7 Things to Consider in Perpetuation Planning

This article was written by Kelly Drouillard and published by Live Oak Bank

You know the facts: insurance agents as a group are aging; the median age of a principal at an insurance agency, according to McKinsey & Co., is in the late 50s. What’s more, fewer than half of these agents have a perpetuation plan in place.

Just as you remind your clients, this should be a reminder to you that planning is the foundation of success. That includes creating and executing a strategy for the orderly transition of your business to a new owner, the capstone of an independent businessperson’s career.

At Live Oak Bank, we’ve seen our fair share of business transitions. Some go well …and others not so well. From surprise last-minute changes to bumps along the financing trail, there really are no guarantees. In watching these transactions, we’ve learned an important lesson: though it may feel overwhelming, perpetuation planning is not a mystery. Think of it as a sale to an internal rather than external, buyer. The key variables are the same: find a qualified and compatible purchaser such as a colleague or staff member, structure and price the deal appropriately, and manage the transition smoothly. It’s essential to effectively use the time prior to the transition to teach your successor(s) all aspects of the agency.

The following seven principles are the key to a successful perpetuation. None of them will surprise you, but it is surprising how often these key attributes are ignored.

  1. Avoid the Mini-Me

Your successor should share your values and priorities for the firm but he or she doesn’t have to be a “mini-me.”

Many agents complain that they can’t find a junior partner who will work as hard as they do, produce the way they do, and even cold call the way they do. But why should the new principal be just like you? The business has been established, and now it has to be sustained—two goals that require different skills. Having harmonious attitudes toward client service, the agency DNA, office management, and demeanor are necessary in order to retain current clients and staff. You’ll never find your exact match, though, and doing so might not even be the best idea for the business.

Did you grow as a business owner? So will your successor. Feel confident in your successor’s ability to run and build the agency. Ideally, this person will have taken on some responsibility for client acquisition, carrier relationships, and business retention long before you finalize the transition. A transition is a big change; your clients will be wary. They chose you for a reason, and they still need to feel well-served and secure. The more comfortable the fit with your successor, the more reassured they will be.

  1. Strengthen Your Financials

Your financials need to be strong. This is a perpetuation plan, not a rescue. You may feel fulfilled by looking back on your achievements, but your successor must look forward and find an opportunity to pursue. A well-managed, profitable, growing agency has good momentum to offer and will also qualify for better financing.

Strong financials also lead to a stronger valuation. Nothing is more important when valuing an agency than growth—both in total revenue and in profitability. Not only does growth counteract the natural attrition of clients but it also provides a future for the staff who can advance and take on additional responsibility. Growth motivates everyone, especially your successor.

  1. Think Through and Research Your Strategy

People and processes need to be in place for your perpetuation plan to be a complete success. Identify potential successors long before it is necessary so that you are able to train, encourage, and share responsibility. Your junior producer is likely more eager to take over than you realize, so communicate your plans clearly and stick to them.

Make sure the successor feels like he or she is in the game. In case things don’t work out, have at least one Plan B. To build a sustainable business, you always have to be thinking about the next generation. Process means making sure your financial strategy is in place. Consult your financial advisers before you finalize the plan. The transfer of a business has tax implications and legal considerations, and your choices, such as whether to choose an asset sale or a stock redemption, play a major role in how much money you keep. Engage your CPA, attorney, and financier early to develop a strategy that will make the details work for you.

  1. Backfill the Successor Chain

If the average agent’s age is 59, one-fourth of the industry’s work force could retire by 2018 according to McKinsey & Co. MarshBerry research indicates that agencies should hire three young producers for every producer currently employed to cover this loss. This includes young hires as well as senior agents, with an ultimate goal of building an unbroken chain of talent to develop.

This wealth of talent will make your perpetuation plans robust, and provides young, tech-savvy agents an opportunity to work with new clients who are seeking insurance. Young agents can learn to produce by reaching out to prospects who belong to their generation, not yours. This future- and growth-oriented approach will make your agency more valuable and the transition to new ownership more stable. After all, your successor will need a successor too.

  1. Know that You Probably Want More than Your Agency Is Worth

If you are the founder of your agency, it’s likely that you’ve poured your soul into it. You see the business as your life’s achievement, and you want to be rewarded for your success. That’s understandable, but your asking price may be unrealistic.

Rather than looking at your past, anyone buying the agency will be thinking about its future. The valuation of your agency will be based on its revenues, profit, growth rate, retention, quality of carrier appointments, client list demographics, and other economic and intangible considerations. All those nights you spent working late don’t count—only their results do.

  1. Don’t Stick Around Too Long

Develop a strategy for the actual transition and discuss it with your successor and staff. This ensures an orderly handoff of responsibilities. If one principal plans to leave the agency, it’s essential to create a written and executable transition plan with benchmarks for the transaction. A written plan focuses the attention, and the payout motivates the spirit—both buyer and seller need skin in the game.

Since you likely have an internal successor, the new principal probably knows the carriers and clients. Nevertheless, you may need to schedule some client meetings to explain the transition and share the strengths of the new owner. Include your successor in carrier communication and visits. Your carriers are as concerned with the future of the agency as your clients. Make sure they are comfortable with the future management.

How long the seller is expected to stay involved is flexible. The buyer may be eager for the seller to leave in order to start implementing changes, but balky clients may need the seller to make a more gradual transition.

Bear in mind that, eventually, you need to let go. Complete the transition and take your hands off the wheel. It’s the new owner’s turn now.

  1. Never Let ‘Em See You Sweat

Clients deserve clear communication throughout the transition process. They should feel like the ownership change is transparent and easy. You may discover that many clients resent the fact that any change has to take place. Some may find a transition to be their opportunity to vent their frustrations. The simpler and more harmonious the change, the more likely that clients will settle quickly into the new office routine.

Hewing closely to these principles won’t necessarily make the perpetuation process easy, but it will make it more manageable.

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