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Create a plan and begin to implement it early for changing ownership of an insurance agency, two industry consultants advise.
But making a plan is not a one-shot deal that, once completed, is put on a shelf for use when ready.
"Planning is a process, not an event," said Robert Reagan, president and CEO of Reagan & Associates, an Atlanta-based insurance consulting firm.
Having an ownership-perpetuation plan is important, as most agencies are owned by one person or a small group of people and the agency's customers, its employees and the owner's family rely on the continued viability of the agency.
Also, having a plan in place allows the owner to retire when he or she wants, knowing that the agency will go to the people he or she chose. A plan "allows owners to call their own shots and make their own decisions" as to their successors, said Thomas Doran, executive vp with Reagan & Associates.
Despite the importance of a perpetuation plan, a recent study conducted by Reagan & Associates in conjunction with Boston College showed that only about 20% of agencies have a written succession plan.
"Unless made a priority, it's just not going to happen," Mr. Doran said.
The two consultants made their presentation at a session during the Independent Insurance Agents of America Inc.'s 103rd annual convention in Boston last month.
A host of reasons exist for failing to develop a plan, ranging from general procrastination to not wanting to address the unpleasant facts of death or retirement. Also, developing a plan means having to deal with the tough choices of whom to make the next leader, for example, deciding which child among several will be the new head of the agency.
Because it could take a very long time to transfer ownership and properly train the next leaders, perhaps the most important aspect of a succession plan is developing it years before the succession occurs.
"You cannot start the process too early," Mr. Reagan said.
Once an agency owner decides to create a plan, the first step is determining the objectives of the transfer.
Does the owner want to give the agency to his or her children, sell it to the agency's employees, or try to maximize the sale price by putting it up for competitive bidding? Each option entails pursuing a different plan. Also, the owner should consider his or her future financial needs and tolerance for risk. Selling an agency to insiders generally means paying for it through the agency's future profits, a risky proposition if the new leaders lack the ability to maintain profitability or if the agency doesn't thrive without the former owner.
Obtaining the highest price usually means selling to a third party. But many owners prefer to transfer ownership to key employees to keep the agency alive as an independent entity.
If selling internally, it's critical to pick those employees who have the skills and energy to keep the agency alive. "It's difficult to come up with an honest assessment of talent and capabilities," Mr. Doran said. But some gaps in talent can be overcome through outside education or training within the agency. And the sooner those people can be identified and trained, the better the succession will be.
A tricky point with any succession is coming up with a value for the agency. A historic rule of thumb has been to value an agency at 1.5 times its annual revenues. But this rule is no longer favored, Mr. Doran said, as it does not accurately reflect the agency's profits. Today, most agencies are sold at about 1.2 times earnings, but this varies greatly by agency.
An agency with a strong balance sheet -- having positive net worth and little debt -- will fetch a higher price than one saddled with debt.
Also, because an internal sale generally is funded by the new owners paying out of future cash flow, an agency without enough cash flow must improve that aspect before any internal sale can take place, Mr. Doran said.
Tax implications also influence a sale. A seller wants to minimize any tax liability, but this often conflicts with the buyer's desire for making payments tax-deductible. Mr. Doran recommends obtaining good tax advice when preparing any succession plan.
Despite the best of plans, situations often change before a transfer is finalized. For example, Mr. Doran said one agency was about to finalize its stock transfer to a group of younger executives when one died in a car accident. To protect themselves, sellers should keep an eye out for other options, such as other buyers, until the sale is complete.
"Prepare for every eventuality and realize things can go differently," Mr. Reagan said.
If all goes according to plan, when it's time to transfer ownership, it will go smoothly. If the planning has been done, then "the implementation is the easiest part," he said.