When developing your agency’s perpetuation plan, one of the most significant decisions you’ll face is whether to shift ownership internally or externally. Internally may require more work and time but could be much easier on your staff and increase your agency’s value. Externally may be faster, easier on you and fetch a better price, but it also comes with drawbacks.
Rick Wittmann, assistant vice president of marketing operations, recommends owners take time to evaluate your overall business objectives when making this difficult choice.
Internal perpetuation
The key to internal perpetuation is finding the right someone to groom for an ownership position. Does your agency have someone who could handle managing the company, is a good leader and savvy business person? Are they willing to take personal financial risk and able to secure appropriate funding?
Internal perpetuation happens gradually over several years, giving the producer a chance to learn the administrative side of the business. It also allows owners to slowly turn over control, increasing their comfort level.
Jerry Yaekel will hand over his agency, Yaekel & Associates in Belleville, Ill., to his children, Jerry and Jill, when he retires in two years. He selected his internal successors about 10 years ago, but not until his children had proved themselves as capable agency owners. With help from General Casualty, he recently completed a financial appraisal and is meeting with a tax planner “to make sure the game plan will work.”
“Internal perpetuation can motivate producers to work harder because they’re more invested in the company, increasing the agency’s worth,” Rick says.
He also emphasizes the importance of planning for adequate funding. Starting a stock bonus plan and awarding agency stock for exceeding production goals, subject to a vesting schedule, is one way to achieve this.
External perpetuation
Most agencies choose external perpetuation when they do not have an employee on board who they feel comfortable handing over the business to. Other times owners may need to sell their agencies quickly, which might not allow enough time to train someone for the ownership role, or the producer may not be able to secure adequate funding.
Merging with a larger, more established agency may benefit the agency by bringing in new technology, operational efficiencies, more services and markets, and greater expertise. However, it could also mean significant cultural change for your employees or involve downsizing.
What every perpetuation plan needs
Consider the following when creating a plan:
- Each agency needs a strong balance sheet to build the foundation for perpetuation. Aim for a tangible net ratio, which is tangible net worth (excess of tangible assets over liabilities) divided by sales revenue, of 20 percent or higher.
- Start early. You never know when illness or other unexpected circumstances might arise.
- Create a formal written buy/sell agreement, even if you’re turning over ownership to a family member or long-term employee. This could prevent future problems and ensure the owner’s wishes are carried out. (Watch for more information buy/sell agreement best practices in a future issue of Generally Speaking.)
Should you have any questions regarding agency perpetuation planning, please feel free to contact Rick Wittmann at (608) 825-5524 or rick.wittmann@generalcasualty.com.
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Pros |
Cons |
Internal
perpetuation |
- can increase agency’s value
- easier transition for staff
- motivates employees, gives them something to strive for
- may provide departing owner more control, peace of mind
|
- only works if you have the right people internally
- takes longer to plan and execute
- is typically more work for departing owners
|
External
perpetuation |
- gives owners more buyers to choose from
- usually fetches a better price
- can be done quickly
- less work for departing owner
- may improve agency’s efficiency and expand product base
|
- gives departing owner less control over agency’s future and less transition time
- disruptive to staff, may involve downsizing
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For more information, please contact Anne M. Smith.