Succession planning

The best time to start linking your agency to the future is now

By Dennis H. Pillsbury

The key to successful succession planning is taking the time to do it right, according to Rick Dennen, founder, president and CEO of Oak Street Funding, a company that specializes in lending money to insurance agencies. As Rick points out, the objective of a succession plan for some agency owners is to perpetuate the dreams of the agency's owner(s). "They can enjoy the reward of passing the agency to the right people who can keep the culture and values intact. They also can be sure that their customers, who oftentimes are their friends as well, will continue to be treated well." And, of course, the dream of some owners might simply be to make as much money as possible from the sale of the agency.

In essence, a succession plan is a plan to sell the agency at some time in the future. The main difference from a simple sale is that the succession plan often will delineate who the buyer(s) will be. So, unlike a plan to sell the agency where the seller's objective is to prepare the agency to make it attractive to an unknown buyer, a succession plan instead needs to include a plan to keep the agency attractive to the buyer and a method of funding so the buyer can successfully perpetuate the agency. In that regard, it is a balancing act where a classic win-win needs to be realized where both the buyer and seller maximize their objectives to the greatest extent possible.

Mark Cormany of French Cormany Insurance Services, Inc., a benefits broker based in Irvine, California, has been the successor on three separate occasions. He agrees that time is the most valuable commodity when putting together a successful succession. "You need to do a lot of leg work," Mark notes. "I start by finding out what the seller wants. Once I identify what he wants then I have to figure out how to make it work for me. You have to find a way to maintain the culture so that employees and clients stay on board. And this is where time is of the essence.

"I created a model where I ran my agency separate from the seller's, became a vice president at the seller's agency and drew a small salary," Mark continues. "Over time, I slowly started integrating the seller's book into mine from a systems standpoint. At the same time, I worked with the employees in the seller's agency and met all the clients before the acquisition was completed. As a result of spending the time to ease my entry into the agency, there was no culture shock when it actually happened. I've found that this method reduces my risk and allows me to give a better multiple, which pleased the sellers since they got better than market value."

Mark notes that "ego can be a problem. A lot of sellers think their clients will never move. That's why you really have to take the time to meet the clients and ease the transition. At the end of two or three years, most of the clients were able to figure out what was going on without having to be told. They saw that the service they were used to receiving wasn't going to change. In fact," Mark adds proudly, "we have a service goal of making each customer feel like they're our only customer. Our clients view us as an intimate boutique operation that is there to solve their problems.

"In fact, one of my clients came to me, concerned that he might outgrow us. His business was really taking off and he was afraid that he might have to move his business to one of the large brokers. I assured him that we had access to the same products as the big brokers and a close relationship with all our carriers. After all, I worked for one of the major carriers for 10 years and know what they are looking for."

And that brings us back to Mark's philosophy concerning succeeding an owner. "I treat the seller the same as I treat my customers. My goal is to get them the best deal possible."

The first two acquisitions were annuity type arrangements that Mark was able to handle out of cash flow. However, in the third deal, "the seller wanted a big lump sum. And that's where Oak Street came in," Mark reports. "They were definitely the most professional of the lenders I talked with and knew the insurance agency business. Their people came out to my office and spent the better part of a day getting to know us. They looked at the previous two acquisitions and the way they were handled. Oak Street understands an agency's revenue stream and what it takes to maintain that revenue. They looked at what we would be doing to assure client retention and develop new business. In short, they brought an agent's perspective to the process that was refreshing and showed that they really understood our business. In the end, they loaned us nearly $1 million in the early spring of 2009 to complete the acquisition. It took almost no time once they had completed the due diligence."

Rick Dennen of Oak Street points out that the company has grown by understanding the niche market that it serves. "We look for situations where the buyer and seller have achieved the win-win scenario so that our financing will be supporting a successful insurance agency going forward. We have supported a large number of succession plans, as well as other growth opportunities agents have recognized."

In closing, Rick emphasizes once again the need to take the time to properly plan for succession. "Any agency needs at least two to three years to prepare it for sale. There are a variety of concerns to consider, including the tax consequences of various methods for transferring the business. Should you use an ESOP or a restricted stock plan, a leveraged buyout, an earn-out, or a seller-assisted plan? In each case, there are tax consequences that should be reviewed by a team of advisors with experience in the agency business, including tax consultants, attorneys and CPAs."

He goes on to point out, however, that many of the steps an agency needs to take to prepare for sale actually should be part of an agency's operating procedures all the time. Assessing the agency's strengths and weaknesses is a key part of preparing an agency for sale. But shouldn't that really be part of an agency's planning process on a regular basis? Shouldn't an agency be regularly assessing its technology, producer productivity, carrier relationships, reputation and all those other items that impact the bottom line and make it more attractive to a buyer? But it also makes it more attractive to its current owners every day by increasing profitability and making it possible to bring in the best people and fuel growth strategies.

Mark explains his ability to compete against the big boys: "I hire better people and pay them better, so they do a much better job." And the way he does that is by assessing his agency's performance every day to make certain that he maximizes opportunities to provide excellent service to his clients. In short, his agency is optimized for success and, as a result, is already optimized for sale when he decides to find his successor.

"People with successful businesses generally have a succession plan in place," Rick concludes. "It's an important part of the best practice procedures for running a business."