Eye On The Law

Protect the Goose that Lays the Golden Eggs: Perpetuation Planning and Selling Your Agency

The last several years have seen an unprecedented number of insurance agency purchase and sale transactions. This flurry of activity has led to increased valuation and sale prices for agencies. Now is the time to make sure you have a plan to perpetuate your agency. A perpetuation plan will allow your agency to care for your clients, and to take care of you. Not only is perpetuation planning in your best interest, some insurers, as a condition of agency appointment, require the agency to submit a perpetuation plan.

Multiple Owners

Any number of factual circumstances may arise that highlight the necessity of having an appropriate perpetuation plan. For example, assume two 50% owners of an agency have no agreement for the sale of an owner’s interest. Now assume that one owner desires to retire, but rather than sell his interest in the agency to the other owner, the retiring owner desires to gift his interest in the agency to his child. The child is not a very good producer, is relatively young and inexperienced, and is not someone that the other owner is interested in doing business with on a long term basis. Absent a buy-sell or similar agreement between the two owners addressing ownership transfers (i.e., a perpetuation plan), the retiring owner will be able to gift his ownership interest in the agency to his child. Now the existing owner is a partner with the child of his former partner. Obviously, the success of the agency will be directly dependent upon the ability of the remaining and new owner to get along; and the foregoing suggests that there may be substantial problems in that regard. An appropriate plan of perpetuation would have eliminated this problem from arising.

Unexpected Death or Disability

Assume an agency is owned 100% by an individual who dies prematurely. The surviving spouse then seeks to sell the agency. Unfortunately, the spouse has no insurance experience and there is no employee with the financial resources or expertise to own and operate the agency. Consequently, the spouse needs to look to third party purchasers. Given the need to sell the agency quickly to service the agency’s clients, potential buyers will be looking to discount the value of the agency, and the spouse is unlikely to receive full value for the sale of the agency. Here, a catastrophic perpetuation plan could have prevented this outcome.

What is a catastrophic perpetuation plan? It is a plan designed for an owner of an agency that has no co-owner, no family member interested in owning the agency, and no trusted employee to transfer ownership of the agency. In such a situation, the owner should look to owners of other agencies as potential candidates to purchase the agency upon the occurrence of a catastrophic event, such as death or permanent disability of the owner. These two owners can establish a contractual commitment to sell/purchase the agency in response to a catastrophic event. This agreement should address, among other things, the purchase price or a formula to determine the purchase price, funding of the purchase price and other transaction issues. A catastrophic perpetuation plan will help ensure the continuation of the business for the benefit of clients and employees as well as avoid the devaluation of the business as a result of the catastrophic event.

There is no one size fits all perpetuation plan that will work for all agencies. Rather, a perpetuation plan and its success will be dependent upon the characteristics of the agency and the desires and goals of the parties involved. A plan of perpetuation will provide definitive answers to any number of circumstances that can and will arise. The plan of perpetuation should attempt to strike a balance of fairness in those circumstances, so that the success of the agency is not jeopardized. Finally, a perpetuation plan is not a static document. It should be periodically reviewed, revised, and updated as circumstances change.

PIA has many resources available to help members with perpetuation planning including PIA’s Agency Journey Mapping webinar on July 21st which will help you get a concrete plan in place for your agency’s future. If you are looking to draw up a contract and take the next legal steps, contact Axley Attorney Judd Genda at jgenda@axley.com or 608-283-6700.