How to prepare your agency for the next generation
Once a month Mark Schadow and his executive team at Ameristar Agency in Golden Valley, Minn., conduct a somewhat unusual meeting. They only talk in the future tense. They're not allowed to address any current issues or day-to-day happenings at the agency, only the big-picture, long-term items.
These sessions have yielded a "bounty of untapped issues," which Mark's team is using to fine-tune its agency perpetuation plan.
About a year ago Ameristar management decided that a detailed, written plan to ensure a smooth transition of agency ownership was a priority.
While Mark isn't planning to retire anytime soon, he wants the agency to be prepared when he does. He, like a lot of agency owners, is part of the 76 million baby boomers expected to retire in the next 10 years. The retirement of baby boomers has been called a "mass exodus of talent" for the business world, expected to create an unprecedented loss of skills and experience from the workforce. And only about 44 million Generation Xers will be left to pick up the slack.
"It is not prudent for agents, as small-business owners and risk managers, to ignore one of the biggest exposures facing their firms: the question of who will keep the agency running if they should die, be injured or simply want to retire," says Rick Wittmann, GC's agency services financial consultant. "The earlier agents begin the process, the more options they'll have and the more time they'll have to implement them."
Perpetuation plan checklist
Rick has identified five critical requirements for a sound perpetuation plan.
- The existing owners must agree on what needs to happen and when. Do they plan to sell to family members or current employees? What are their personal financial needs?
- If a decision is made to transfer ownership internally, there must be a sufficient number of willing buyers to handle all of the obligations. Potential owners should have a strong desire to be an owner of a small business, willing to assume the risk, have current or potential management ability, savvy business skills and a high level of maturity.
- A good transition requires adequate funding, either from internal operations or outside sources. For internal funding, available cash flow must exceed debt service associated with purchasing a retiring shareholder's interest. To build a base of capital sufficient to support the perpetuation process, agency managers must establish a plan to build and maintain a strong balance sheet via retained earnings.
- It must include an agency valuation. The primary valuation basis is the projected cash flow of the agency over the period of time the sale will be carried out. If the price is set too high, the purchasers will not be able to meet their payment commitments. If it is too low, the agency owner won't receive what the agency is really worth.
- The final step is the implementation and review process. A plan must be carried out to be successful, but some factors may change over time. An agency owner must be prepared to rework the plan periodically to allow the agency to achieve its goal: a successful business transition.
Making your agency stronger now
When Ameristar started the planning process, it focused on the future. But Mark sees it benefiting their current business, too. Part of their plan is to make the agency as strong as possible now, so they're better equipped to provide good service with quicker turnaround for years to come. He says that carriers and customers are demanding more from agencies than ever, and he only expects that to increase.
"In the early planning stages we evaluated our target markets and our customer base and decided to focus our efforts on the things we do best," he says. "And that focus is helping us take the agency to the next level."
As a result of the plan, the Ameristar leadership team not only feels more secure about the agency's future but also has redefined its business appetite, promoted two CSRs to management positions and hired three new staff members.
How General Casualty can help
"During agency visits my colleagues and I make a point to ask agents about their perpetuation planning," says Jeff Lamb, Northern Plains marketing manager. "Over the years, we've seen how disruptive an unplanned ownership transition can be on customers, staff and carriers. And we want agents to consider us a resource as they develop a plan."
GC can provide planning tools such as a perpetuation questionnaire, action plan and best practice information. Rick can lend further assistance in determining the amount of retained earnings needed to perpetuate internally.
"We applaud agency owners who maintain written perpetuation plans, and encourage all agents to have one," Jeff says. "We believe their time and effort will be well worth it in the future."
For more information please contact Anne M. Smith.