Why You Need a Perpetuation Plan

Many independent insurance agency owners build their business with the goal of selling the agency when they reach their 60s or 70s and using the proceeds to fund a comfortable retirement. But what happens if things don’t go as planned? A downturn in the business market—or worse, the death of the owner—can force an unplanned or unfavorable sale, which could have a negative impact on the owner, owner’s heirs, or agency employees.

The 2014 Future One Agency Universe Study estimates that 14 percent of independent agencies do not have a perpetuation plan in place, although industry insiders believe the number is much higher. Often, agency owners are so focused on managing the day-to-day business that they don’t consider what the future may hold. A business perpetuation plan can help ensure that your independent agency can continue when you are no longer at the helm, and also ensure that you get the most value from your business while facilitating a smooth transition to new ownership.

Three Approaches to Planning
When it comes to perpetuation planning, you should first prepare for the worst, and then put together a proper strategy to transfer the business to new ownership. In terms of crisis management, every business perpetuation plan should include a corporate life insurance policy to protect the employees, other principals, and/or the owners’ heirs in case the agency owner dies. The policy would pay out to the company or appropriate beneficiaries to provide needed liquidity and allow for the buyout of the deceased owner’s shares. For agencies that have multiple partners, a buy-sell agreement makes it possible for the remaining owners to buy up the deceased principal’s shares in the event of his or her death and keep the company moving forward.

Once you’ve got that part covered, you need to consider how you plan to transfer the business. The Agency Universe Study recommended three popular approaches to perpetuation planning for independent agency owners:

Selling to a Family Member – Under this model, a child or other relative will purchase the agency from the original owner. The sale of the business is self-funded, often through a lifetime annuity to the owner or other insurance vehicle. The owner receives regular payments until he or she passes away, at which point the child or family member inherits the business, generally with minimal tax implications. Another option is to provide a child with planned gifts of stock, so that he or she eventually owns majority equity in the firm. (Of course, this model leaves the agency owner without any income from the business transfer.)

In many cases, however, the most important consideration is not how the sale can be structured, but whether the next generation is equipped to take the reins. An owner in his or her 60s likely will have children in their late 20s or early 30s, which is an early start to take over an established agency. As part of your perpetuation planning, you should consider how to best train up the new management, prepare your employees for the transition, and gradually relinquish control well in advance of exiting the business.

Selling to Other Principals – If the agency has more than one owner, the other partners can buy out the exiting owner. A similar option involves raising up a younger associate from a minority partner to future owner in preparation for a future business transfer. Selling to another principal works well when the partners are on the same page as relates to the management of the business and minimizes the impact on existing clients. An Employee Stock Ownership Plan (ESOP) is an effective financial tool for a perpetuation plan, providing the needed funding to buy out the exiting principals based on the value of the shares they own. Other employees can also own ESOP shares, which later can be cashed out when they retire.

Selling to an Outside Party – The current market favors agency sellers, with a high demand from buyers nationwide. But, funding an agency transfer can be challenging. Potential buyers in their 30s, 40s and 50s generally do not have the liquidity to secure loans to purchase businesses valued between $500,000 – $10,000,000. What’s more, traditional lenders shy away from financing insurance agency acquisitions, because of the lack of tangible assets to use as collateral.

Fortunately, for buyers with a credit scores in the mid 600s or better without recent bankruptcies or short sales, Springtree Group can provide a 10-year amortization, 6% APR with no prepayment penalties. The process begins with a Loan Intake Form to determine eligibility, and loans can generally be funding in 45 days.

To learn more about different models of business perpetuation funding, or to discuss the potential sale of your business, call Springtree Group at (972) 395-8811 or contact us online.