Agency Succession Planning: Options And Opportunities

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.