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Succession planning
The time to start is now
By Thomas J. Sukay and Patrick Sitkins
Succession planning—also sometimes known as perpetuation—is arguably the biggest challenge facing independent insurance agencies and brokerages, and the insurance industry as a whole.
Many agency owners who came to realize they did not have solid plans for transition ended up selling to one of a wide variety of buyers, ranging from other regional brokers or banks, to private equity investors or large, national brokers.
Many principals put off the planning process or tell themselves they don’t need a transition plan. The truth is that leadership transition within every agency is inevitable, and when the need arises, it is not as easy as making a few phone calls. Agencies have many choices on how they perpetuate their business other than a sale to a third party.
When discussing succession planning, there is a distinct difference between organizations’ financial perpetuation and their leadership perpetuation. A firm’s stakeholders must also answer two key questions: “Who will own the agency?” and “Who will lead the firm and continue the legacy?” Within these distinct areas, strategic and emotional issues also enter into the equation. Succession planning requires those involved to address all of these elements in order to make the transition a smooth one for everyone involved.
There will always be firms that want to sell in order to maximize their liquidity. On the other hand, there will always be others that will choose to continue their legacy and remain independent. In the end, everyone will need to face the reality of ownership/leadership transition within their agency. Whether that transition takes the form of developing the future leaders within an agency (including the creation of a formal “ownership succession plan”), bringing in leadership from outside of the company, or looking for an exit strategy, it is clear that the process is best accomplished by planning, as opposed to reacting.
Ownership succession plan defined
An ownership succession plan is simply a predetermined methodology that addresses certain likely ownership events—such as the loss of an owner—and is documented in a legal agreement among the shareholders. These plans seek to minimize the interruption to the business upon the occurrence of those events. Remember that ownership succession plans are necessary for sole proprietorships or other one-owner entities as well as businesses that have multiple owners. An ownership succession plan is most important for the latter, though, because the likelihood of an event requiring a change of ownership is much higher.
Ownership succession plans address a few common events:
• The sale of new shares to a new shareholder
• The sale of one shareholder’s shares to another existing shareholder (or the other shareholders as a group)
• The resignation of a shareholder from the business
• The termination of a shareholder from the business
• The death or disability of an existing shareholder
• The retirement of a shareholder.
Why should I have an ownership succession plan?
Most business owners avoid this question. They are usually busy enjoying the fruits of their labor and all of the perks and status that come with their role in the firm. The feelings of accomplishment, worth, and power are all very difficult things to give up. Most agency owners run their businesses to support a lifestyle to which they have become accustomed. Many companies (and sole owners) avoid this perpetuation process because it forces them to look at their personal mortality and the mortality of their most important asset—their business.
Many companies have looked into developing ownership succession plans, but the process is often derailed. So the question remains: why should they have an ownership succession plan? There are a number of reasons:
• A key employee wants to participate in the ownership of the company; this new owner (or family member) has helped grow the business but had no financial risk during that period.
• Owners often overvalue their own contribution.
• The owner must address his or her own mortality and its impact on the business.
• The owner must consider the mortality of another owner; it is easier to deal with the business partner than with the partner’s spouse or legal representative.
• The succession planning process requires the owner to focus on his or her personal and professional goals.
When should I start?
Yesterday. That’s not a joke—you can’t start this process soon enough. The good news is you still have time to begin, and it is not as painful as many business owners believe. There are some basic actions that you should take:
1. Outline your personal and professional goals and understand how those goals affect the future of your business.
2. Identify the sacrifices you are willing to make as part of the transition. You must remember there are just as many emotional factors as there are strategic considerations.
3. Determine a fair value for your business, including the value that would be realized in the event of a sale, or if the business continues as a viable entity. As a first step, get a clear understanding of your assets. This may include real estate and inventory, as well as intellectual property and sales backlog and other assets.
Also, take a close look at the agreements you have on file—many businesses have employees who never signed nonsolicitation, nondisclosure, or noncompetition agreements. A buyer may question your ownership of the client relationship if key employees are not restricted by one or more of these agreements.
4. Understand your owners’ compensation levels as compared to non-owner employees. Many business owners overcompensate long-term, non-owner employees, with the compensation becoming a form of a de facto dividend. Other employees, though, may view this as an entitlement. Compensation adjustments to reflect the fair value of each employee’s contribution become very difficult.
5. Plan for the death or disability of one or more of the owners and establish a fair methodology for valuing their interest.
Conclusion
No one ever regrets having a succession plan; many are sorry when they need one and don’t have one, though. Developing a succession plan may be the most important thing you do for your business. Before taking this step, it is critical for the owners and shareholders to understand their personal and professional goals, as this understanding will determine the scope of the ownership succession plan.
The authors
Thomas J. Sukay is president of Sukay & Associates, Inc., a financial advisory firm. Patrick Sitkins is director of marketing for Sitkins Group, Inc.
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