Agency Succession Planning – Options and Opportunities

These situations are often fraught with difficulties. The owner must “unlock” the agency’s liquidity so that he or she can retire and not create excessive financial leverage for his/her successors. The agency owner must choose between protecting the legacy of the family business and transferring ownership to avoid creating an excessive financial burden.

The agency owner has three options. It is much more difficult to decide which strategy is best than actually executing it. It is important to evaluate each strategy as an option in order to choose the best.

Buy-Sell Agreement. A buy-sell agreement is a way to change the control of your business. It can be tailored to suit specific circumstances and times. Most commonly, buy-sell agreements are used to transfer ownership from one principal to another based on agreed terms, price and timing. They are often executed between family members in order to change ownership smoothly from one party to the next, or multiple parties.

Buy-sells can be supplemented with employee stock ownership plans (ESOPs) or life insurance. These vehicles offer tax benefits that allow for the transfer of ownership. This can lower the financial burden of the successors and could provide greater tax benefits to the seller.

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These options are far more flexible than traditional financing methods in years past. There is still a downside risk that the successors will have to pay a financial obligation to the seller for the purchase. This must be balanced with maintaining adequate capital in the business and cash flow to maintain their lifestyles. The upside is that leveraged ESOPs, as well as other innovative financial methods, can dramatically reduce the cost of capital and debt service, and significantly improve cash flow.

Joint Venture or Partnership. Partnering with another agency in the same geographic area is a great option. There are many opportunities. The partnership allows the owner of a business to fund his retirement by partnering with another agency of equal or greater scale and allow him to develop into an exit strategy over many years.

Partnering has the obvious advantage of allowing economies to scale to play a significant role in increasing earnings for both businesses. The combination of the two entities will provide enough cash flow to finance a buy-sell arrangement if they have a plan for integration and profit sharing.

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Partnerships or joint ventures, on the other hand, are flexible enough to allow an agency owner to “unwind” his business if things don’t work out between them. It is basically the best of both the worlds because it gives the agency owner enough flexibility to design his succession plan and allows him to gradually obtain liquidity from the company.

Key family members of the agency have the opportunity to stay involved in the operation, and could be granted ownership in the combined entity after the formalization of a sale option. This option can be included in a partnership agreement. This allows the continuation of the family’s legacy by participating in a larger company and gradually merging it with another entity.

The joint venture partner might find it to be the best option. They can execute an acquisition strategy efficiently, but they do so on a slower basis. This reduces both their risk and gives them time to integrate the agencies into an efficient operating system.

When developing such a strategy, it is important to have a well-thought out plan in place before any discussions can begin. To achieve financial optimization, both operations must be flexible enough to allow for modifications.

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Independent professional advisors should also be included in the discussions. This will enable both parties to evaluate the financial dynamics, tax implications, and any other legal changes of control issues. Both parties should seek out independent financial and industry advisors that are impartial and who can help them to construct an agreement without bias. This ensures that everyone is treated equally and the neutral third party can offer suggestions that are beneficial for both.

Selling a business. The easiest way to solve and complete a succession plan is to sell an agency in today’s market. This creates liquidity for the owner, and can provide professional opportunities and rewards to family members.

Agency owners often approach us to sell their business as a succession plan route. Some owners believe that their exit from the business is simultaneous with the sale. Realize that to maximize the sale price, an owner must remain involved in the business for at minimum three years. Therefore, he should not wait to begin the selling process.

Most acquirers don’t have a strong interest in agencies whose owners will not continue to be part of the business after the transaction. They know that this is a relationship-based business. There is an enormous risk if the owner doesn’t stay with the new company for a reasonable time. This will allow for smooth transitions with both customers and employees.

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No matter who the “transaction partner” may be, most employees need to remain in the business even after the transaction is closed. This could be a great opportunity for family members of the second- or third generation. You may have new career options and a higher salary if you work for a well-capitalized company.

In this instance, it is important to evaluate the qualitative and quantitative attributes of potential buyers. The agency owner will be referred to another buyer if the quality of life is more important than the highest sale price.

The sale of an agency is a rare event. The owner cannot afford to not do the necessary “reverse diligence” on potential buyers. Professional advisors are recommended to help evaluate the financial and nonfinancial implications of the different opportunities.

Before he plans to exit the agency, an agency owner should plan at least five years in advance. This gives you ample time to research the possibilities, start the transition process, and exit the business. If you are looking to retire at 55, it is possible to start thinking about your long-term strategy as early as 45.

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