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‘Great Retirement’ Brings Succession Planning Into Focus

Many independent agency owners will soon face decisions about both their personal future and the longevity of their business. Here's how to create a successful perpetuation plan and why it should be mission critical.
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‘great retirement’ brings succession planning into focus

Maybe you're not yet ready to hang the “gone fishing" sign on your independent insurance agency's front door. But odds are, if you fit the average demographic of an independent agent, retirement is something you've at least considered over the past year or two.

According to estimates released in January by the Federal Reserve Bank of St. Louis, 3.3 million Americans opted to retire between January 2020 and October 2021, during the height of the COVID-19 pandemic. Most of those retirees were age 65 and older.

The average age of the independent insurance agent, depending on what data set you use, is in the mid to upper 50s. That means many independent agents will soon face critical decisions about both their personal future and the longevity of their agencies.

Running parallel to the “Great Retirement" is the continued escalation of industry-wide merger & acquisition activity. From 2020 to 2021, the number of insurance brokerage M&As in the U.S. grew by nearly 30%, to just north of 1,000 deals, according to OPTIS Partners. Further, the level of M&A activity accelerated in the second half of 2021, possibly due to proposed legislation aimed at raising capital gains taxes.

With so many pondering retirement and industry consolidation happening at a rapid pace, you'd assume all independent agents already have an actionable and effective succession plan in place. Yet, studies tell us the opposite. As many as 83% of insurance agencies have no written succession plan, according to the 2020 Big “I" Agency Universe Study. 

Here are some of the considerations that go into creating a successful plan and why it should be mission critical.

Benefits of a Succession Plan

I've been in M&A for more than 10 years, and when I meet an agency owner, I can tell in a few minutes whether they have thought about succession planning based on the way they run their business.

I smile when an owner gives me a timeline: “Listen, Sean, in five to seven years, I'm going to get out." These types of owners run their agency as if they're about to sell it. That's a good thing. For most independent agents, their agency is a part of their identity. And while it is their life's work and key to their identity, it's also human nature to want to maximize its value for the owner's benefit. It's not surprising if they shudder at the thought of no longer being at the helm of their business while also hoping to sell it for a premium. Although seemingly contradictory, it is also a complex reality for many owners as they plan for the future.

However, succession planning is not about the way you feel in the here and now. It is about giving yourself the option to walk away on your own terms when the time is right.

The way you craft your agency's succession plan is up to you. You can set it up to walk away from your business for a period of time and still receive a steady stream of income. Or, you can set the stage for a smooth transition to family members who have the same passion for insurance as you. Alternatively, you can sell a portion of your agency and create an employment agreement with a new owner that lets you continue to lead the agency's operations for a few more years before retirement. Or, of course, you can simply hand over the keys to a buyer and walk away.

In addition to providing a full slate of options, a well-crafted succession plan protects you in the event of an emergency. If you suffer a health scare or other family emergency, a succession plan offers you—and your employees—peace of mind knowing what will happen next with the agency.

How to Choose a Successor

Determining the criteria for choosing a successor is sometimes the hardest decision for independent agents. Finding the right answer takes outside-the-box thinking. Some agents look at the qualities that made them a successful business owner and seek a successor who has the same traits. That may not always be the best approach, because while your unique skills and personality allowed your agency to attain its current level of success, the next captain of your ship may require a different skillset to propel the agency into the future.

Instead of looking solely at a potential successor's strengths, agency owners should also consider their weaknesses. For example, maybe an agent is fantastic at sales but their finance skills are lacking. A successor with a higher level of financial acumen could put the agency on more solid ground and give the business a broader set of aptitudes from which to draw.

Some independent agents choose a long-time employee as their successor. While an organic approach could lead to a smooth transition, agency owners must make sure the chosen employee shares their passion for ownership. After all, management and ownership require different mindsets. Your top manager might be great at their job, but can they handle the 24/7 demands of ownership—and do they really want to be an owner?

The key questions to ask are: Is your chosen successor comfortable simply renewing your current book of business? Or do they have a vision for growing your agency after you retire?

In addition, some independent agents choose to transfer their agencies to family members after retirement. Insurance is a relationship business and family relationships can help grow strong agencies. But if your chosen family member isn't as invested in insurance as you are, they are not the right successor.

If you don't have a successor who's ready to jump into your business, then your next best step is to talk with other independent agents. In this current period of consolidation, there are thousands of independent agents actively seeking to purchase additional agencies, and there are plenty of ways to find them, including the Strategic Insurance Agency Alliance (SIAA).

Factors for Your Succession Plan

Start with a list of priorities. Once you identify the dealbreakers, the next steps will seem more natural.

For some agency owners, price may be paramount. How important is it to maximize your life's work and get the appropriate value from selling your agency? For others, the No. 1 factor in succession planning may be relationships with their staff. Many agency owners have built remarkable teams over the years, and they want to be sure the culture they worked hard to create will continue. Other agents may rank long-term relationships with their carriers or customers as the top factor on their succession planning checklist.

Another consideration is timing. This trips up many independent agents. The reality is it's never too early to start developing a succession plan. I liken it to buying life insurance. You don't want to wait until you have a serious health problem before purchasing a policy. In the same way, you don't want to wait until you lose your enthusiasm for your business to develop a succession plan.

Some agents worry that if they develop a five-year plan, that means they will have to retire in five years no matter what. But you can always rework the plan's timing based on your personal level of agency engagement as it's not legally binding, of course.

Ideally, when you're ready to retire, you should build in enough time to notify your current staff and make them comfortable with the transition. The larger your agency, the longer the transition period should last. In general, the more upfront you are with your current management team about succession planning, the greater the trust your employees will have with you and your successor.

However, be aware that confidentiality is also important in selling an agency. Be transparent enough to give your employees peace of mind but not so transparent that you breach the seller's confidentiality. A well-versed lawyer in the M&A space can help you know what—and what not—to communicate and to whom.

Preparing Your Agency for the Transition

When it comes to preparing for the transition, invest in your agency. For some independent agents, this takes a behavioral change. To execute a successful succession plan, get comfortable investing in your business and making it more valuable. This includes investing in people, facilities and technology—everything that can help set your agency apart from the crowd.

This level of investment should be a part of your agency's ongoing strategy. The worst thing you can do is grow complacent, rely on renewals, fail to invest and expect your agency to survive. If your agency's book of business deteriorates over time and you fail to make attaining new business or purchasing leading-edge technology a priority, you may find yourself taking cash away from your planned retirement to make last-minute upgrades.

In addition to investing, set your agency apart by taking care of the basics. Get your financials in order. Look at your agency through the lens of a potential buyer. Consider areas where you might be vulnerable and shore up those weaknesses. For example, is there concentration risk in the ownership of customer relationships?

From a legal and tax standpoint, it is well worth the time and expense to ask for outside counsel. The same is true in obtaining an accurate valuation for your agency. Rely on accountants and lawyers who have worked with independent agents on M&A activity for years. They know market multiples and understand the vagaries of the industry. Ask them for honest advice about how much your agency is worth—and don't be afraid of the answer.

It is said that starting a new job, finding a house and getting married are the three most stressful times in life. If you're an independent agent, getting ready to transition your agency will trump all three.

Develop your succession plan now. You will rest easier knowing your business is well-positioned for the future. That peace of mind is invaluable.

Sean Kenny is vice president of corporate development for SIAA (Strategic Insurance Agency Alliance), the nation's largest independent insurance agency alliance.

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Friday, July 1, 2022
Perpetuation & Valuation