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I like to imagine that if our forefathers were agency owners today,they'd choose a recapitalization strategy to enact a successful succession plan.











Agency Financial Management

To form a more perfect union

What Independence Day can teach us about "succession"

By Rick Dennen

This month we celebrate the founding of the United States of America. It's been nearly 240 years since the Declaration of Independence was drafted and signed to proclaim the secession of the 13 colonies from the British Empire. Although we may not think of them as businessmen, our forefathers were enterprising and entrepreneurial. Like business owners, they were pioneering visionaries who took risks that laid the foundation for a thriving country.

Our early history offers rich lessons from Revolutionary War battles, the lives and accomplishments of early political and military leaders, the birth of national traditions and icons, and more. The secession, in particular, provides valuable lessons for agency owners who are planning to exit their business. 

George Washington, Alexander Hamilton, Ben Franklin and the other signers of the U.S. Constitution hoped to ensure the continuation of the new nation so it could become stronger and more profitable for its constituents. Many of the results they desired from the secession closely align with the results today's independent agency owners desire from successions. I like to imagine that if our forefathers were agency owners today, they'd choose a recapitalization strategy to enact a successful succession plan.

A recapitalization strategy is simply a transfer of company ownership, value or stock, typically to relatives, employees, management, key producers or others. It provides the seller with cash needed to exit while leaving the business in the hands of people who will ensure its continuation. A leveraged recapitalization involves the buyer or buyers borrowing funds from a lender to purchase ownership, using the assets of the agency as collateral. Borrowing money to acquire a business is often the only option for a succession that involves family members or employees.

Independent agency owners, like our forefathers in the secession, can achieve four goals when choosing a leveraged recapitalization as part of a succession plan.

1. Achieve Independence. Britain taxed and ruled the colonies without allowing them representation in Parliament. Although the colonies wanted to have a say in matters that affected them, what they really wanted was sovereignty. Agency owners who want their business to maintain autonomy during the succession transition and thereafter can find solutions in a recapitalization. A leveraged recapitalization keeps ownership with the desired parties, whereas equity investors and mezzanine investors usually have a seat at the table and want control of or input into business decisions and operations.

2. Gain financially. The British Parliament enacted several laws that taxed the colonies, reducing their available resources. The secession freed the colonies from those extra costs and the threat of their continually increasing. Taxes incurred from selling a business today also will significantly diminish an owner's profit. With a recapitalization, however, ownership can be slowly transitioned to buyers through the sale of stock. If the recapitalization is properly timed and structured, tax burdens can be reduced for both sellers and buyers. In the case of a leveraged recapitalization, buyers (whether family members or employed producers) can secure a loan supported by future renewal commissions to purchase agency stock.

3. Pursue happiness. Most of the early settlers journeyed to America in search of a better way of life. They pursued happiness and independence. Clients and employees who feel connected to an agency are likely engaged because they are satisfied with the agency's operation and the services it provides. If an agency is sold over a period of time to a family member or employee, providing the buyer or buyers a controlled transition to gain ownership, it helps ensure the continuation of the services, operations and success that keep stakeholders happy and the business thriving.

4. Leave a legacy. Our forefathers were not shortsighted. They realized they wouldn't be around forever (Franklin was 70 years old in 1776) and needed to lay the groundwork for a solid foundation if the new nation was to continue with the same ideals with which it started. Agency owners who want to leave a legacy can perpetuate their business with those who've grown it and established relationships to help it succeed. Agency aggregators often offer attractive money, but for owners who want to maintain their vision for how the business functions, how employees and clients are treated, community involvement, and so on, transferring ownership to those who share that vision is a good option. A leveraged recapitalization that makes purchasing the business a viable and affordable option is a good strategy to consider.

Although agency owners may feel sad when contemplating the day when they're no longer engaged in their business, they can look forward to seeing their hard work continue and to providing others the opportunity to take it to next level. Far sadder is the real possibility of losing a legacy in the event of an untimely death because a proper succession plan isn't in place. A leveraged recapitalization can form a new and more perfect union between seller and buyers that's beneficial to both parties.

The author

Rick Dennen is president and CEO of Oak Street Dennen is a CPA and is a licensed agent in Indiana for life, accident and health products. In addition, he is an instructor of venture capital and entrepreneurial finance at the Indiana University Kelly School of Business. He can be reached




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