Does Your Agency Have a Perpetuation Plan?

For many agencies the answer to the above question is no and that can lead to a lot of problems when it comes time for one or more of the principal owners to retire, which according to research done by Reagan Consulting will be sooner rather than later for the majority of agencies.  In a presentation that was given to one of my clients recently they reported that the average age of agency owners was 54 and that this average age had increased by three years over the period from 2008 to 2014.  Their Private Ownership Study, completed in 2010, was the basis for the presentation made to my client on the elements of a successful perpetuation plan.

In the past few months, the IA newsletter has contained a couple of articles on different aspects of perpetuation plans.  One of them discussed the three major types of plans, sale to family members, sale to other owners or employees, and sale to an outside third-party (which is more of an exit strategy than a perpetuation plan).  Each of them has their advantages and disadvantages.  The first two ensure continuity of operation of the agency, but can falter if no family member is ready to take over and successfully run the agency or there are disputes among family members.  Similar lack of readiness or disputes can also derail the sale to other owners or employees, and in both instances there may not be enough cash flow to support a buyout of the retiring principal owner for a valuation that is acceptable to that owner.  The sale to an outside third-party would most likely result in the highest amount paid to the retiring owner, but there would be no guarantee that the agency would continue to be operated as before or that the jobs of employees who may have worked for the agency for many years would be preserved.

The other IA newsletter article discussed the timing involved in implementing perpetuation plans, which timing would also apply to a sale to an outside third-party.  The consensus of the persons interviewed for that article was that implementing a successful perpetuation plan takes a minimum of five years.  The first and perhaps most important thing that must occur is for the retiring principal owner to decide what they want to see happen when they leave, which requires them to decide what they want to do with the rest of their life.  Do they want to stay involved with the agency in some way or would they prefer to devote themselves to some other interest or tour the world?  Such lifestyle decisions will be an important factor in how much money the retiring principal owner needs to get for their ownership interest in the agency.

Once the initial decision is made about what the retiring principal owner wants to see happen, they need to determine if their preferred outcome is possible and then develop a plan to reach their goal.  This is where the Private Ownership Study can be a valuable resource. It concludes that there are four things that must be in place for any perpetuation plan to be successful.  They are a healthy agency operation, a reasonable seller, able buyers, and an effective ownership transfer mechanism.   The Study explains what goes into each of these “Four Pillars of Perpetuation” and its Appendix C has a handy checklist that can be used to see where an agency may be lacking in the foundation for a successful perpetuation plan.  What should give hope to any agency principal owner who would prefer to transfer their ownership to family members, other owners, or employees is that doing what it takes to make such an internal perpetuation possible will also maximize the value of the agency for an outside third-party purchase in the event the internal perpetuation plan does not work out.