplest way out and the agent didn’t have to do what they have never done before – bring someone else into their business, train and spend time with people who may have different ideas about running the agency. Most ‘Lone Rangers’ are comfortable enough with their clients and can even spend time with employees and company folks. But the idea of mentoring someone who will eventually own their businesses is foreign to them. Many of them are so averse to this concept that they will sell their agencies at a value below what they deserve to avoid this “unknown universe.”
What the ‘Lone Rangers’ don’t consider is the ramifications of a sale if they intend to remain in their communities. Over the long years spent in a business, we find that our best and long term clients either are or become our friends, especially in rural areas. Selling out to the highest bidder (often banks, regional agencies, nationals or foreign competitors seeking a foothold) puts your “friends” into the hands of folks you (and they) might not find as friendly and service-oriented as you have been. No one thinks about how they will face their friends in the future having “sold” them with the agency.
So selling to the highest bidder works well if you’re going to leave the area (and have the time to set up your agency for maximum value). Otherwise you may not get the full value for your agency in the sale. And, you have to deal with your client/friends after the sale if the service levels are not up to yours.
Meanwhile the ‘Lone Rangers’ are envious of their friends who have children, partners or employees who are capable of taking over the business some day. What the “Rangers” don’t realize is the panic faced by many of these owners with default succession plans. They have watched their children and/or partners/employees grow into their roles in the agency and they well-know the weaknesses of each of them. They wonder whether or not their successors can fill their shoes once the older owner departs.
Many times there is truly no cause for this concern. Every parent and elder has periods during which he thinks of his successors as the “idiot children.” Their mistakes have been magnified to the point that the owner is concerned over the well-being of the firm and the security of his retirement payout. That’s why so many agents have required third party loans to fully pay them with the debt carried by a financial institution for the payments he could have engineered for him or herself. But the agents have convenient memories, remembering the faults of others and forgetting their own mistakes as they grew from their 20’s and 30’s into ownership positions.
No, most are not ‘Idiot Kids,’ they are the same kind of people as their elders, learning more from their own mistakes than from the teachings of their elders. But it is hard for the older owner to distinguish between youngsters growing up and those real Idiot Kids who have been spoiled and will take over the agency long enough to realize that they don’t like it even without the older owner (who they always thought was holding them back). Within a few years to a decade, these new owners will have secured their future by merging or selling their predecessors’ businesses at a tidy profit. This is only a shame and a problem if the older generation gave the younger generation a break on the price to allow them value benefit in the ownership transfer. In that case, the old owner discounted the value of the agency in favor of the new generation of owners only to have it sold at a tidy profit shortly thereafter. However, if the ownership transfer was at a fair value, then the new owners have every right and privilege to merge or sell if they are not up to growing the agency’s value as an independent entity.
The problem is not the eventual sale or merger of agencies. Sales and mergers are actually a part of agency life-cycles that is healthy for the industry. The problem is that the original owners knew that the new generation of owners were not capable of managing the growth and value of the agency and still sold it to them BECAUSE MOST OWNERS DON’T FEEL THEY HAVE ANY CHOICE.
So the ‘Lone Rangers’ sell their agencies because they feel they don’t have the option of internally succession and the multi-generational owners are concerned because they feel obligated to their children (or other successors) and feel they have no choice. Do you see the commonality? All of these agents, small, medium sized or large, urban, suburban or rural¸ ’Lone Rangers’ and agencies with successors –- all of them feel trapped with no options besides selling and hoping for the best.
BUT IT DOESN’T HAVE TO BE THAT WAY.
No, we can’t rule from the grave (or from retirement), but tools are in place to secure the future of your agency (and the future of the payments to you) whether you are alone in ownership or have generations behind you.
If you have time (several years before you either retire or want to cash out), there’s a plan of action you can take to make your retirement or withdrawal from ownership more secure. If you waited too long (you’re in the process of selling down or need to do something within the next year), there are still tools that can be implemented that can secure your payout to maximize the value of your asset.
In a nutshell, whether or not you have time before you turn over the reins to your next generation or if you still haven’t identified that next generation, a management reporting process can be established that will require the next owners of the business to operate it in a manner that will assure you of its ability to make payments to you in a buy-out. This reporting requires the new owners to retain sufficient business and to grow the agency sufficiently to sponsor the payments to the retiring owner. If it doesn’t happen, they have pre-agreed in the purchase agreement that the agency will have to be sold once again to satisfy the old owners (or they must secure full payment of the remaining balance due to the retired owner). The reporting system mandates both retention and growth to minimum levels AND the prudent spending habits that keep the agency’s balance sheet liquidity ratios at levels that will assure any financial auditor of the agency’s continued ability to support it debt.
The difference between having the luxury of time and doing this shortly before an ownership transfer is the training and implementation that can be done prior to (and proving the validity of) and ownership transfer and the need to establish the reporting system without any evidence that the new owners are capable of achieving the requisite goals to assure sufficient success to manage the value paid for the agency. If you have the time, you establish the management reporting program as a test of the ability of the agency (and its potential new owners) to support the financial strength needed to buy out the old owner(s). If the agency with its younger owner-potentials can accomplish this in the years available to them prior to the buy-out, the older owner can be reassured of the agency’s continued stability. The achievement of the objectives can be the pre-requisite for the ownership transfer and could, potentially, provide a ‘way out’ for an ownership change that could be disastrous if actually implemented. Doing what’s best for the old owner is also doing what’s best for the new generation. If they are capable of handling the ownership change, it’s wonderful. If not, we know this prior to any change in ownership and other avenues can be explored.
If you are a ‘short-timer’ and need to make a transition quickly, this same management reporting requirement can be used to sell to a new owner who will either retain and build the business or have to re-sell it to satisfy the retired owner. No owner will ever be surprised again by their payments suddenly stopping and a sorrowful letter explaining the cash shortfalls that make further payments difficult. The reporting process and balance sheet liquidity reporting requirements will reflect any negative changes very quickly and the Sale Agreement will contain very specific remedies if the agency cannot support its payments.
Plan ahead and any change of ownership can be managed to provide the maximum value to the old owner with a payment schedule that makes the burden bearable without sacrifice to the new owners. If you would like to explore Succession and Perpetuation Planning with Agency Consulting Group, Inc., please call us at 800-779-2430 and we’d be happy to discuss your specific situation in complete confidence and confidentiality.