Perpetuation Planning: Are You On Track?

Sometimes, when Tim Cunningham asks clients or prospects who are ready to perpetuate when they’d like to exit the business, they’ll say “Geez, I’d like to be in Florida by next February.”

“They think, ‘I’ll take a pill and I’ll be perpetuated,’” says Cunningham, a partner at OPTIS Partners, LLC. “But it probably takes a minimum of five and optimally 10 years to get everything in place.”

“I’d say five years is too late, honestly,” agrees David Schaefer, president & CEO of AHT Insurance in Washington, D.C., where planning has already begun for a major retirement that won’t occur for another 12 years. “Based on our trajectory, we’re going to need all of that time to fund for and plan for that next retirement. It takes a lot of saving to get there.”

Are you in the process of mapping out the future of your agency? Here’s what you should remember at each stage of the perpetuation planning process.

Five Years Out: Know Your Options

Deena Giltz McCullough, president & CEO of Northern Insuring in Plattsburgh, New York, says it’s important to start thinking about personal goals vs. business goals five years before an exit.

“People need to know their own personal financial situation,” she says. “It isn’t just your agency perpetuation—it’s also a matter of: What do you want to do with your life? Are you going to stay involved in some way? Do you see some hobby or some other career you want to have? Are you financially dependent on selling your business? That’s what scares people a lot because they don’t know what their personal plan is.”

“It will creep up on you before you know it,” agrees Clint Ivy, president of Fleming & Riles Insurance in Albany, Georgia. “Five years gives you time to prepare logistically for how things will run and talk things out. The money side is one thing, but the actual logistics and how everybody’s going to work together—you need a lot of time to prepare that.”

If you’re thinking about selling, you should begin the process of figuring out where you need your revenues to be. “Have a plan and have it operate like a real business plan,” says Randall Bonaventure, CEO and partner/owner of Knox Insurance Group in Lafayette, Louisiana, recently acquired by BancorpSouth Insurance Services Inc. “My partner and I knew the laws of the land, we knew the taxes, we had a perpetuation plan in the event of disability or death, we kept minutes of board meetings. It can be a well-run business and still have traditional family values, but you’ve got to have a plan.”

Three Years Out: Stack the Roster

At this stage, “you ought to really know what direction you’re leaning in and make sure you’ve got your ducks in a row with your legal team, your financial helpers, your consultants,” Giltz McCullough says. “Who are your key people? It’s all about communicating at the right time with the right people and moving your strategy forward.”

Here, identifying a perpetuator—whether it’s an individual, multiple people or a company—is paramount. “You must find and nurture youthful talent that will be capable financially of participating in an acquisition to internally perpetuate the company,” Schaefer says. “For us, it’s a constant need and a constant process. We’re always attempting to attract and develop high-performing 20- and 30-year-olds.”

Planning on selling? “If you’re going to be acquired, then go out and get a feel for who you think the possible players will be,” Bonaventure says. “There are probably 50 of them out there that would have bought us. We wanted to narrow that down to four real potential options.”

One Year Out: Solidify Your Plan

Now’s the time to start getting something in writing that addresses “how this process is going to work and who these people are,” Ivy says. “You don’t have to say ‘This is what it’s worth,’ but just get a plan in place so everybody feels like now they have skin in the game and are all going to be working toward this goal at the end. Nobody wants to be working toward something and then it doesn’t happen.”

If you’re planning to sell, take the pulse of the industry. “A year from the mark is probably a good date to sit down and say, ‘Where do you think the industry is going? Is it getting more difficult? Are rates going up? Are rates going down? Do you have to finalize a growth period? Do we need 5% more growth?’” Bonaventure says. “If we don’t hit that growth, then let’s take another year to figure out where we want revenues to be before we start doing that.”

It’s a necessity not only for your employees, but for your clients who count on you as well. “Insurance at the end of the day is a promise,” Schaefer says. “We almost look at it is as part of our pledge to have integrity in terms of our commitment to perpetuation. If we weren’t committed to perpetuating ourselves, then we would begin to erode our integrity as it relates to the promises we make to our clients every day.”

Jacquelyn Connelly is IA senior editor.