For Frank Sayner, the path to perpetuation wasn’t paved with bright lights or big  announcements. In fact, customers didn’t even know the agency had changed hands because the transition to the new principal was such a smooth process.

And that’s exactly how he wanted it.

“This is a community of 8,000 people, and we were very concerned about our employees and our clients,” says current principal Bart Garrison. To keep the transition low-key, no announcement was made that the agency had new ownership. Says Garrison: “If we’d changed the name and had a big reopening, it would have given people a chance to shop.”

Seeking Out the Next Principal 
Sayner found a way to meet young agents, select a potential successor and perpetuate his agency, all while running High Country Insurance, of Ruidoso, N.M. He executed his plan without fanfare and a lot of expense.

“I knew my own children weren’t interested in joining the agency, and I knew I didn’t want to sell to the big houses,” says Sayner, now 67. “And I’ve done well in this little community, going from next to nothing to one of the largest agencies in the area, so I wanted the independent agent tradition to continue.”

Sayner first selected a timeframe when he wanted to begin phasing himself out of the agency—and then he got busy. He stayed active in agent groups so he could meet younger producers. And he set his sights on those 20- to 25-years his junior, “because that’s the age I had my strongest drive to succeed.”

Among the young professionals Sayner met and found impressive was Garrison, then about 40. But Garrison worked for another agent with whom Sayner was good friends. “I struggled with that a lot,” Sayner recalls.

The two men continued their dialog for months until both decided they wanted to join forces. They then approached Garrison’s boss, who agreed to a plan that would allow all parties time to prepare forthe transition. In August 2005, Garrison began work as a producer for High Country Insurance. If the arrangement worked smoothly on both sides,

Sayner would sell Garrison the agency in 18 months.

The process worked so well that Sayner says he wouldn’t change a thing if he had to do it again. Garrison bought the agency in January 2007, and by then knew many of the agency’s clients, including its large commercial accounts. And Sayner had time to get used to another agent’s way of doing things. “It’s difficult under even the best of circumstances,” he admits. “You have days when you think you’d have done something a little differently. But you have to remember that you don’t have the responsibilities anymore, either.”

Six months later and about 190 miles away, the Leavell family executed its perpetuation of Leavell Insurance in Hobbs, N.M., much the same way. Three generations of Leavells had owned the three-office, 23-person agency since 1951. But they felt the time had come for new blood, and they were already getting purchase offers. Family members wanted to choose their own successors, however, so they asked three of the agency’s producers to consider a joint purchase. After careful consideration, all three accepted: Gary Beall, Hector Baeza and Randy Hobbs purchased the agency in April 2007.

“We didn’t change the agency’s name, we kept everything the same and it’s worked for us,” says Baeza, now vice president. Competition, particularly in the oil and gas niche that is the agency’s specialty, is fierce, he says, and change could have been construed as negative. Many commercial accounts have been with the agency 10 years or more. So while Carroll Leavell still has a place in the agency and his photograph is on the agency’s website, neither he nor any other Leavell is an owner. “Most of our clients know now about the change in ownership,” says Baeza, “but it’s business as usual.”

Putting Leadership Potential into Action
Even if you’re not planning to perpetuate for another 10 or 15 years, hiring young producers now is an important part of the process. By bringing in talent early, you’ll have the opportunity to evaluate new hires and begin grooming those who show leadership potential.

Marshall & Sterling Insurance hired Tim Dean as a producer 25 years ago. “We’ve never gone outside our organization for leadership,” says John O’Shea, board chairman of the 20-office firm based in Poughkeepsie, N.Y. When the agency was ready to select its next president, a group of board members interviewed several internal candidates, and Dean emerged as the stand-out. The former Pitney Bowes salesman “is a good leader, people respect him and he’s not afraid to make decisions,” says O’Shea. That leadership potential was put to the test immediately when the new principal took the reins.

Dean, 48, took the helm of the 350- person ESOP (Employee Stock Ownership Plan) agency in January 2009. One of his first jobs was to decide the future of several senior employees whose performance had waned. “In some cases, that future was retirement,” says O’Shea. “Tim acted as needed.”

Dean also led the discussion on compensation when the soft market lowered the agency’s earnings. Says O’Shea, “We changed our program so that it’s not as generous now as it had been, and Tim made the announcement to our employees.” Dean’s largest responsibility is maximizing earnings so dividends can be paid to employees and the agency’s stock will grow. “I think he’ll be in this job for the next 15 to 20 years,” says O’Shea.

Bigger Agency, Bigger Role; Same Process
At age 42, David Bauer was already a principal when his agency merged with another in 2003. Five years later, Bauer bought out the merged agency’s two other partners and became the owner and president of what is now Capital Bauer, an insurance and financial services firm in Albany. Here are the steps Bauer and the company’s former partners took to make it happen:

1. The agency hired an outside consultant to evaluate it. “Money is probably the most objective thing to talk about,” says Bauer. “And there are a lot of financial measurements to be made.” 
2. Existing principals and Bauer agreed on the agency’s value and signed a sale-ofstock agreement in 2006 that allowed Bauer to buy their non-voting shares. “In this way, I started to dilute their ownership, but not diminish their safety, which is the voting shares,” Bauer says. Once the sale was executed, Bauer owned 50% of the stock while the older men owned 50% together. 
3. The sellers discussed whether they would finance the second half of the sale to Bauer, and if so, how long they would hold the note. “The longer the sellers hold the note,” says Bauer, “the more important it becomes that the buyer is competent to handle the agency’s operations.” The sellers chose to finance. 
4. At the start of 2008, both sellers were still active in the agency. One was nearing 60 and planned to retire at the end of 2010. The other owner was 57. “But with the upcoming election of
   Obama, we all truly believed that capital gains taxes would increase,” says Bauer, “so we decided to accelerate the buy-out to the end of 2008.” Bauer was 47. 
5. The planned sale of voting stock was changed from an installment sale to a cash transaction. In this way the retiring owners would owe no capital gains taxes in the event the taxes were later increased. 
6. Bauer obtained financing from one of the agency’s carriers and in December purchased all voting shares, becoming sole owner of the 41-person business. Bauer is now looking to buy other agencies. In a few years, he’ll start identifying individuals in the agency to purchase stock and find a younger agent to succeed him. “I truly believe that unless you make a perpetuation plan and execute it, your agency diminishes in value,” he says. To prepare for his perpetuation,

Bauer is growing retained earnings, applying discipline to expenditures  and reinvesting in the agency. “Whether a bank, an owner or a carrier holds the financing, they’ll need to see stability and profitability before they agree to do the transaction,” he says. That’s why he’s already so hard at work: He knows profitability is fragile—and that stability doesn’t happen overnight.

An Eye Toward the Future
Joe Convertino brought on his son, Joe Jr., as a producer for CH Insurance in Syracuse in 1996. Young Joe was 31 at the time and had built a bevy of contacts as a salesman for a payroll company. He used those connections to build a healthy book of business before purchasing 49% of his father’s agency in 2008. “I look back at myself over that time, and I was strictly sales,” says Convertino, Jr. “It took years just to understand all the roles here, become involved in the financials, and learn to make decisions about growing the agency.”

Convertino, Jr. is now 44. His father is 69 and still an active agent. When Joe, Jr. becomes majority owner of the 24-person firm in a few years, he’ll begin looking for a younger agent to succeed him. But because he is sales- and relationship driven, he’ll look for someone more like  is dad: oriented toward insurance technicalities and internal development. Even so, a long list of connections will be required for the next perpetuator. Says Convertino, Jr., “I’ve seen producers who haven’t had that, and they haven’t succeeded.”

Another characteristic that will be important: the ability to work well inside the office. “Some producers are happy doing what they do every day. But to own an agency, you have to be a team player and to listen and learn from situations,” says Convertino, Jr. “It really helps you understand what the next steps should be down the road.”

Hodges (hodgeswrites@gmail.com) is an IA senior contributing editor.

Right Person, Wrong Financing?
Financing a perpetuation can be the biggest challenge. You may find a potential successor who seems the perfect fit, but if the agency has neither the capital nor income to support both the retiring and rising principal(s), success will be elusive. Bill Post, CEO of Post Insurance Services in Boise, Idaho, says lack of cash is the reason many owners sell to national brokerages, since those brokerages usually pay in cash.

“Cash is great, but I want to be happy, and I want our employees to be happy,” says Post, who started the agency in the 1970s and grew it from two employees to 14 today. Two major brokerages have approached Post to buy the business, but he’s sticking to the perpetuation plan he made 10 years ago. Post, now 67, asked a professional on the carrier side who is 15 years his junior to join the agency with the idea of buying it a few years down the road. The plan worked, and now President Terry Robb is searching for a younger agent who’ll replace him. “It’s hard to find a person who’s willing to put in the effort and sacrifice,” Post says. Too many agents want to “come in as producers, make a good income and then buy in for what the owner is getting paid. It doesn’t work like that.”

To start the purchase process, Post hired a consultant to perform an appraisal. Then he allowed Robb and another employee to buy a percentage of agency shares at a price below the appraised price-per-share. But when shares reverted to the appraised price, only Robb continued to buy in. That’s why he and Post are hunting for another agent willing and able to become a principal “We could go to [a bank] and they’d give us the money, but they want me to co-sign,” says Post.”If I’m going to do that, I may as well carry the paper myself.” That’s what he’s doing to make the perpetuation work.