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Agency Succession Planning: Options And Opportunities

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Agency Succession Planning: Options And Opportunities

On a weekly basis, we confront countless agency owners who have spent their entire careers in the business. They now have second- and sometimes third-generation family members working within their firms. These dedicated professionals, who are approaching or have gone beyond retirement age, are internally conflicted with an emerging issue: succession planning and perpetuation of their business.

The struggle in these situations often turns on how to “unlock” the liquidity within the agency so the owner can retire without creating excessive financial leverage for the successors. The agency owner is caught between keeping the family business intact so that the next generation can continue its legacy without creating an inordinate financial burden through transfer of ownership.

There are three basic solutions available to the agency owner. Concluding which alternative is the correct strategy is far more difficult than the actual execution of it. In order to select properly which solution is best, it is highly advisable that each one be evaluated carefully as a possible strategy.

Buy-Sell Agreement. The execution of a buy-sell agreement allows for change of control of the business that largely can be customized to fit specific circumstances and timing. Buy-sell agreements typically are used to change the ownership control from one principal to others based on agreed-upon terms, price and timing. In many instances they are executed among family members to smoothly change the ownership from one party to another, or several others.

More recently, buy-sells are very effectively supplemented when used with life insurance or Employee Stock Ownership Plans (ESOPs). The benefit of such vehicles allows certain tax advantages to the transfer of ownership, which ultimately lowers the financial burden for the successors and may create greater tax advantages to the seller.

These options far exceed the conventional financing methods used in years past. Downside risk still exists where the successors have a financial debt obligation to the seller from the purchase, which must be balanced against keeping adequate capital in the business to support ongoing operations and maintaining their own personal lifestyle cash flow needs. However, the upside is substantial in that through the use of leveraged ESOPs and other creative financial methods, the cost of capital or debt service dramatically can be reduced and cash flow significantly improved.

Partnership or Joint Venture. If an agency owner is well suited to consider partnering with another firm within its geographic region, there are tremendous opportunities that can exist with this type of an arrangement. Essentially, the owner of one business can fund his retirement through partnering with an agency of equal or greater size and to evolve into an exit strategy over several years.

The obvious benefit that exists with partnering is that economies of scale play a key role in adding additional earnings to both businesses. If the two entities can establish a well thought out plan of integration and profit sharing, the “financial lift” from this combination can create enough additional free cash flow to fund a buy-sell agreement that could be included in the partnership agreement.

Conversely, partnerships or joint ventures are flexible enough that an agency owner easily can “unwind” his business in the event that things do not work out between the two parties. Essentially, it creates the best of both worlds in that it allows for enough flexibility to the agency owner to create his own succession plan, while also satisfying the need gradually to obtain liquidity from the business.

In addition, key family members within the agency are given an opportunity to remain with the operation and potentially can be awarded ownership in the combined entity upon formalization of a sale option that can be included in the partnership agreement. This allows for continuation of the familys legacy through participation in a larger company, while gradually merging it into another entity.

Conversely, the joint venture partner may find this to be the best of both worlds as well. They are able to execute effectively an acquisition strategy but to perform it on a more gradual basis. This minimizes their risk and allows time for both parties to integrate successfully the agencies into a more efficient operating model.

The key to remember in developing such a strategy is that there must be a clearly thought out plan on the front end of discussions. There must be openness to modifying both operations to achieve the desired financial optimization.

It is equally important that independent professional advisors be brought into the discussions early. This will allow both parties to assess the financial dynamics, tax implications and any other legal change of control issues. It is advisable that both parties utilize industry legal and financial advisors who are neutral and can approach the construction of an agreement without bias. This creates a level playing field where a neutral third party can make recommendations that will be beneficial to both parties.

Sale of Business. Selling an agency in todays market is probably the most straightforward approach to solving and completing a succession plan. It creates a liquidity event for the owner and can allow for professional opportunities and rewards for family members within the business.

Many times, we are approached by agency owners who seek selling as a succession planning route. The problem is that some believe their exit from the business happens contemporaneously with the sale. It is important to realize that in order to really maximize the sale price, the owner generally must stay involved with the business for at least three years and therefore, should not wait until he is ready to retire to start the sales process.

Most acquirers do not have a high level of interest in an agency whose owner will not be part of the business, post-transaction. They clearly understand that this is a relationship business and an overwhelming risk exists if the owner does not stay within the new organization for a reasonable period of time. This allows for a smooth transition with customers as well as with the employees of the agency.

Regardless of the potential “transaction partner,” there is an absolute need for most employees to stay within the business after the transaction closes. This may present a tremendous opportunity for second- and third-generation family members within the agency. Working in a larger, well-capitalized company, can allow for new career opportunities that may also include significant compensation as well.

The important fact to remember in this situation is to assess the qualitative and quantitative characteristics with the possible buyers. If quality of life for family members is more important than getting the highest sales price, this certainly will send the agency owner to a different type of buyer.

Selling an agency is something that usually only happens once. An owner can ill-afford not doing the appropriate “reverse” due diligence on possible buyers. It is advisable that professional advisors be engaged to assist in evaluating the financial and nonfinancial issues that exist among the various opportunities.

An agency owner should start planning at least five and as far as 10 years before he actually plans his exit from the business. This allows ample time to explore the opportunities, begin the transition process and to segue out of the business. For those who like the thought of retiring at 55, age 45 is not too early to begin the process of thinking about their long-term strategy.

Robert J. Lieblein is managing principal and Steven S. Wevodau is principal of WFG Capital Advisors, Harrisburg, Pa. They can be reached at [email protected] and [email protected].

Reproduced from National Underwriter Life & Health/Financial Services Edition, November 7, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved.Copyright in this article as an independent work may be held by the author.


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