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Agency Financial Management Dealing with shareholder dynamics Different wants and needs can cause discord when perpetuating the agency By Paul J. Di Stefano, CPA, CPCU
Supposedly, there is a cynical old “curse” that goes something like this: “May you always have partners.” The reality of agency shareholder partners is quite an interesting phenomenon with instances in which those relationships seem to work well on the surface but where they may unfortunately suddenly cease being functional. Underlying many shareholder relationships is a certain tension, part of which relates to the tendency to attempt to measure which of the partners is “pulling harder at the oars” or carrying his or her own weight. Our experience would indicate that partnerships tend to become dysfunctional when there is a significant change on the horizon that has the potential to disrupt the day-to-day equilibrium of the relationship. One of the main disruptive influences is when the sale of the agency is being considered. This can bring to the fore the divergent personal goals of the agency principals which may be directly related to age differentials. As one might expect when there are substantial age differences among agency owners, personal goals are likely to differ. In the case of older principals, the general tendency to favor an agency sale may naturally be greater than it is with younger owners. Having said that, we have seen situations in which the older owners want to hold on to their equity while the younger owners, feeling that things are stagnating, favor partnering with a more dynamic operation. In this situation, the tension between these age groups is understandable. In other cases, older partners may be comfortable with the amount of money that they are taking out of the agency while the younger partners feel that they are not receiving the compensation that they deserve. How do you reconcile those divergent aspirations? We’ve handled many amicable cases while others have not gone so well. One situation was so out of hand by the time Harbor Capital became involved that the partners were no longer speaking to one another. Our first goal was to take each of the partners aside and speak with them individually in order to understand why the partnership was so dysfunctional. As it turned out, one of the problems was that one of the partners wanted to retire and be bought out. That partner had already moved into a new “retirement” house in a distant city and was forced to commute back to the office because the original timetable for the agency to be sold had never been implemented. In effect, he was forced to remain with the agency longer than he had planned. Another partner had no desire to sell and wanted to leave with his book of business in return for giving up his equity in the agency. The other partner wanted a buyer who would allow his son who worked in the agency to service his accounts when he eventually retired. The key here was to first convince all the partners that their goals could be met in the context of a single transaction. We proceeded to do this through individual conversations held with each of the partners. Once this was accomplished we were in a position to open discussions with the appropriate merger partners that would be able to accommodate the various individual goals of the partners. I am happy to report that in the end, each partner’s goal was met, including the exiting partner. In another situation involving multiple partners, the relationship issues revolved around a situation where there were both active and passive partners. In this case, the passive partners had provided the initial funding to start the agency while the active partners brought in the markets and production capability to build the business. In this case, the passive partners were also shareholders in another agency. The issue that often arises in cases with both active and passive partners typically revolves around the balancing of financial considerations with strategic and cultural considerations. The passive partners often look at a sale from strictly a financial viewpoint while the active partners have multiple perspectives, which can include future strategic opportunities as well as operating compatibility. Since the passive partners normally have no future operational involvement, their motivation tends to be securing the highest guaranteed purchase price. The active partners, while also not looking to leave any money on the table, are normally concerned about the cultural compatibilities when considering the prospect of working with the acquirer for years in the future. Another complication with passive partners tends to be the structure of a potential transaction. For instance, in the case where a transaction includes an earn-out provision, which of the partners should participate in that earn-out? While the active partner’s participation seemed a logical scenario, the passive partner’s participation can be somewhat problematic since they would, in effect, not be assisting in helping achieve that earn-out. In one deal, the dilemma was how to share the proceeds of the purchase price if the passive partners did not participate in the earn-out. Should the passive partners get a disproportional share of the upfront money to compensate for not participating? As one can imagine, this question created quite a quandary in negotiations. Not only were we negotiating with the buyers on behalf of our client, but we were also helping the active and passive partners negotiate their internal deal. The negotiations, in fact, became so complicated that we went back to the buyers requesting a deal in which all the payments were guaranteed. Fortunately, in this case, we were able to convince the buyer that an all-cash deal was not an unreasonable way to approach the transaction. We have seen a number of cases where some partners become virtually passive with their lack of day-to-day involvement in the agency. Those situations may cause tensions among the younger “bucks,” particularly those with no equity who may believe that they have played a meaningful role in the agency’s success. In too many cases, the concerns of the younger group are not addressed, ultimately resulting in the loss of key people. While we understand the reluctance to have new partner/shareholders, current shareholders—especially those who have stepped back from day-to-day involvement in the agency—need to look critically at this issue. The reality is that enfranchising key people as new shareholders positions the agency for a future internal or external sale. As stakeholders in the agency, these individuals would benefit directly from either perpetuation scenario. In summary, the dynamic between agency partners may take on a life of its own, especially where the future of the agency is concerned. One of the first goals when consulting with an agency client in a merger & acquisition or strategic engagement, is to gain a full understanding of the personal goals of each partner. This helps to envision, prior to negotiating with potential acquirers, the kinds of deal structures that all the partners individually will find attractive in meeting their wish list. * The author |
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