What did Lance Armstrong most desire during all those years in the spotlight? Certainly he wanted to be a winner. But there was something beyond the immediate gratification of the yellow jersey and it’s something he has in common with many agency owners. Because of Armstrong’s steroid-abuse actions, the one thing he wanted the most — an enduring legacy — has been taken from him. And if agency leaders don’t pay attention to their own legacy, history could show them a similar fate. There’s clearly a challenge for most independent brokers with succession planning, so let’s talk about what you can do to help secure your legacy.

First, consider the following: A 2011 MarshBerry survey found that nearly 70% of agencies did not have a formal perpetuation plan in place. And other stats we track at MarshBerry are just as scary:

  • Average age of majority owner of stock: 58
  • Average percentage of the book of business controlled by producers over 50: 52% (compared to 38% for high-growth agencies)
  • Average weighted new business production by producers over 50: 47% (compared to 32% for high growth agencies)

Why do I point out these statistics? Because in the end, perpetuation is a process, not a transaction, and numbers do not lie. It takes time to create a plan and process, driven around generating free cash flow, building a balance sheet and hiring and training and mentoring young people. Often it takes five to 10 years to prepare what you hope will be a successful perpetuation. Yet so many agency owners wake up one day and think it is time to perpetuate — and then realize that they can’t. So they either watch the value of their agency diminish over time or sell to a third party.
What are the reasons and roadblocks to internal perpetuation? The same 2011 survey by MarshBerry indicated these major obstacles to internal perpetuation:

  1. Financial issues: 34%
  2. No candidates: 19%
  3. Risk-averse owners: 16%
  4. Risk-averse candidates: 11%
  5. Believe best deal is external: 11%
  6. Lack of communication: 8%

Hanging-on syndrome

Just like the once-star athlete who will not retire gracefully, the insurance industry is filled with aging owners who, despite their best intentions, refuse to transfer stock, retire or hand over leadership. The ego often creates this roadblock.

I have seen far too many examples of owners who hire the right talent, train and mentor them, all along giving them the promise “someday when you own the agency.” While in the end, those words become hollow. When talented employees join an agency with the goal of one day owning and managing it, I feel that nothing destroys morale more than seeing the aging star athlete, in this case the owner, staying in the game despite declining skills, lack of intensity and, candidly, while it has all begun to pass them by.

‘Need the discipline’

The ability to perpetuate can often create a harsh reality. The reality is that most agency owners view perpetuation as an event, rather than a continual process. This view leads to an external sale for many agencies that had dreamed of an internal perpetuation because the owner lacks the discipline to continually reinvest in the agency. To perpetuate internally, agencies need the discipline to:

  1. Develop, execute and implement a long-term business plan related to perpetuation;
  2. Continually reinvest in all staff personnel, not just production;
  3. Build an internal market with realistic sellers and risk tolerant buyers;
  4. Focus on financial metrics and best practices;
  5. Operate the business like a business, not as a lifestyle firm;
  6. Be willing to let go; and
  7. Continually transfer stock.

Securities offered through MarshBerry Capital, Member FINRA and SIPC.

Lieblein is executive vice president of MarshBerry in Harrisburg, Penn. and EBA Advisory Board member.

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