Agency Succession Plan

kstein

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I wonder if anyone else has gone through something like this.

I work in my family agency (3rd gen) and we consist of my dad (principal) me, a brother, sister, and 2 secretaries/CSR gals. My siblings are both brokers, with my sister recently starting. Right now commissions are assigned to the agency and I talk home half of what I bring in. The agency pays for all overhead and we have a formal office as well. In the last 2 yrs or so I've taken over most of the principals jobs, like marketing campaigns, finding new products, sales ideas. I've been in the business for 10yrs and just turned 30, my dad is 65 this year and is on the backside of working new accounts, learning new products, etc. I'm starting to feel like my 50% is a little too rich for the agency, and what they provide, so there is some frustration with that (as a broker feeling like I'm giving too much to the house).

There is also the concern of succession and taking our agency to another level. We have no formal plan in place but an upcoming talk about ownership. Because of our setup, I'm next in line to take over, even though I'm not the oldest. We have a great family relationship and work well together. There really isn't any hostility between us and we have a good relationship. A concern I have here is the longer I contribute to the agency, the more "expensive" it becomes. I guess I'm wondering if anyone has some feedback about direction or overall ideas (ie increasing my % of new business commission or buying 5% of the agency each year) of how an agency switches hands while still maintaining the same structure. A buyout or me going on my own isn't something we want to do.
I know my dad wants to stay involved and he does a great job with contracts/commissions but his complatency (after 30+yrs) with growth is frustrating when I'm ready to grow and expand. We are a l/h agency with about 80% in medicare and 20% in other products (ltc, ACA, fe). Our total revenue will be about 1.2-1.5m this yr. I feel stuck in how to solve this problem and look forward to any suggestions.

Thanks.
 
Our agency is quite similar. 45% Medicare, 20% IFP & 35% group.
We do no life, FE, CI, LTC, or annuities. No time.
Myself age 62, my brother age 54, his wife(CSR), another broker age 54, and, another CSR.
The non family broker lived across the street and grow up with my younger brother.
My father started our agency in 1960 as a sole prop.
We incorporated in 1986.
My brother & I were given a small amount of shares. Over time, ending in 1991, we bought my father out(50/50).
So, I'm guessing your father is a sole prop?
You should start with incorporation. Everyone issued some shares, with your father getting the lions share.
What happens if your father passed away today?
 
We are incorporated already. How did you value the agency and did that valuation stay the same at reach incremental purchase?
 
if at any point you feel you would like to have a discussion in person feel free to let me know and I would be happy to speak with you about this in detail.

There are so many organizations in this industry with the same predicament its impossible to fathom. Therefore, there are just as many answers to those challenges. In my opinion, you need to discuss as many different options as possible to identify a solution fitting your situation. The good news, you say you are a tight nit family and everyone gets along. Consider yourself and your family blessed and far ahead of most sharing this challenging situation with you.
That is an unusual circumstance but fortunate scenario. The majority of cases I have consulted with these matters, relations have deteriorated before I entered the equation and then it was more like a mediation than a negotiation or meeting to find a reasonable solution.

DS4 was in a good situation simply creating an entity (type of corporation) where shares of the company can be issued, allocated or sold to the interested parties with a desire to continue the family business turned out to be a solution. I can tell you now days, even if there was no entity established, that option most likely wouldn't resolve the issues I have encountered. The business today has produced individuals with far different mindsets. Its more about who has been responsible or "more responsible" for the success of the organization. Almost every time there is a multiple-sided disagreement as to how the success was achieved.

Recently, there was a family owned agency in a similar situation. A few of them were in Production Roles, a few in Administration and/or Management Roles as well as a few in Supporting Roles like a Marketer and Account Executives. The debate was as expected, the agency wouldn't be in the position it is without the revenue generated by the Producers. Of course they were quickly reminded the importance of Marketing Relationships and how there wouldn't be any revenue just RFP's without that role being performed efficiently. Then it was time for the AE's to make it clear an enormous sum of the total revenue would be absent altogether without the "rounding out" they had performed for years and of course everyone claimed to have the ability to be just as effective in any of the needed roles.

Once these issues were navigated, the real challenge began with the task of placing a value on the organization when being sold on the open market as opposed to actual amount after formulating a family discount for the successors. This was a very challenging situation because two individuals were looking to retire and by now I am sure I don't have to tell you that even those two didn't agree on much either. They felt that whatever amount was finally deciphered to purchase the agency, shouldn't be split 50/50 either.

We did manage to uncover a solution that satisfied everyone involved but what I can tell you is there are no two deals ever alike. I have been in the business in so many different capacities I don't care to say but it started as an Executive Level Recruiter that in time evolved into an M&A specialist. I enjoyed that function so much that I continue in that capacity today but have now added Performance Management for individual producers/agents and organizations of all sizes. As an Industry Consultant providing solutions that can only come from an accumulation of 20 years providing successful resolutions to extremely challenging scenarios that appeared to be catastrophic disasters (or so it seemed at that time), I grant you patience and wish you luck with your future dealings to find a reasonable and acceptable resolution. If there was one hint I can offer it would be to think along the lines of an earn-out performance plan to be executed by the individuals that are looking to remain in the organization as the retiree's move on to their next phase of life. You cannot allow yourself to look backwards remembering past performances. Only look forward and how a future performance, if performed at levels expected, would allow everyone to show their gratification for the pioneers that founded the opportunity that many others do not have. I would be excited to have a successful business I was beginning to stress over compensating an older family member in a way they could retire only to give me an opportunity to implement my vision for the future.

Good luck and God Bless!
 
I wonder if anyone else has gone through something like this.

I work in my family agency (3rd gen) and we consist of my dad (principal) me, a brother, sister, and 2 secretaries/CSR gals. My siblings are both brokers, with my sister recently starting. Right now commissions are assigned to the agency and I talk home half of what I bring in. The agency pays for all overhead and we have a formal office as well. In the last 2 yrs or so I've taken over most of the principals jobs, like marketing campaigns, finding new products, sales ideas. I've been in the business for 10yrs and just turned 30, my dad is 65 this year and is on the backside of working new accounts, learning new products, etc. I'm starting to feel like my 50% is a little too rich for the agency, and what they provide, so there is some frustration with that (as a broker feeling like I'm giving too much to the house).

There is also the concern of succession and taking our agency to another level. We have no formal plan in place but an upcoming talk about ownership. Because of our setup, I'm next in line to take over, even though I'm not the oldest. We have a great family relationship and work well together. There really isn't any hostility between us and we have a good relationship. A concern I have here is the longer I contribute to the agency, the more "expensive" it becomes. I guess I'm wondering if anyone has some feedback about direction or overall ideas (ie increasing my % of new business commission or buying 5% of the agency each year) of how an agency switches hands while still maintaining the same structure. A buyout or me going on my own isn't something we want to do.
I know my dad wants to stay involved and he does a great job with contracts/commissions but his complatency (after 30+yrs) with growth is frustrating when I'm ready to grow and expand. We are a l/h agency with about 80% in medicare and 20% in other products (ltc, ACA, fe). Our total revenue will be about 1.2-1.5m this yr. I feel stuck in how to solve this problem and look forward to any suggestions.

Thanks.

We are incorporated already. How did you value the agency and did that valuation stay the same at reach incremental purchase?

I actually have a lot of general agents/agencies as clients. I've had them come to me directly, brought to me by a mid-market investment banking firm that has a specialty in insurance agencies, and from accountants/attorneys. That said, I've gone through the entire planning process numerous times -- and it is a process. If you want it done correctly, go through the planning process.

I would actually sit down -- as the client -- with your trust and estates attorney, your CPA, and your financial advisor. You and your family should exclusively play the role of the client. Have objectivity in the planning process. Use an outside valuation expert, one who has expertise in insurance agencies (yes, they do exist). Use an outside financial advisor/insurance professional -- one who is more knowledgable, has more expertise, etc., than you or anyone else at your agency.

Regarding the succession, vis a vis ownership -- you buying small interests annually, having it be part of compensation, etc. -- there is no way to answer that question unless you go through a comprehensive process. You have to look at the tax consequences, basis, potential discounts, the economics as a whole, the emotional aspects, who is going to own what, and so on. I look at you as the client asking a very important question. My response -- facts, I need the facts, all of them, and there is an entire discussion around those facts. It is not an answer that can nor should be answered in one paragraph of a discussion, one discussion, one meeting, and so forth.

As far as the compensation question, and the operations of the agency -- are you a member of any of the trade organizations? What about local organizations? Some insurance companies offer mentor groups and study groups, and that can be a resource for you as well. This too is not a simple discussion. I know one general agent who was able to model everything, and kept looking at different payouts to the agent, house, etc. He felt that quantifying the ripples, the ramifications, would allow him to find an ideal economic model. I thought it was an interesting approach and exercise.

Anyway, you have a lot of work to do. Good luck.
 
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