PERPETUATION ARCHITECTURE

Rough Notes, Aug 2005 by Walkotten, Wayne A

Use a combination of financial alternatives to transfer the agency to the next generation

If you want to retire within the next 10 years and have not started planning for the perpetuation of your agency, you are not alone. Nevertheless, you should be planning. The process of transferring books of business, agency leadership and stock in an effort to realize the value of your firm must begin immediately, or you may not reap the rewards of your years as an agency owner. The goal of this article is to help you understand that perpetuation is a long-term process and also to educate you on what it takes to properly guide you through this agency transition.

The foundation for perpetuation begins with communication-communication with your partners and your perpetuation candidates is critical to the successful transition of the agency. Partners must first understand the personal goals of one another, each individual's retirement plans, how this affects the agency plan, and how to transition each person away from the agency. Agency owners too often are surprised when a partner states that he or she wants to retire in one year and expects the agency or partners to buy 100% of that person's respective stock.

Outline the agency's future and ownership opportunities with prospective hires. Such information is an effective carrot once you've identified a quality candidate. Agency owners today often speak about the shortage of young people who want to get into insurance and the shortage of perpetuation candidates available in the market. While these concerns are valid, how well have current agency owners educated the next generation regarding ownership potential, expectations, and the financial discipline necessary to assume ownership? How well have current owners proactively communicated the skills and goals necessary to become an owner?

The problem of finding and hiring viable perpetuation candidates is greatly compounded by a lack of internal communication by agency owners. Open communication (among all stakeholders) during both the planning and transition stages of books, management, and stock will ensure the effective hand-off to the next generation. Any lack of communication may cause excellent candidates to leave the agency, unsure of the future and the opportunity that ownership can bring.

Once the communication foundation is established, an agency can begin to build the pillars of perpetuation: Books of Business, Leadership, and Stock Ownership.

Pillars of perpetuation

Books of business. Not only must the agency have a sales culture that supports growth, but the books of retiring owners must also be transferred to capable producers and account managers over a period of time. You already know that owner books of business are rooted in relationships. As such, why take them for granted? You need to plan for the smooth transition of these relationships just as you need to plan for transitioning stock and leadership. Additionally, high retention obviously facilitates net revenue growth. All the new production in the world is great, but as your attrition rates begin to approach your new business production rates, the agency's overall revenue growth flattens.

One potential transition scenario involves the following two steps. First, retiring owners can set a minimum commission threshold equivalent to the bottom 80% of their accounts and transfer anything below this floor to the house, account executives or CSEs, if possible. The top 20% of an owner's accounts is likely to represent close to 80% of the owner's revenue and therefore production compensation. This allows the retiring owner to maintain the majority of his or her payroll, provides more time for new business production, and allows the retiring owner the chance to groom the next generation. Because these accounts are being assigned to producers, the agency can ultimately pay smaller renewal commissions to the new producer or assignee. This will drop additional dollars to the agency's bottom line and thus help fund the perpetuation process. (see the example below.)

We encourage a multiple year process as this still affords the agency time to find the right relationship fit should any differences arise between the insured and the producer. This example assumes that the agency is currently paying the retiring owner 30% renewal commissions.

Many agencies make the mistake of handing only the smallest and most labor-intensive accounts to new producers. This process only breeds a culture of writing small accounts, as the producers become comfortable with accounts that should be handled by a small commercial department. In addition, accounts that don't need the higher level involvement of a producer or do not require a significant amount of time out of the office should be transferred to account managers. The support of more experienced producers can help new producers write larger accounts. Through a process of trading down smaller accounts, producers will build the agency's book of business, which is the first pillar on which to perpetuate the agency.