PERPETUATION ARCHITECTURE

Rough Notes, Aug 2005 by Walkotten, Wayne A

It also should be noted that references to the books of business are to those of the agency. It is imperative that the agency own the books of business. Otherwise the ownership rights of producers will significantly impair the overall value of the agency.

Leadership. Leadership is the second pillar upon which an agency bases its perpetuation plan. This pillar relies on the sales and management leadership of the agency's key employees. Without leadership, the agency will not have a direction-sales and management effectiveness will suffer. Strong leadership in both sales and management can be rewarded with the opportunity for stock ownership.

But not all producers are great leaders, just as not all leaders are great producers. When attracting prospective employees to the agency, look for attributes that will have a positive impact on the culture of the agency.

When there are gaps in the leadership or management roles, it is important to document the need and its role in the organization, and then recruit for the specific position. Owners can take two steps to help fill these roles. First, establish an organizational chart and indicate the roles and responsibilities for each position. Make sure everyone within the agency knows where he or she stands, what everyone does, and the reporting structure. second, define both the subjective and objective criteria that an employee must satisfy in order to qualify for ownership (or advancement in general). These two steps will foster communication across the agency and help manage the expectations associated with continued development of each individual.

Owners must also allow perpetuation candidates the opportunity to manage various functions within the organization. This will expose each candidate to the intricacies of running the business, dealing with employees, working with carriers, reviewing the financials, etc. When done over the course of multiple years, this also allows the owner to help educate and groom future leaders across all facets of the organization.

Stock. Stock ownership is the third pillar of perpetuation. When one considers buying a stock on Wall Street, the potential investor weighs the risk and reward of the potential ownership. In much the same way, an agency investment has risk, and these risks influence the transfer of ownership. The rewards of ownership come through the cash returns available to owners and the increase in value over time. Current owners already know the value of ownership. Do your perpetuation candidates? Not only should the perpetuation candidate consider the risk and reward of buying agency stock, but when such a person is identified for potential equity, the current partners should be asking themselves, "Can I trust this person to buy me out?" What is the candidate's tolerance for risk and will this person leverage his or her personal financial assets to help buy you out?

The harsh reality is that the stock transfer process will need to be funded in large part by the agency. This could take 7 to 10 years. As an owner, are you willing to walk away from your agency in the hopes that someone can run the operation as well as you did and make payments to you over 10 years? Probably not. You do not want, nor deserve, to assume that much risk. This is another reason why you need to view perpetuation as a continual process. Most owners need to begin divesting stock 10 years before they plan on retiring. This serves many purposesamong them: