Best practices for insurance agency exit and succession

There are lots of reasons to think about a succession plan, and it’s not all about an agency owner choosing to retire. Life happens. Serious illness, the unexpected death of an owner or divorce might be reasons to sell your interest in the agency. Or you could get lucky, win $100 million in the lottery and move to Tahiti.

When to start planning

Often, independent insurance agencies are family-owned businesses, and the dream of the founder is to pass the legacy on to family members. “My business partner and I always thought we might get one of our five sons into the business,” says Stuart S. Durland, vice president of operations for Seely & Durand Insurance in Warwick, N.Y., an agency founded by his grandfather in 1934. “That never transpired so we had to start thinking about the alternatives.”

Durland joined the agency in 1990 after a stint at Travelers Insurance Company. He notes that there is four years’ difference in ages between the partners, which puts one closer to retirement than the other. Does the older owner retire first? Or does he stay longer to accommodate a departure year for the younger owner? They started thinking about this 20 years ago and developed a buy/sell plan, which is funded by life and disability insurance.

Matt Naimoli and Zack Gould, founders of G&N Insurance, which opened in 2010 in Southborough, Mass., aren’t ready to start thinking about a succession plan or exit strategy. “Most entrepreneurs say that the day you open your business, you should have a plan to exit,” Gould acknowledges. “We tend to adhere to the notion of ‘If you enter with an exit plan, you’re not enabling yourself to reach your true potential.’”

Naimoli adds that, as young agents who started from scratch, “We’re still focused on growing and creating impact and we have very little experience with succession planning. Likely to our own fault, we’re too focused on expansion.”

U.S. Army veteran Robert Klinger, president and CEO of the Klinger Insurance Group, disagrees strongly. He believes that agents need to start planning from day one, saying “Begin with the end in mind.” He advises agency principals to consider succession and exit strategy as part of their annual business plan, noting that insurance agents need to do a better job of their own risk management. He recommends having a road map that is a working document subject to modification annually.

Andrew Harris, CEO of Liberty Insurance Associates in Millstone Township, N.J., started planning when his son expressed an interest in being in the insurance industry. Harris gave his son an online career aptitude test as a gift to see what industry he might have an affinity for. It turned out that his son (also named Andrew) had a strong correlation for insurance and business. Harris Jr. worked at another insurance company for 10 years, and when it was sold he joined his father’s agency, where he’s been ever since, learning the ropes.

More planning at larger firms

Tom Doran, a partner at Reagan Consulting in Atlanta, Ga., counsels larger firms with three to five owners or more in strategic planning. For such larger firms, he notes, succession and exit strategies are part of the annual planning process, which he notes should be an ongoing exercise to ensure the perpetuation of the business that’s not dependent on any one person. It should be a continual process, not event driven.

Doran advises agencies to look at the “ages and stages” of the agency owners and potential owners down the road. For larger organizations, you need an ongoing dedication to succession planning to ensure that there’s a steady stream of incoming men and women who will serve as agency owners in the future. It’s as important as the agency’s growth strategy, producer recruitment strategy and market expansion strategy.

Robert “Bob” Pettinicchi, executive vice president and chief lending office, InsurBanc, based in Farmington, Conn., advises independent insurance agencies and notes that prospective buyers often hope that no one has a succession plan so they can swoop in. He also believes that the agency’s plan shouldn’t be a “succession” plan; it should be a “success” plan. Every action should be about creating value.

“It’s a people question,” Doran says. To transfer a business, you need a buyer and a seller. “It’s too late when you’re getting ready to sell to look around and find out that there are no buyers internally. At that point, you may have no choice but to sell to an outside buyer,” he adds.

Key items to consider

Durland believes that you need to be comfortable that the person or entity purchasing your agency or your share will be reliable and conscientious, especially if it’s a loan-based deal. He urges agency principals to think of the staff and ensure that they won’t be impacted too significantly. “And you have to accept that business may be done differently under the new ownership, which isn’t necessarily a negative,” he says.

“Set up a plan with guidance from accounting, legal and industry professionals,” Harris says. He recommends having a funding plan in place — either external or internal. Agents need to look at their cash flow and profitability to see whether it can support any internal perpetuation plan.

An important question from the outset is whether anyone in the family wants to be part of the business, Klinger says. “If so, can they run it? Does someone in my company want it? Do I want to sell outright? Do I want to bring partners in?” He recommends meeting with a business broker experienced in selling insurance agencies and asking what they look for in terms of financials. You may need a few years to get the business in shape to sell. He adds, “There’s been heavy merger and acquisition activity in the last three to four years, but will that continue for the next five years?”

Steven J. Aronson, president of 100-year-old Aronson Insurance, an Acrisure partner Agency, in Needham, Mass., thinks that quality of life is an important consideration for designing an exit strategy. “Many buyers will pay you a handsome price for your agency, but how happy will you be the day, week, month or years after the deal is done? If you want to walk away, will your client be well cared for — the same way you did? If you want to stay, but not “manage”, will you be happy working for the other next owner? If you want to stay and manage, which might be the best opportunity to maximize your financial deal, will your style fit into the buyer’s culture?

“If you will stay,” Aronson adds, “you can earn substantial additional dollars by caring for and continuing to grow your old agency or book.” He believes this option is particularly important if you are younger, or if you have children in the business.

“Three key things are setting value expectations, determining who the buying group would be, and laying out projections of what the deal would look like to both buyer and seller,” Doran says. This should be done about three years in advance so when the time comes to execute the plan there are no surprises to either party.

As soon as you have more than one owner, Doran adds, depending on the owners’ ages, you should have a shareholder or partnership agreement in place. It should spell out how equity would be transferred in the event of death, permanent disability, termination of employment or retirement of one of the owners.

Seek trusted advisors

It’s important to get advice from trusted professionals, whether you’re a sole proprietor or a larger organization. You need a good accountant, a tax specialist (who may also be your accountant), an attorney experienced in succession planning for independent insurance agencies similar to yours, and a valuation specialist. Klinger suggests that you also talk to your carrier partners. “Some might want to approve the buyer, especially if buyer isn’t appointed with the same carriers,” he observes.

Harris had been a member of MarshBerry, a consulting firm that provides intellectual capital, strategic consulting, and merger and acquisition advice to clients within the insurance industry. “MarshBerry or similar firms look at your agency from a board of directors point of view, asking what is your value, what are you doing to increase the value, and what is your long-term plan, are you going to keep it or sell it?” Harris explains. He believes that it’s important to maximize the profit and efficiency of the agency. “If you do that you don’t have to sell it,” he says. “You can perpetuate it. It will run without you.”

Ease on down the road

To everything there is a season, but how do you know when it’s the season of life for you to move on from the agency? “It depends on the circumstances,” says Durland. Most purchasers want the seller to stay on for a certain amount of time to ensure transparency and a smooth transition.

Harris notes that there’s an intuitive aspect to easing out of an agency; there are no hard and fast rules on timing. He agrees that transition is important, but some overlap is best. In his case, his son is gradually taking over the agency. He has stepped down as president, but he’s the CEO.

“I want to see more senior people slowly transition out of the business,” Harris says. “But it depends on whether you want to stay active in the business but not in the same role with the same responsibility. You shouldn’t want seasoned professionals to leave abruptly. They still have tremendous relationships and ability to add value to the company.

“The exit strategy isn’t really about the money,” says Barry Seigerman, an independent broker/producer with more than 50 years’ experience in the industry as an agency founder and chairman and CEO of a multi-line agency. “It’s all about the quality of life you want, what you will do after the sale and how you feel about what you’ve achieved versus what you set out to do.”

There’s a delicate balance when easing out and challenges in transitioning a family-owned business. As Harris observes, the successor may be looking over his or her shoulder to see whether Dad or Mom approves. At the same time, the agency staff may be looking at the parent as if to say “Is this decision your [son/daughter] made right?” But, he adds, “When things are right they tend to fall into place.”

Aronson find the question of when to move almost impossible to answer. He’s 65 and he wants to work full-time for another five years and then ease out over the following five years. Why? “Because I love what I do,” he responds. “And, as my wife reminds me, she married me for better or worse — but not for lunch.” If he were 75, the answer would be different. “I might like to get out almost right away,” he adds. “But at 40 or 50, or even 60, I’d be looking for a very long term opportunity to continue to work, in a meaningful way, with the new agency.”

Klinger: Need to have a play book with “what if” scenarios and a plan for dealing with each one, e.g., what if I get sick, what if I get injured, etc. Who are people that my spouse or firm can turn to? Go to carriers, local associations, fellow agency owners to help you template some scenarios. That becomes working document.

When to let staff know

Depending on the confidentiality agreement you end up with, Durland says that you should let your key staff know as soon as you can that you’re planning to transfer the business. “Being honest and up front is the best policy,” he believes.

Seigerman concurs. “Always keep staff informed on long-term strategic goals and the various options you’re considering,” he advises.

Harris informed his staff from the time he brought his son into the agency. “My son is my perpetuation plan,” he told them. Keeping the staff informed tells them you’re going to be a legacy agency, and it’s not for sale. It helps to keep the staff motivated when they know you have a perpetuation plan. They’re not as worried about job security so they won’t leave when you do. Harris recommends positioning the conversation this way: Not only do I need your help to keep the agency going, but so does my son. He also recommends having this conversation with your carrier partners.

In his agency, Harris has stepped down as president, but is still there as CEO. His son does more and more of the day-to-day running of the agency. “It’s happening easily and naturally,” He says.

Klinger advises having confidential conversations with your team when you start thinking about easing out. See what their interests are, what their plans are. Do any of them have aspirations of owning their own agency? Are they happy just being employees?

If you get sick, Klinger adds, be sure you let the staff know that you have insurance in place to keep the firm going. You need to know your staff and how committed and loyal they are to you. That’s going to dictate the timing of when you tell them that you’re thinking of selling. Also, what is the prospective buyer likely to be like? Reassure them that they’ll still have jobs. Shortcut rumors with good communication. Employees can tell when owners are cutting back, for example, losing carriers, not growing the business, and so on.

Klinger is setting up his business like a law firm or accounting firm. He’s growing junior producers to see which ones have the maturity and vision to be able to step up into the organization. “If you show them a career path, they’ll work harder, he says.

Final words of wisdom

Succession planning is a complicated process with lots of moving parts, says Doran. “Most agency principals make the mistake of waiting too long to start the conversation.” Don’t let that be you.

Pettinacchi notes that communication seems to be missing in most plans. And it’s the most important component.

“Have an outside consulting group work with you to look at your business and business plan and give you guidance. You’re too close to the situation to look at it critically,” Harris says. With all the changes facing the insurance industry, he still sees a bright future for the independent insurance agency. “It’s going to be a challenge to attract people into it,” he observes. There’s a large opportunity for the next generation to flood into the industry as the baby boomers retire. “Recognizing that is the challenge, I firmly believe there is still a role for agents. It might be different, and the way we sell might be different, but consulting, advising and guiding people to make the right decisions on important topics will always be there. Right now, artificial intelligence can’t look at all the permutations of your life and business. We need to do a better job as industry to focus collectively on what our future is going to look like.”

“If you think your son or daughter is interested in the business, have them go to work for someone else first,” Klinger advises. I want you to go out and make mistakes first. Learn from hard times. Start at the lowest level. Best officers were enlisted. They understand all the aspects of the operation and appreciate the hard work it took to get there. Better leader and earn more respect among your peers and subordinates. I’ll do what it takes to make us successful. It’s all about the team.

“Your team helped get you here — you did not build this alone, so take care of your team,” Aronson says. Consider not only a nice bonus at the time of the transaction, but, if you are staying, consider stay-bonuses for 12, 24 and even 36 months out. They are your key to future success and happiness. “For your top people, these could be the largest checks they will ever see in their lifetime.”

See also: 

• Growth in 2019: Five common themes of successful independent insurance agents
• 7 cultural issues that drive insurance sales success