Insurance Agency Legacy Planning: Keeping It In the Family

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Building a small business is no easy task. Time, energy, money and, often, personal sacrifices are given and made to create and maintain a successful business. Once operations and management have reached a healthy functionality, you may think your investment and livelihood are safe. You focus your attention on immediate profits and gaining new customers, rather than long-term planning and strategy. But, what happens when retirement is around the corner, or if there is an accident and you are no longer able function as chief agent? The legacy of your life’s work is at stake. What will become of your loved ones and your business?

The Successor
You need to have a plan in place for perpetuation of the insurance agency you have strenuously and thoughtfully built. But, who is willing and capable to take on such a challenge? You obviously want to have a relationship built on trust with your replacement, but you also want to make sure your family is taken care of. A good option is passing along the agency to a family member well versed in the insurance industry. If a child, niece, nephew or other family member is ready and willing to take the reins, then all parties need to understand how the actual transaction takes place, and potential pitfalls you should avoid in the process.

The Financials
Even when you are transferring ownership of your agency to a family member, a monetary transaction will take place. In general, the family member will purchase the business from you. This begs the question, can your successor afford to simply buy the agency, and if not, how are they going to pay you? Can you structure a leveraged buy-out to use cash flows from the newly acquired business toward payments? Can the buyer take a loan and, if so, will you be partially responsible for financing the note? Will the perpetuation of the business be structured as an asset transfer or a stock transfer?

Often, sellers do not consider the financial and tax ramifications of an actual purchase and transfer of money. Creating a detailed financial plan and process of transferring ownership is crucial to a successful change. Likewise, carriers must be informed about the ownership transition, and you need to confirm in advance that the carriers will issue a contract to your successor. Overall, having open and honest conversations about the financial aspects can help ensure a smooth transition of ownership.

The Timing
Often, the owner and successor have not outlined and agreed upon a structured transition process and instead are “winging it” with the timing of the business transfer. Creating a timeline detailing each stage of the transition is vital to maintaining the day-to-day operations during a leadership change. All responsibility and job tasks cannot simply be passed from one owner to the other on a given day. When the agency’s founder and leader is removed and replaced, employee performance sometimes may slide. The staff needs a period of transition, learning, and integration to ensure a high level of knowledge concerning the agency’s workflow and procedures under the new management.

Likewise, before taking on this new and challenging role, the successor must be extremely familiar with the organization’s finances, clients, suppliers, human resources, and licensing. Even if the family member has been a part of the business for some time, taking on a leadership role can be daunting, and it may take some time for the new owner to feel comfortable heading up the organization. Sitting down with your intended successor and having an in depth conversation concerning all of these areas will ensure your business is in capable hands.

Clearly passing along your insurance agency to a family member is an important and lengthy process, but the security of your business and your family is well worth the time and energy. Selling your agency to a family member ensures that your employees and clients will be in capable hands and simultaneously lets you leave a meaningful legacy for your heirs. Springtree Group specializes in helping buyers and sellers finance a successful agency transfer and offers more than 10 different lending programs exclusively for insurance agents. If you are planning to pass along your insurance agency to a family member, call us at (972) 395-8811 for expert guidance to ensure the transaction goes through without a hitch.