You may greet every new work day with a smile, a spring in your step, and the satisfaction that you’re doing exactly what you want in life. Or you may look at that first cup of coffee as the fuel that gives you just enough energy to drag yourself into the office in the morning. Either way, you’ve probably given some thought to what comes next. There will be a day when unlocking the agency’s doors isn’t going to be part of your daily routine. When that happens, what will you do? There’s no right or wrong answer. Some insurance agency owners envision a relaxing life with a daily stroll on well-manicured fairways, or taking time to find the biggest bass in a favorite lake. Others may see the next step as a second chance to do something they’ve always wanted to do, or envision a gentle transition, with a family member or employee gradually picking up a bigger share of the responsibility.
For most agencies, the best type of exit plan is a succession plan. After all, your book of business won’t disappear the day you walk out of the office for the last time. You may transition the business to a family member or a trusted employee, or you may sell it to another agency. To ensure that those actions achieve your objectives, you need a succession plan that addresses who the owner will be and how they will be chosen, how you will prepare them and transfer control, and how you’ll transfer the agency’s assets—all while ensuring you get what you need financially.
Many agency owners create succession plans as a way of continuing their dreams for the business. They can enjoy the reward of passing the agency to the right people who can keep the culture and values intact. They can also be sure that their customers, who oftentimes are their friends as well, will continue to be treated well.
When should you start planning?
Remember when you were in elementary school and the teacher kept imploring you to take your time and be careful so you’d make fewer errors? That advice also holds true when it comes to succession planning. Giving yourself enough time to plan means that you’ll be able to think through all of the aspects carefully. It also reduces the risk that you’ll be backed into a corner by external events, such as a serious illness in the family. Once you develop your plan, a gradual transition will protect the health of the business and reduce the stress of everyone involved, including your employees. When people know what is going to happen—and when—they tend to worry less, so they’re more productive and better focused on the objectives you’ve established.
According to a study by NFP Advisor Services Group, merger and acquisition consultants say the ideal amount of time for transitioning ownership of a financial advisory practice can be as long as 10 years—although in practice owners assume that five or fewer years is sufficient. It takes a minimum of two to three years to properly prepare an insurance agency for a transition. There are a variety of concerns to consider, including the tax consequences of various methods for transferring the business. Should you use an ESOP or a restricted stock plan, a leveraged buyout, an earn-out, or a seller-assisted plan? In each case, there are tax consequences that should be reviewed by a team of advisers with experience in the agency business, including tax consultants, attorneys and CPAs. No matter how long your timetable may be, review it periodically to make sure that you’re accomplishing all of the goals in a timely fashion. You may need to adjust your activities as a result of changes in the business or your life.
Who will succeed you?
People may tell you that you can never be replaced, but it’s a fact that someone can succeed you. That brings up two other advantages of a succession plan: you can have some say in who that successor will be, and you can build in time to prepare that person for the eventual transition.
According to an American Family Business Survey (conducted by Mass Mutual Financial Group, Kennesaw State University, and the Family Firm Institute), just over 45% of the owners of closely held businesses who planned to retire within five years had chosen a successor. That number dropped to 29% among those who expected to retire in the next six to 11 years.
No two agencies are exactly the same. That’s why it’s important to take the time to envision the future you want for your agency. Should it stay in the family? Should you sell to employees? Your situation will help you narrow your options.