Feature Article

Agency Succession Planning: Developing a Game Plan

By Jon Persky, CPC, CIC, PHR, President of Optimum Performance Solutions, LLC

Recently, I was speaking to an agent about his agency perpetuation plan.

Agent: “My son is my perpetuation plan.”

Consultant: “Really? How old is he?”

Agent: “Twelve.”

Consultant: “Oh. And is he licensed?”

The son can be the perpetuation plan in about 20 years, assuming he wants to join the agency and is competent. But this doesn’t address what happens if the agent dies, becomes disabled, or wants to retire before then.

But let’s assume the son is 32 instead of 12 and has been working in the agency for the past few years. Is he ready to take over the reins of the agency? Maybe yes, maybe no. Assuming you don’t want to sell the agency to an outside party, there are numerous issues that must be addressed with the internal heir apparent.

(Note: There are no “right” or “wrong” answers to most of the questions posed in this article. The best solution is for the current owner and the successor to have an honest and frank discussion about each of the following points.)

GENERAL SUCCESSION ISSUES

Can the successor personally afford to purchase the agency from you? If not, how will this person pay you for the agency? Most agencies are acquired through a leveraged buy-out, meaning that the cash flow of the agency is used to pay the seller.

Are you willing to hold a note from this person? What happens if he walks away from the agency after running it into the ground? Did he provide you with sufficient collateral to protect you or are you going to have to go back into the agency and try to rebuild it?

Is the successor the beneficiary of an insurance policy on you? What about disability insurance? Have you outlined a detailed process to transfer your managerial responsibilities to your successor?

OWNERSHIP TRANSFER ISSUES

Will the transfer of ownership be a stock transfer or an asset transfer? This issue can have serious tax ramifications to both the buyer and the seller. Besides the agency, are there any assets owned by the seller personally, such as the building, automobiles, etc., that will be included in the deal with the successor? If the space is leased, can the successor replace the current agency owner on the lease?

CARRIER ISSUES

Most carrier agreements state that if there is a material change in the stock ownership of an agency, the carrier must be informed and they may or may not issue a contract to the successor. Likewise, agreements are not transferable in the event of an asset sale. Before the successor takes over the agency, you and the successor should speak with your carriers to get their concurrence regarding the agency perpetuation plans.

LICENSING ISSUES

Does the successor have his property and casualty, life and health, and other needed insurance licenses? If not, what is being done to obtain the necessary licenses and when is the licensing expected to be completed?

PRODUCT KNOWLEDGE ISSUES

What level of knowledge does the successor have in the various personal lines, commercial lines, and life and health products the agency sells? In any area where the level of knowledge is less than “high,” what training or process is being used to raise the successor to a “high” ranking?

AGENCY OPERATIONS MANAGEMENT ISSUES

Does the successor have a high level of knowledge regarding the agency’s workflow and procedures? Is he familiar with the way the automation system works and what information/reports can be generated from it?

AGENCY ACCOUNTING ISSUES

When was the last time you discussed the agency’s accounting, financial systems, and financial condition with your successor? You don’t want to wait until he is ready to take over before sharing the information with him. To some, accounting is like a foreign language. Make sure you begin to indoctrinate your successor early regarding the financial statements, budget, payroll, payroll taxes, and cash flow of the agency.

You also need to make sure the successor understands the fiduciary relationship between the agency and its carriers and clients. He can’t use the trust account to pay agency operating expenses or to give himself a loan.

YOUR BEST BET IS TO PLAN EARLY AND CONSTANTLY REVIEW YOUR PLAN.

HUMAN RESOURCES ISSUES

How familiar is the successor with the human resources laws that apply to your agency? Does he know how to interview candidates, do performance reviews on existing employees, and terminate problem employees? Lack of knowledge in this area can be devastating, as defending yourself against an HR-related lawsuit can be costly. A mistake in this area can cost the successor (as well as you) the agency.

MARKETING AND CLIENT ISSUES

How familiar is the successor with the agency’s current geographic market area as well as potential new marketing opportunities? How will your key clients and centers of influence be transitioned to the successor in the event of your death, disability, or retirement?

DEVELOPING A GAME PLAN

Once you have identified your likely successor, you need to evaluate this person by applying the preceding questions to him or her. You also need to determine how long it will take to bring him up to speed in all the areas he needs to be knowledgeable in. How does this fit into your personal retirement plans?

If you want to retire at the end of the year and it is going to take your successor two years to reach an adequate level to run the agency, you have two choices: delay your retirement or sell to someone else. But retirement is an easier issue to deal with than your unforeseen death or disability. In those cases, you may not have the luxury of time to get the successor up to speed in all these areas.

This may necessitate a change in your perpetuation plan from selling to the successor to selling to a third party. But a third party may look upon your death or disability as a fire sale since there will not be a transition period. The result could be a lower sales price.

Your best bet is to plan early and constantly review your plan. You may also want to bring in an outside consultant to help facilitate an agency perpetuation planning meeting and help develop your game plan.

Jon Persky, CPA, CIC, PHR is president of Optimum Performance Solutions, LLC, a company that provides management consulting services on a nationwide basis to insurance agencies and carriers. The firm specializes in the areas of mergers and acquisitions, agency valuation, sales and marketing, compensation planning, perpetuation planning, and workflow analysis. Learn more at optperform.com or contact Jon at jon@optperform.com.