When tragedy strikes, a perpetuation plan can protect
principals' heirs as well as ensure the agency's future
By Barbara A. Morris
When recently asked to describe his agency's perpetuation plan, one agency principal paused for a moment and then, somewhat nervously, responded, "The perpetuation plan we have is that I'll come to work the next day."
It's a great plan if agents truly believe they'll live to be 100, enjoy great health, and never do something different. But the plan pales when real life sets in, when illness or death compels the agency principal, or those who remain, to make hard and often uncomfortable choices. It's a plan that potentially sets any agency on the brink of disaster should the unthinkable occur.
The unthinkable did occur at the Albert Palancia Agency, Inc., in the form of a cancer diagnosis on Christopher Palancia, one of three brothers--and partners--who owned the mid-sized agency in Mamaroneck, New York.
Chris, then in his mid-forties, was diagnosed with prostate cancer several years ago. Surgery revealed that the cancer had already spread. The next year and a half was a blur of chemotherapy treatments, hospital and doctor visits, and the growing realization among the entire Palancia family that Chris would probably not survive. On July 4, 1998, Christopher Palancia died, not yet 50 years old. He left behind a wife, four grown children, and an insurance agency in which he had played a pivotal role.
"When reality hits that you have not only a partner but a brother who is so seriously ill--you don't know if you're standing on solid ground or if the ground is shaking and about to fall," recalls Joseph Palancia, the first brother to have joined the family-owned agency, established by his father, Albert, in 1978. Yet Joe concedes that those difficult times of sadness, fear, and uncertainty could have been compounded even further had the agency principals not methodically addressed perpetuation of their business long before illness forced those hard issues to the forefront.
Ironically it was Chris, head of the agency's life/health operation, who years before had activated the financial and insurance vehicles meant to ensure continuation of the agency under even the worst-case scenario. Specifically, a disability income policy, triggered after a three-month waiting period, was in place to pay Chris' salary when his illness forced him out of work. A buy-sell agreement, backed by life insurance for the three partners separate from their own personal life insurance policies, was triggered upon the death of Chris Palancia. As Joe explains, the corporation or agency, named as the beneficiary, used the life insurance proceeds to pay Chris' beneficiary, who then relinquished her share of the corporation.
While the details of a perpetuation plan may seem cold in the face of the inevitable death of a loved one, Joe Palancia believes such planning is critical. Planning keeps the agency on solid financial footing and allows the principals to focus on things that are truly important.
"When dealing with a partner who is sick, finances are the last thing you want to have to think about. You want to be able to focus on the person's health--not finances," says Palacia. And while he stresses that his brother's illness and death was an inexplicable tragedy, he believes an additional tragedy would have been the loss of an agency that Chris and his brothers had worked so hard to grow.
"I truly feel that if it had not been for the provisions we had made, this tragic incident could have put us out of business," says Palancia. "Christopher Palancia was a true professional," he adds, recalling the passion his brother had for helping personal and commercial lines clients protect their assets and financial futures. Thankfully, continues Palancia, "Chris practiced what he preached--he looked first in the mirror at what his own agency needed."
Unfortunately, many agencies fail to look into that proverbial mirror--perhaps frightened of even acknowledging the possibility that a key employee could become ill or die, or working under the naive assumption that when a crisis occurs, perpetuation will miraculously fall neatly into place.
J. Kyle Dougherty, president of Dougherty Insurance Agency, Inc., a small agency in Stratford, Connecticut, speculates about another obstacle to perpetuation planning, which he believes is particularly rampant among the small, family-owned operations. The older generation, he says, procrastinates on the issue of perpetuation, not willing to conceive of the time when they no longer are at the helm. The younger generation, influenced by a combination of respect and fear, doesn't press the issue--concerned about appearing too "pushy" about what is clearly a sensitive topic.
Dougherty, who purchased the agency from his father Maynard (Doc) in 1999, concedes that their perpetuation plan was relatively simple and without the emotional tensions that sometimes plague family-owned operations. Upon his purchase of the agency, the two men switched titles--Dougherty became president and his father assumed the role of vice president. Yet Dougherty reports that even this simple perpetuation plan was committed to paper, with specifics as to the terms and conditions of the purchase, and with financial vehicles in place to respond should a tragedy accelerate the succession timeline.
"It's absolutely important to do something before a crisis scenario occurs--to have an agreement in place that spells out what would happen if something happened," stresses Dougherty.
Peter Thornton, CIC, vice president of Thornton Agency, Inc., a small agency in Parsippany, New Jersey, calls his agency's plan for succession "simple," yet he believes it effectively addresses the most serious issues that could arise if "something happened."
Thornton, one of three brothers but the only sibling working in the agency established by his father, John, in 1976, says the long-term plan calls for a smooth transition of the agency from one generation to the next. However, in the event of unanticipated events prior to this transition, insurance protections are in place to fund inheritance payments to the father's heirs and spouse while still ensuring Peter's ownership and control over the agency.
Thornton acknowledges, however, that the specific numbers and details outlining how--and when--the agency will pass from father to son have not yet been put to paper. He maintains that "there are no pressing issues right now so we've tended to set aside these perpetuation discussions for a rainy day." Yet he adds, with just a hint of discomfort, that when the rain arrives, "it probably should already have been done."
Al Diamond, president of Agency Consulting Group, Inc. (ACG), a Cherry Hill, New Jersey-based agency consulting company, has seen firsthand the fallout of many an agency's failure to look in the mirror--to chart a perpetuation plan before life's unpredictable twists and turns force the issue.
In one instance, an agency owner in his mid-thirties donned his new jogging suit on a fateful Christmas morning and was hit by a truck as he approached a curve. No one at the agency was trained to step into his shoes during the six months he was in traction. Apparently, recalls Diamond, the owner had maintained exclusive and tight control over all of the small agency's key accounts and viewed the agency employees more as clerks than as professionals who should play an active role in sales, service and retentions.
Over those six months, key clients, unable to obtain the personalized hand-holding to which they were accustomed, left the agency, many falling prey to other agencies who seized the opportunity to target these vulnerable accounts. By the time the principal was ready to return, recalls Diamond, "the agency had melted away. There was no one backing him up--it destroyed his agency." The end result? The agency principal was forced to sell the business which might otherwise have survived intact if he had taken the time to plan beforehand.
On the other side of the spectrum is the maturing agency owner who, anticipating his retirement, had the courage to look into the mirror. What he saw was five grown children, all passionately devoted to their father's agency, yet all laboring under the uncomfortable cloud of who would assume what level of responsibility upon the passing of the business to the next generation.
Recognizing the need to address this potentially divisive question before it created chaos within the family and the family-owned business, the agency owner candidly evaluated the strengths and weaknesses of each grown child. He also asked for their input as to the role they envisioned for themselves in the future. The end result? Each successor assumed the title of president upon the father's retirement and each assumed control over a distinct division which best reflected that person's interests and capabilities. Since their father's passing, the succeeding generation of five siblings has worked in concert to grow the agency from a $3 million to $12 million operation that continues to thrive. "It is the picture," says Diamond, "of a successful perpetuation plan."
Over his many years of consulting, Diamond reports, he has seen many scenarios in which a smooth and successful agency perpetuation was not the outcome. Many agencies, he observes, have fallen victim to a forced sale to pay off heirs, have experienced destructive infighting for control among grown children, or have had to work under the lackluster leadership of a successor who assumed the reins out of a sense of obligation, feeling trapped rather than excited about this new career opportunity.
These and other potentially ruinous scenarios that play out over and over again in real life should compel agency owners to address their agency's perpetuation now, before it's too late, cautions David J. Madara, CPCU, AAI, president of The Madara Company, a mid-sized agency in Mt. Laurel, New Jersey.
Madara, who just recently went through a third-generation perpetuation in which the agency passed from his father and uncle to him and his sister's husband, likewise maintains that there is no magic elixir for the perpetuation dilemma. "It's not a science ... there's no cookie cutter approach," he says, observing instead that each perpetuation arrangement must reflect the individual personalities, goals, and financial and human resources that the agency brings to bear on the equation. Ultimately, he continues, "the perpetuation deal has to make sense to the seller's personal plan."
The bottom line, says Diamond, who is also president of the American Association of Insurance Management Consultants, is that, at best, too many agencies give perpetuation "lip service," and only after being pressured by their companies to address the issue. Instead, he believes, every agency should embrace the issue of perpetuation as part of its overall strategic planning that clearly outlines objectives, timelines, and measurable expectations. The individuals targeted for succession also should play a steadily increasing role with the agency's key accounts well before control changes hands, thereby ensuring a true succession--rather than one that merely appears on legal documents.
Jacki Jungsberger, AAI, ACSR, CPIW, vice president of Tri-County Agency of Brick, Inc., a small family-owned agency in Brick, New Jersey, has worked out a plan with her father, Donald, for her to purchase the agency. With father and daughter the only players in the succession equation, it has been a relatively simple plan to devise. Yet many agency owners, she cautions, face harder choices either because more people are potentially involved or because there is no one waiting to continue the business. Sale, merger, or the pursuit of outside talent to perpetuate an agency are equally viable options that many agencies also explore.
Whatever the ultimate perpetua-tion decision, its implementation should be outlined in detail for those who follow. For as Jungsberger points out: "The plan needs to be written down because out of sight ... out of mind. People forget what they've said." Sometimes, they need the document to jar their memories.
The author
Barbara A. Morris is a New Jersey-based freelance journalist who writes extensively about the insurance business.