How succession planning can save your independent insurance agency

Here’s how a mindful plan can protect your business from severe financial loss – and preserve your legacy.

Unfortunately, it’s quite common for agency principals to not spend a significant amount of time considering the future of their agencies as it pertains to their exit. (Credit: Weitwinkel/Shutterstock.com)

The thing about independent insurance agents is that it isn’t just something they do – it’s who they are.

The people who endeavor each day to protect the interests of their clients take well-deserved pride in their work. They are tireless entrepreneurs, many of whom have spent decades building their book of business. Some are respected, recognizable figures in their communities. They sponsor a local little league team, lead local charity efforts or are involved with their chambers of commerce.

As such, successful independent agents tend to stay on the job into their golden years. After all, why give up the life of an agency principal when you’re still active, you enjoy your work and you continue to make money? The value of any business is its future earnings potential, and doing your best to add to that for as long as you can is a sound strategy.

Unfortunately, it’s quite common for agency principals to not spend a significant amount of time considering the future of their agencies as it pertains to their exit. They’ve led their business for so long that they can have a hard time picturing someone else at the helm, and discussions around who will succeed them often get put off for another day.

The problem is, in some cases that day doesn’t come – and when something unexpected happens to the agency principal, responsibility for the fate of the agency suddenly gets thrust upon their family. Quite often, that valuable business that took decades to build gets sold well below market value.

Having a succession plan in place can provide peace of mind to the principal, business partners, staff and the owner’s family. It’s the elephant in the room that agency owners can no longer ignore.

Why a successor is in your best financial interest

The average age of independent agency principals in the U.S. is 55, according to the 2020 Agency Universe Study conducted every two years by the Big “I” and Future One. While some experts will assert that age is probably slightly higher, 55 is still a good age to start thinking about what your endgame will be.

That may involve appointing an internal successor, bringing in a qualified person to fill the role, merging with another agency or selling. Savvy agents know that doesn’t mean you should wait until 55 to start protecting your agency. Contingency plans in the event of a life-changing event should be updated at every step of your agency’s development.

If your imagined scenario includes an eventual sale, here’s something you should know: You’ll likely end up with a bigger payout and incur fewer taxes by selling your agency internally (having someone succeed you and buy you out) than if you sold to a third party.

“You’re going to get less by selling outside your firm than selling inside because an outside sale most likely will be an asset sale,” said Al Diamond, president of Agency Consulting Group Inc. in Cherry Hill, New Jersey. “They’re buying your assets from your corporation. And you’re going to pay not only capital gains tax but greater income tax on the revenue that you generated. An internal sale is often a stock sale, and all you’re responsible for as the seller is the capital gains tax.”

One benefit of an internal sale is that if you negotiate properly, you can arrange for a much longer payout and accept smaller payments over an extended period of time, as opposed to a larger sum received up-front in an external sale, Diamond added.

The extended payout period also makes it easier for an internal successor to afford the payments with the agency’s cash flow, and it provides interest payments to the seller that increase their overall return. (The process of valuating your agency is extensive and full of considerations; for that reason, we won’t cover it here but check out our previous blogs on the topic for a deeper dive.)

Selecting a successor

In order to successfully navigate the waters of agency succession, agency owners need to have the full picture of their options and develop a comprehensive plan.

Reflect on the idea that someone will succeed you, not replace you. (After all, no one can replace you.)

Even if retirement seems a long way off, regardless of your age, agency owners would do well to develop a vision of how their eventual, ideal exit would look. At what point do you see yourself stepping down? (“I’ll know when it’s time” is not an acceptable answer.) Do you already have someone in-house to whom you’d like to pass the baton someday? Would you prefer to keep your agency intact and independent, and retain your staff?

Bear in mind that if you sell externally, you’ll have little to no influence on which of your CSRs or office staffers get to keep their jobs. If you feel a personal responsibility to the well-being of your people, that’s another reason to ensure that the next person to run your agency shares your concerns about keeping them employed.

Your successor needs to be someone you trust implicitly with every line of your agency’s financials, and with whom you can be completely transparent in all matters. While there are always intangibles involved, here’s a checklist of desirable qualities an ideal successor should possess in order for your agency to succeed beyond you:

While many agency principals say they would rather keep their business in the family, that’s not always achievable. Sometimes, having a son or daughter employed at your agency could prove a natural fit; in other cases, even the smartest heir might not be a qualified leader.

Whether it’s your progeny, another internal candidate or an agent you recruit specifically as a potential successor, you’re responsible for grooming them to assume the duties of running the entire agency. Every agency is different, and only you know the length of time required to train that person to take over completely.

Develop a detailed plan to facilitate a smooth transition for your employees. When it finally comes time for someone else to take the helm, craft an announcement for your clients. It’s vital to them that they know they can expect the same level of personal attention.

Don’t go it alone

A well-executed succession plan requires the counsel of a team of trusted professionals. These should include your business lawyer, your accountant, and a separate financial advisor if you have one. If your agency has an ownership structure in which others have a stake, they need to be included, as well.

Advice from others in your position is also valuable. Talk to fellow agency owners and discover how they’ve approached their succession plans. One of the advantages of being part of an agency network is having the opportunity to ask fellow members how they’ve handled it.

Likewise, a consultant can help answer any questions and can prove a valuable partner throughout the process.

In order to ensure the value of their agency, principals need to focus on continually enhancing their profitability to achieve higher levels of annual revenue growth – and this is where succession plans often get derailed. Even while continually working to build your business, the work must be put in to protect it.

Throughout the entire process of handing over the reins of your agency, even if it takes a decade or longer, plan for the best and prepare for the worst. Know that if something should happen to you, the timeline you’ve set could always be cut short. Flexibility will become key.

Creating a well-documented and well thought-out succession plan is one of the most critical investments you will make in your business to protect your family, customers and employees – and the legacy of all you’ve built will be preserved.

David M. Dawson, CPCU, is Regional Executive Vice President of Renaissance Alliance.

Related: