A White Paper from Oak Street Funding
Successful Succession
Develop a
plan to reward
yourself for
years of
hard work
White Paper: Successful Succession
Successful Succession:
Rewarding yourself for years of hard work
Are you ready for the next step?
You may greet every new workday with a smile, a spring in your step,
and the satisfaction that you’re doing exactly what you want in life. Or,
you may look at that first cup of coffee as the fuel that gives you just
enough energy to drag yourself into the office in the morning.
There will be a day
Either way, you’ve probably given some thought to what comes next.
when unlocking the
be part of your daily routine. When that happens, what will you do?
There will be a day when unlocking the agency’s doors isn’t going to
agency’s doors isn’t
There’s no right or wrong answer. Some insurance agency owners
going to be a part of
taking time to find the biggest bass in a favorite lake. Others may see
your daily routine.
envision a relaxing life with a daily stroll on well-manicured fairways, or
the next step as a second chance to do something they’ve always
wanted to do or envision a gentle transition, with a family member or
employee gradually picking up a bigger share of the responsibility.
Selling your agency is an obvious solution if you are planning to retire
or want to start a new venture. It may also be an attractive choice if you
are in your 50s or 60s and are thinking ahead to retirement, but do not
want to end your career abruptly. Other common reasons for giving
thought to the next step include the following.
•
You want to scale back the time you spend on the business.
•
You’re unable to risk personal capital or generate the capital
required to take your business to the next level.
•
You want the advantages of being part of a larger company,
such as greater management depth, more advanced
technology or better financing.
•
You want to provide your management the opportunity to take
the agency to the next level.
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White Paper: Successful Succession
No matter what your personal motivation may be, you’ll probably want
to “exit” your business somewhere along the way. It’s something that
demands serious thought because it can have big implications for your
family’s financial health, your employees, your valued clients, and how
much of your hard-earned work ends up in Uncle Sam’s hands.
That’s why it’s important to have an exit plan. As business succession
expert Bob O’Hara notes, having a plan doesn’t mean that you “must
chisel, in stone, a departure date from your business.” Instead, he
explains, exit planning involves taking steps “to make your company
Most exit plan
failures are due to
lack of a written
succession plan.
increasingly valuable — whether you plan to stay or leave.” 1
Why do you need a plan?
You may already have a good idea of what you want that next step to
be, so what’s the point of developing a formal plan? As with so many
things in business, if you don’t manage a situation, it may end up
managing you. Instead of being in control of your exit, you may find
yourself in a crisis situation.
The U.S. Small Business Administration says that most business owners
who approach exit planning unsuccessfully do so largely because they
don’t take the time to develop a written plan that:
•
Spells out the specific objectives and how they’ll be achieved,
•
Considers finances and other aspects (such as business value
and employees),
•
Includes a detailed list of tasks that must be completed as part
of the plan, and
•
Identifies specific dates for each task and the individual who
must complete them.
2
For most agencies, the best type of exit plan is a succession plan. After
all, your book of business won’t disappear the day you walk out of the
office for the last time. You may transition the business to a family
member or a trusted employee, or you may sell it to another agency.
To ensure that those actions achieve your objectives, you need a
succession plan that addresses:
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White Paper: Successful Succession
•
How you’ll transfer control of the agency to the next owner(s).
•
How you’ll transfer the agency’s assets to the next owner(s).
•
Who the owner(s) will be and how they will be chosen.
•
How you’ll determine a fair value for the agency.
•
How you (or your heirs) will be compensated for that value.
Rick Dennen, President and CEO of Oak Street Funding, says that many
agency owners create succession plans as a way of continuing their
dreams for the business. “They can enjoy the reward of passing the
agency to the right people who can keep the culture and values intact.
They can also be sure that their customers, who oftentimes are their
friends as well, will continue to be treated well.”
3
When should you start planning?
Remember when you were in elementary school, and the teacher kept
imploring you to take your time and be careful so you’d make fewer
errors? That advice also holds true when it comes to succession
planning.
Giving yourself enough time to plan means that you’ll be able to think
through all of the aspects carefully. It also reduces the risk that you’ll
be backed into a corner by external events, such as a serious illness in
the family. Once you develop your plan, a gradual transition will
protect the health of the business and reduce the stress of everyone
involved, including your employees. When people know what is going
to happen — and when — they tend to worry less, so they’re more
productive and better focused on the objectives you’ve established.
According to a study by NFP Advisor Services Group, merger and
acquisition consultants say that the ideal amount of time for
transitioning ownership of a financial advisory practice can be as long
as ten years — although in practice owners assume that five or fewer
years is sufficient.
4
Oak Street Funding’s Rick Dennen says that it takes a minimum of two
to three years to properly prepare an insurance agency for a transition.
“There are a variety of concerns to consider, including the tax
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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.”
5
No matter how long your timetable may be, review it periodically to
make sure that you’re accomplishing all of the goals in a timely fashion.
You may need to adjust your activities as a result of changes in the
business or your life.
Who will succeed you?
People may tell you that you can never be replaced, but it’s a fact that
someone can succeed you. That brings up two other advantages of a
succession plan: you can have some say in who that successor will be,
A plan gives you
and you can build in time to prepare that person for the eventual
transition.
the ability to have
According to an American Family Business Survey (conducted by Mass
some say in who
Mutual Financial Group, Kennesaw State University, and the Family Firm
Institute), just over 45 percent of the owners of closely held businesses
your successor
who planned to retire within five years had chosen a successor. That
with be.
next six to eleven years.
number drops to 29 percent among those who expect to retire in the
6
No two agencies are exactly the same. That’s why it’s important to take
the time to envision the future you want for your agency. Should it stay
in the family? Should you sell to employees? Your situation will help
you narrow your options.
FAMILY MEMBER?
It’s common to look at a child or other family member as the logical
successor, but as some agency owners have discovered, children may
have plans of their own. Or, it may be that your child’s personality or
skills may not be well-suited to the tasks associated with running an
agency. (And trying to force the development of those skills by
throwing an unprepared individual into the proverbial fire rarely ends
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White Paper: Successful Succession
successfully or pleasantly.) So it’s important to be sure that the family
member is both qualified and eager. A caution: only about 30 percent
of family-owned businesses survive in the second generation’s hands,
and less than 15 percent make it to a third generation.
7
PARTNER?
If your business is already a partnership, one of your partners may be
interested in acquiring your share. In fact, your partnership agreement
may already include language that facilitates a transition.
EMPLOYEE?
Perhaps there are one or more employees who have served you and
your clients well. Giving them the opportunity to become owners is a
way to reward them for their commitment and a way to ensure that
your clients will continue to be served by familiar faces. As with family
members, it’s important to ensure that employees are both qualified
and interested.
OUTSIDER?
Another local agent may have an interest in expanding his or her
business. Or you may find a complete stranger who wants to buy you
out. Some agents contract with qualified business brokers. One
particularly handy (and free) resource to consider is Oak Street
Funding’s Agency Exchange (www.osfagencyexchange.com). It’s an
online marketplace that allows you to list your business for sale and
potentially allows you to connect with thousands of motivated buyers.
Oak Street’s team can also refer you to advisors who can help.
What’s your role in the plan?
The fact that you’ve been able to sustain (and maybe even grow) your
business in a tough economy says a lot about the leadership you’ve
provided. As you implement your succession plan, that leadership will
continue to be important, whether that’s in terms of making sure that
your successor develops the knowledge he or she needs to succeed,
helping employees through the inevitable changes, or making sure that
current clients continue to be comfortable.
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But be careful of how much value you attach to yourself and your
professional reputation. As exit plan expert Bob O’Hara notes, “If you
are irreplaceable, then your business has little value to a third party and
cannot be continued by insiders. For a business to have value in
anyone’s estimation, it must be able to thrive without you.”
8
That’s why part of your succession plan involves increasing the value of
your company while simultaneously reducing its dependence upon
you. For example, O’Hara suggests efforts to diversify your customer
base, sustain cash flow, and develop your team’s management skills —
all steps most businesses should already be taking.
Assemble your expert team
Increase your
Successful businesspeople usually become that way because they know
agency’s value
especially important when it comes to creating and implementing a
while reducing
dependence on
you at the same
time.
how to tap into knowledge and advice from a variety of experts. That’s
succession plan. Build a team of experts you trust, including your CPA
and attorney, and keep them involved throughout the entire process.
They will provide additional viewpoints and identify issues you may not
have considered on your own.
Your CPA is a particularly valuable member of that team, because the
income tax-related implications of a business transition can vary
widely. A good CPA can offer guidance on the best way to structure
the transition and ensure that you get the greatest benefit from the
proceeds.
Create a transition strategy
Once your succession plan is in place, and you know your timing, it’s
time to start moving toward making that transition a reality. The first
step is to take an honest assessment of your agency’s strengths and
weaknesses. For example, do you have state-of-the-art technology?
Strong producers under contract? Great carrier relationships?
Exceptional customer service? An excellent reputation? Look for ways
to enhance what you already do well, and develop strategies for
resolving other issues.
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Next, develop a clear understanding of your agency’s fair market value
— not what you might want to sell it for, but what it’s actually worth in
today’s marketplace. Even if you’re planning to transition ownership to
family members or employees, you need to know the underlying value.
Today, most agencies are sold at a price that’s driven by projected
earnings, risk and availability of financing, according to Michael
Mensch of Agency Brokerage Consultants. 9
EARNINGS. The common benchmark for earnings is EBITDA, which
refers to earnings before interest, taxes, depreciation and amortization.
To reach this important number, add your net profit, interest on debt,
income tax paid, depreciation and amortization, non-recurring
expenses and your salary and benefits. Next, subtract projected
expenses such as rent, employee compensation and any costs
associated with your departure. Mensch reports that the average small
agency may sell for up to four to five times its adjusted EBITDA.
10
RISK. As an insurance agent, you have a better-than-normal
appreciation of the role of risk. To a prospective buyer, understanding
the inherent risk in a purchase is critical. Among the risk factors today’s
buyers may consider are the following:
•
Declining revenue or earnings
•
Revenue concentrated in a few carriers, producers, or accounts
•
Revenue concentrated with non-rated carriers or substandard
markets
•
Low account retention or renewal commission base
•
Employee issues
•
High loss ratios
•
Poor recordkeeping
FINANCING. Few potential buyers (including employees) will have the
full purchase price close at hand. If you can help the buyer access
third-party financing, you stand a better chance of receiving the full
value for your agency. Financing also opens up the sale to a larger pool
of prospective buyers, which is essential for competitive bidding.
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White Paper: Successful Succession
Typically, the more money that can be borrowed to finance an
acquisition, the more likely it is that you will obtain the best price and
terms for your agency.
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PROFITABILITY. Another important factor in assessing the value of
your agency to a buyer is how your profitability and performance
compare to that of your peers. Joseph Totah, a former agency principal
who now heads AgencyEquity.com, recommends developing a
confidential summary that includes information such as:
•
Reports by client and by carrier on the book of business
•
Average policy count per household
•
Average premium per policy
•
Breakdown by line of business
•
Location of accounts
•
Accounts by premium size and by revenue size
•
Largest clients
•
Supporting documentation from carriers such as loss ratio
reports, commission statements and schedules. 12
You’ll also need to provide pro forma financials, which project future
revenue and profitability. Be sure these numbers don’t include onetime (non-recurring) transactions.
Structuring the transition
Before you negotiate a price and terms, it’s time to work with your
attorney and CPA to identify and develop the sale/transition structure
that best fits your objectives and tax situation. Three common
approaches are:
LEVERAGED BUYOUT. The buyer acquires a controlling interest in
your agency’s stock and finances most of the purchase price with a
loan. The agency’s assets are used as collateral.
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EARN-OUT. The buyer typically pays 60 to 80 percent of the purchase
price upfront, with the remaining 20 to 40 percent paid out over time
as the agency achieves certain levels of revenue or profitability.
SELLER-ASSISTED. The buyer makes a sizable initial payment and
gives you a note to cover the rest. You can choose to receive the
buyer’s regular payments on the note, or resell it at a discount to a
Access to capital
company that specializes in note purchases.
is often the key to
The buyer may need assistance in locating funding for the transaction,
taking advantage
ultimately benefits you). While many prospective owners look to local
and your business expertise may make the process easier (which
of transitional
banks as their first potential funding sources, most banks are hesitant
opportunities.
lending on balance sheet financials and collateral such as real estate
to lend money to insurance agencies. Banks normally base their
and inventory. An insurance agency’s primary asset is the future cash
flow that’s embedded in its book of business.
A more practical alternative is a lender that understands and focuses
exclusively on the insurance industry. With a loan from Oak Street
Funding, the buyer can borrow against the future commission stream
from the agency’s in-force book of business. It’s a solution hundreds of
agency owners have used to finance acquisitions and other strategies
for growth. Access to affordable capital is the key to taking advantage
of those opportunities, and Oak Street Funding has money to lend.
Oak Street can customize a loan for the buyer’s specific needs and
situation, from $10,000 to $10 million, with a term of one to 12 years.
The goal is to help insurance agents finance growth with minimal outof-pocket cost by leveraging the power of their agencies’ cash flow.
Learn more or request a free quote at www.oakstreetfunding.com or
1-866-OAK FUND.
Making the actual transition
The work doesn’t end once the papers have been signed. The transition
between owners is full of make-or-break moments involving carriers,
customers, and employees. Employees who aren’t buyers will want to
know that their jobs are secure and that they’re not facing significant
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changes in the work environment. The more time you devote to
sharing your plans throughout the succession process, the less
uncertainty they’ll face. That’s important, because their moods and
statements will have a significant effect upon what your loyal clients
think of the new owner.
Overall, clients want to be assured that their protection will not suffer
any disruptions, and that the acquisition won’t create any hassles for
them. If the employees are well-liked, customers will also want to be
reassured that they’ll continue to deal with the same friendly faces.
In addition, be aware that successful transitions often take less time
than anticipated. Before you know it, your former agency may be a
well-running machine that doesn’t need much of your time or advice.
While it’s a common reaction to feel unwanted and depressed, don’t. It
simply means you did a great job of planning for the succession, your
plan succeeded, and you can now focus on your dreams!
Oak Street can customize a loan for your needs and situation, from
$10,000 to $10 million, with a term of one to 12 years. The goal is to
help you finance growth with minimal out-of-pocket cost by leveraging
the power of your agency’s cash flow. Learn more or request a free
quote at www.oakstreetfunding.com or 1-866-OAK FUND.
The growth opportunities available to agency owners through smart,
sound, strategic acquisitions are limitless. Access to affordable capital is
the key to taking advantage of those opportunities, and Oak Street
Funding has money to lend.
The materials in this paper are for informational purposes only. They are not offered as and do not
constitute an offer for a loan, professional or legal advice or legal opinion and should not be used as
a substitute for obtaining professional or legal advice. The use of this paper, including sending an
email, voice mail or any other communication to Oak Street, does not create a relationship of any
kind between you and Oak Street.
Loans and lines of credit subject to approval. Rate may vary at any time. CA residents: Loans made
pursuant to a Department of Corporations California Finance Lenders License. Potential borrowers
are responsible for their own due diligence on acquisitions.
© 2012 Oak Street Funding
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White Paper: Successful Succession
1
O’Hara, Bob, “Why Should You Exit Plan When You Have No Plans to Exit,” www.exitplanning-edu.com.
2
O’Hara, Bob, “Getting Started in the Exit Planning Process,” www.exitplanning-edu.com.
3
Pillsbury, Dennis, “Succession Planning: The best time to start linking your agency to the future is now,”
Rough Notes August 2012.
4
Aite Group. (2012). The Efficient Frontier of Succession: Maximizing Practice Value white paper. NFP Advisor
Services Group, 2012.
5
Pillsbury, Dennis, op. cit.
6
“Statistics Talk: The Importance of Small Business Succession Planning,” Prudential Insurance, 2008.
7
“Plan Ahead to Pass Wealth to Your Heirs,” www.bizfilings.com.
8
O’Hara, Bob, “Why Should You Exit Plan When You Have No Plans to Exit,” www.exitplanning-edu.com.
9
Michael Mensch, “Preparing for selling an insurance agency,” www.agencyequity.com/
preparing_selling_insurance_agency.
10
Michael Mensch, “How to maximize the sale of your agency,” www.oakstreetfunding.com/Article.
aspx?ArticleID=11&CategoryID=2.
11
ibid.
12
Joseph Totah, “Key Statistics to include in your agency prospectus,”
www.oakstreetfunding.com/Article.aspx?ArticleID=13&CategoryID=4.
© 2012 Oak Street Funding
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