“What if one of your account managers or producers won the lottery at lunch and didn’t come back that afternoon? How would the agency manage?” asked keynote speaker Kelly Donaue-Piro of Agency Performance Partners at IACON 2024, the annual conference for the Ohio Insurance Agents Association (OIA).
Start with a series of questions. What is your agency’s answer to the lottery-at-lunch question? More specifically, what’s the agency’s answer to the lottery-at-lunch question regarding the agency’s owners and future owners? Does your agency have a perpetuation plan? Could the plan weather the storm of emergency? Is the plan prepared for the prospective next generation owner to have a change of heart and take a new opportunity?
Whatever the case may be, IA Valuations, OIA’s team of advisors, finds many agency owners are expert risk advisors for others, but if they audited their own perpetuation plan there would be much risk left unaddressed, or more commonly, there is no plan.
Whether you are an agency owner with a drafted plan, a mental “plan,” or no plan at all, here are 3 keys to remember when creating a perpetuation plan.
#1: Set a Retirement Year.
“Plan for your exit the day you buy your agency.” – Mike Wagar, SVP Agency Banking & Specialty Lines Leader, Westfield Bank
Setting a finish line is necessary to create the rest of the plan. The finish line is when you would like to retire. Even if your retirement year is an estimate, get something in writing. From there, you can begin to pencil in the rest of the timeline of events that would need to occur and to make your retirement goal a reality.
It’s not easy to prepare your agency for your retirement if you are the principal. You need young talent with an interest in ownership, and that can be hard to come by. Ideally, you will be able to give yourself a runway to find talent, develop them, and shepherd them towards ownership.
Financially, it makes sense to pencil in your retirement year as early as possible so that you know the amount of time you have to gift shares to the next-generation owners, if applicable. In 2024, the annual limit was $18,000 per person. A principal could gift a next-generation owner $18,000 worth of shares as a tax-free gift. Due to these limits, you must allow yourself time to gift tax-free, if you plan to go this direction. If gifting is not applicable, you still need a runway to plan because, in order for a principal to be compensated fairly via an internal perpetuation, a 10-year time horizon is most common with seller-financed deals.
#2: Create New Minority Owners ASAP.
“I’ve seen so many businesses struggle because the “old guy” failed to get out of the way.” – Bruce Strachan, CEO, Strachan-Novak Insurance Services
This quote is not so much about the incumbent owner as it is about the next-generation owner. Prioritize creating new owners because, often new owners inject organic growth and energy into the agency. Two prerequisites to this claim: the new owners should be validated and have proven they can grow a profitable book of business prior to receiving ownership.
In our team’s experience, retiring owners sense when they start to lose the hunger that first drove new business. If you are in those shoes, to the best of your ability, don’t hold onto the reigns too long. If there is a next-generation owner within your agency, granting them ownership will benefit the incumbent owner, the staff, and the clients. A next-generation owner is to your benefit by securing your personal financial health.
Establishing a next-generation minority owner benefits the staff and clients by creating stability for their future. If the ownership is communicated, then the staff and the clients know who they can look to for their care in the future.
#3: Use Professionals. You Cannot “Overdo” a Perpetuation Plan.
“We used about seven different professionals to assist in our perpetuation over the course of seven years.” – Rob Strachan, President, Strachan-Novak Insurance Services
We share this quote from Rob to cast a vision for the agency owner or aspiring owner reading this article to encourage the planning to start now and to treat the planning seriously. Who are the people that can assist you in creating an internal perpetuation plan? These are by no means necessary but are encouraged.
- A personal financial advisor. Use a financial advisor in order to help you create your finish line. They can help you come up with the actual dollars you will need to enable the retirement you want and from there determine when you can retire.
- An accountant for your agency. They provide both parties with the ability to advise on the bet financial vehicle to use for the sale. They will be able to clearly define how much tax burden each party will take on. A key to remember for many agency owners is to not be caught up on how much the tax burden is, but who the tax burden is on.
- An attorney for the transaction. An attorney will be able to revise, draft, and review the documents that you need to execute the transitions of ownership. These will chiefly be shareholder agreements or operating agreements.
- A perpetuation advisor, like IA Valuations. This is the advisor that will walk through each step of the process with you. If the advisor you choose is anything like IA Valuations, they will help you draft a tangible perpetuation plan with goals and deadlines to hold the whole perpetuation team accountable to a timely and accurate transition of shares. They can also save you expenses on other professional fees by equipping owners with template documents. It seems contradictory, but without this third-party professional, owners could spend more time and money completing a perpetuation than they would have otherwise.
Benjamin Franklin’s famous quote sums up the intent of this discourse well, “By failing to prepare, you are preparing to fail.”
As you would advise your clients on how they can decrease the cost of their risks, allow us to advise you to decrease the risk around your exit plan by creating a perpetuation plan. If you are considering a transition in your agency or just have questions about this process, please reach out to Jarod Steed at jarod@iavaluations.com.
By: Jarod Steed, Business Planning & Valuations Analyst
About IA Valuations and Agency Link – Founded in 2017, the IA Valuations team has performed over 270 valuations to independent insurance agencies across the U.S. Our advisors have 25+ years of experience guiding agency owners on maximizing their agency value, planning, and legal needs for ownership transition. In addition, IA Valuations has provided perpetuation planning, financial modeling and business planning for independent insurance agencies. Finally, IA Valuations has advised dozens of agency owners on selling their agencies through our Agency Link process. Agency Link is a platform that connects buyers and sellers together to further the growth and strength of the IA system. To learn more about IA Valuations, please visit IAValuations.com or contact@iavaluations.com.
The information provided in these documents is general in nature and shall not be construed as personal legal, tax or financial advice for your situation. Please contact@iavaluations.com to discuss your personal situation.
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