These are questions every agency owner should address well before retirement. Yet, according to MarshBerry, only six in 10 insurance brokerage firms have a defined plan for transitioning retiring producers’ books of business. Just three in 10 have chosen a future CEO or put in place a program to develop its future leaders.
A strong perpetuation plan provides a road map for transferring ownership and management while protecting the agency’s value, employees and client relationships. And the planning should begin long before an owner contemplates retirement.
Start planning while building your agency
For a relatively new agency, perpetuation planning doesn’t necessarily mean identifying a successor. Instead, the focus should be on establishing a business that can function without its founder.
That includes documenting operating procedures, maintaining accurate financial records and developing relationships between clients and employees beyond the agency principal.
Owners should also establish contingency arrangements for unexpected events, such as death or disability. If there are multiple owners, a buy-sell agreement can specify how an ownership interest will be valued and transferred, who has the right to purchase it and how the purchase will be funded.
These early measures help protect the business while laying the groundwork for an eventual ownership transition.
Develop future leaders as the agency grows
As an agency expands, owners should begin identifying employees with the potential to assume greater management responsibilities and eventually become owners.
A lack of qualified successors can pose a major obstacle to your firm’s perpetuation. Developing those candidates requires more than promoting successful producers into management positions.
Prospective successors should have experience in financial management, agency operations, personnel supervision and carrier relationships.
Owners can prepare them by:
- Including them in strategic planning and financial discussions.
- Assigning responsibility for major operational initiatives.
- Introducing them to key clients and carrier executives.
- Providing management training and mentoring.
- Gradually expanding their decision-making authority.
The objective is to develop a management team capable of running the agency without depending on its founder for every important decision.
Determine your ownership transition strategy
As retirement approaches, owners need to make big decisions about the agency’s future. There are generally three options to consider, each of which involves different financial and operational considerations and poses its own challenges:
Transferring ownership to family members. Family succession requires determining whether relatives have both the interest and qualifications to operate the agency. Such transfers may preserve the agency’s independence but require financing arrangements for family members who lack sufficient capital.
Selling shares to employees or existing partners. Options for internal buyers include installment purchases, gradual equity acquisitions, seller financing and outside investment.
Selling the business to an outside buyer. An external sale may generate a higher purchase price, but owners must weigh that against their preferences for retaining the agency’s name, employees, culture and independence.
An independent agency valuation is essential for comparing these alternatives. Owners should assess recurring revenue, profitability, client retention, organic growth and the concentration of business among major clients or producers.
Prepare for the actual transition
MarshBerry recommends beginning serious perpetuation planning 10 to 15 years before an anticipated ownership transition.
As the transition gets closer, the plan should establish specific milestones for transferring management responsibilities and ownership interests.
Owners should work with attorneys, accountants and financial advisers to address purchase agreements, financing, taxes and other legal obligations.
The plan should also specify how employees, carriers and clients will be informed of the changes.
Introducing successors to major accounts well before the transition can help preserve relationships and reduce the risk of losing business when the founder departs.
Equally important, the outgoing owner must be prepared to relinquish control. A successor who has ownership responsibility but little decision-making authority may struggle to establish credibility.
Keep the plan current
Perpetuation planning is not a one-time exercise. Owners should review their plans regularly as agency valuations, financial circumstances and personnel change.
A potential successor may leave, a family member may decide against joining the business or an acquisition may substantially change the agency’s ownership structure.
The earlier owners begin planning, the more time they have to develop capable successors, arrange financing and preserve their options.
Ultimately, a successful perpetuation plan should accomplish two things: provide owners with an appropriate financial return for the business they’ve built and ensure that the agency can continue serving clients long after they’ve retired.