AGENCY FINANCIAL MANAGEMENT
Principals' cooperation and communication in problem resolution determines an agency's future and success
By Paul J. Di Stefano, CPA, CPCU
Failure to deal with serious issues relating to agency ownership can impede the agency's future success.
Being in an agency partnership is like being in a marriage. It has its ups and downs, and it takes work and dialogue to resolve problems that arise in the course of the relationship. Whether we are talking about an equal 50/50 partnership, a 10% minority shareholder or group of minority shareholders, or the like, the concerns and expectations of all agency principals and/or partners must be recognized. Failure to deal with serious issues relating to agency ownership can impede the agency's future success. Unresolved conflict among owners can also negatively affect the day-to-day operations of the agency and create tension at the staff level. Many times, owner conflicts revolve around money and how it is distributed; however, egos and personalities can create difficulties as well.
In general, whether the issue relates to money or operating philosophy, continuing problems are often the result of a lack of communication. Disagreements can stem from a variety of issues: profit distributions vs. the need to retain earnings for capital expenditures; compensation vs. individual contribution to agency success; operation philosophy, to name a few. What results is a dysfunctional environment due to the principals' failure to reach a clear resolution. The issue may fester for months or years until another difference of opinion pops up and tempers flair like a volcano, spewing unresolved past hostility.
If things get heated enough, drastic action may occur and may result--in the most serious cases--with the voluntary or involuntary termination of a non-control partner and the potential accompanying loss of agency accounts. The result in these types of cases is litigation or arbitration, accompanied by legal costs and operational distraction.
Our organization has worked with a number of agencies whose conflicts "got out of hand" but could have been resolved if the principals had made an effort to reconcile. Following are some cases that we have dealt with, and how they were resolved--whether satisfactorily or unsatisfactorily.
No shareholders' agreement
One situation involved four equal partners, one of whom was terminated for allegedly not carrying his full load.
Communication was not a strong point with this group, and one day the decision was made by the other shareholders to terminate the one partner. Since no shareholders' agreement existed to address the buyout of a partner, the terminated partner had no option but to initiate a lawsuit as an oppressed minority shareholder to force a buyout, a remedy available in many states to protect the rights of minority shareholders. The case took several years to resolve, and the legal fees were burdensome The partners should have first tried to resolve the performance-related issue through a compensation plan with objective success criteria. If this failed, the ultimate financial outcome achieved through litigation could have been easily reached by fairly negotiating with the departing partner.
Listening but not hearing
The next example shows how partners communicated but failed to hear each other. Two of the partners were in their mid-60s, each with a different agenda. The majority equity partner wanted to continue working and was effectively dragging his feet in finalizing a plan to buy out his retirement-minded partner. The partner had already bought a "retirement" home in a neighboring town and wanted his equity to be purchased so that he could move on. But he continued working, since his talents were difficult to replace. Unhappy with the stalemate, a third partner became concerned about the future of the agency and was considering leaving with his accounts.
When the agency retained Harbor Capital Advisors, we interviewed the partners and discussed the seriousness of the situation in order to help them move toward getting a consensus regarding strategic direction. It was immediately apparent that part of the problem was that the partners were giving only lip service to each other's concerns. The solution was finding the right strategic buyer who would provide a role for the senior partner for the next several years and a carrier path for the younger partner.
Keeping the peace
In another success story, the founder offered a key, highly compensated producer the opportunity to buy agency equity at an early critical stage in the agency's development when it required working capital. The producer's investment bought a 30% interest in the agency, which three years later was operating successfully and generating strong cash flow. During this period, an issue regarding producer hiring and compensation surfaced between the two principals. The producer had become disenchanted with the hiring decisions of the major shareholder; and since he had no power to make decisions related to the success of the agency, he demanded to be bought out or he would leave.
The decision was made to accommodate him, with the agency purchasing his shares with cash and notes at a fair price. This encouraged him to continue his status as a highly paid producer at the agency. This ended up as a win-win with the founder grateful for having raised the initial capital to make the agency a success and with the producer pocketing a substantial profit. Most important in resolving this problem was the recognition that having this producer motivated and comfortable was more important than whether or not he should be cashed out as an equity holder.
All in the family
Sometimes family situations are the toughest to resolve. An example of using a creative approach to resolve family member compensation and agency perpetuation occurred in a family-owned agency in which each of the two agency principals' sons was a key producer as well as the key to the planned perpetuation of this agency. The issue of future agency ownership came up, along with the issue of the ownership of the book of business produced by the sons. The agency principals decided that "discretion was the better part of valor" and addressed the ownership of accounts issue by creating a separate subsidiary with rights to those accounts. The sons were given the responsibility to jointly decide on the ownership splits in the subsidiary ownership and how a perpetuation buyout scheme would be structured between the sons.
A win-win situation
Another case of successful partner conflict resolution involved a principal who had purchased an agency in an adjoining town. The manager of the target agency had initiated and expedited the purchase. Although the manager had no equity at the time of the acquisition, the acquiring principal gave him a minority position in the leveraged agency. Over a four-year period, that acquisition turned out to be tremendously profitable. Also during that time the relationship between the two shareholders deteriorated because they held differing views over management of the agency.
Since the subsidiary was a distinct entity with its own culture, Harbor Capital's recommendation was to sell the acquired agency, since a buyout by either party would have been problematical. Because the value of the agency had appreciated greatly, both shareholders came out winners. The minority principal hit a financial home run with no investment. The majority shareholder pocketed a windfall profit and used a portion of the proceeds of the sale to fund other acquisitions which were more compatible with the culture of his core agency. The solution worked because the acquiring principal was philosophical about sharing the good fortune with his partner and recognized that he never would have had had the opportunity without the initial help of this individual.
In summary
In our experience, the best route to the resolution of partner disputes is to confront issues "head on." In most cases, creative solutions can be found. Hostile agency breakups are at best disruptive and at worst extremely costly, both financially and as an operational distraction. The lesson to be learned is that if a relationship cannot be salvaged, it is in everyone's interest to find a viable, alternative solution. Sometimes that requires the intercession of an experienced, independent third party who can help all parties find a solution. *
The author
Paul J. Di Stefano, CPA, CPCU, is the managing director of Harbor Capital Advisors, Inc., a national financial and management consulting firm which offers services to the insurance industry. Services include agency appraisals, merger & acquisition representation, as well as strategic and management consulting. Harbor Capital Advisors, Inc., can be reached in New York at (800) 858-2732 or through its Web site (www.harborcapitaladvisors.com).