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Agency Financial Management Personal issues in ownership transfers Perpetuation, merger & exit strategies involve more than just numbers By Author My associates and I have found that the personal issue side of perpetuation planning does not get enough attention. The financial aspects of the perpetuation planning process are often discussed in a rather antiseptic manner—for the most part taking for granted the personal aspects of the process. However, our experience has shown that, in reality, those nonfinancial perspectives are almost as important as dealing with the numbers. We routinely find that many agency principals struggle with these issues in private without verbalizing their thoughts and concerns. Among some of the more common concerns is how to deal with issues ranging from the giving up of management control to a complete exit from agency ownership. These are similar to concerns that come up in other contexts such as when agencies consider merging. One of the major potential deal breakers in merger discussions is who will run the combined agency. One Harbor Capital assignment that comes to mind highlights the control issue in a merger context. It involved two larger agencies that were seriously exploring the possibility of a merger. One agency was a successful specialty agency that focused on liability products but did not have a strong general brokerage division. The prospective merger partner had built its success on both property/casualty and benefits programs as well as commercial and personal lines retail brokerage. While the current principals of both agencies were actually able to sort out how the combined entity would be managed over the near term, the sticking point came when the discussion turned to the long-term solution. One of the parties to the transaction insisted that a younger family member be designated as the future head of the new organization, upon the retirement of the current principals. The other side of the prospective transaction objected to this predetermined succession plan on the basis that the decision would not have to be made for a number of years and serious consideration would have to be given to two of its minority shareholders, either of whom had the background and appropriate experience to run the combined organization, The bottom line was that this merger was never completed because of this one obstacle which became non-negotiable. This negotiating position became engrained in the mind of one of the parties as a method of keeping quasi control. Unfortunately, when it surfaced, it ended up sending a number of negative signals to the other side. In another negotiation, the control issue revolved around a sole shareholder, well past normal retirement age, who finally decided to explore a merger primarily due to a problem with the agency’s key market. The hidden agenda was the fact that this principal, although he was spending much of his time traveling, wanted to “remain active.” The problem centered on the definition of remaining active, since it would prove difficult for this principal to be ‘pulling on the oars’ to help move the agency forward while being off site for extended periods at a time. While it was easy to be sympathetic to the goals of this individual, it was not until a more realistic approach prevailed that the transaction could be completed. We have noticed that some agency principals deal with perpetuation with the “out of sight, out of mind” approach. While they realize that they should begin the planning process, they keep putting it off. We recently received a call from an agency with several family partners. It was clear from the beginning of our conversation that some of the partners were engaging in discussions with us only at the behest of their partner. Initially, they were not open to advice since their attitude seemed to be, “Don’t confuse me with the facts since my mind is made up.” In this situation, the plan was to have three of the principals’ family members, who had been with the agency for several years, perpetuate the agency. The event that caused the group to reconsider this approach was the decision of one family member to leave and pursue other opportunities. The issue which now confronted the principals was that they were now in their late 50s and without a viable plan. The reality is that the original plan to have family members perpetuate the agency and buy out the principals had its own inherent problems, since all three principals would be retiring in near proximity to each other. This is a case where even though there was “a plan” in the minds of the principals, the reality was that the plan was not well thought out and no backup existed. Eventually all parties recognized the need for a comprehensive solution. Some perpetuation plans, although not formerly committed to, actually evolve over time. One principal in his 70s decided that part of a strategic plan would be to grow the agency organically and by acquisition and slowly give up equity in the process. Part of the initial process was to buy out some passive shareholders and sell that stock on a discounted basis to some of the key younger players in the agency. A secondary move that was made at the behest of some of the minority shareholders was to merge with another agency. Although the principal’s percentage stake in the agency was declining, the total value of that stake was actually staying the same. The opportunity came to sell his stake in the agency to a strategic partner. This deal left the minority shares in place, which made it easier for the principal to make the decision to exit, since he felt comfortable that other shareholders would be left in good hands. Further complicating perpetuation planning are commitments which are often made to younger key individuals in the agency about future equity ownership. In many cases those commitments may never be realized even though they may have been well intentioned. The reality is that those commitments may not have considered that the principal would have second thoughts about actually pulling the trigger. On a number of occasions, I have heard principals insist adamantly that they intend to continue indefinitely into the future. In the case of sole owners, that is obviously their prerogative. Unfortunately, in many cases, personal issues may interfere with those plans. Mindsets also may change within fairly short periods of time based upon how agency owners feel physically. I have heard personally from agents who decide to finally embark on a formal plan that if it had been two years ago, they would have gone in a totally different direction. In summary, agency principals must recognize that there are personal issues which need to be addressed as part of the perpetuation process. Failing to focus in a realistic manner with these issues can interfere with the development and implementation of any perpetuation plan. * The author |
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