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Perpetuation or Succession?

Planning for succession can be very rewarding IF you have the right people behind you. It can be downright dangerous if you don't. The emotional rewards of passing your agency to your next generation is very satisfying as long as that generation desires and shows talents to do the job. If not, you are committing an egregious blunder that will affect your children for their entire (hated) career.

A number of years ago, we visited a family-owned agency in which both mother and father were involved. When we asked them of their perpetuation plan, they proudly pointed to their two daughters who were freshly involved in the family business. They planned the succession of their daughters into ownership. As with many such businesses, the owners presume and assume that their desires and expectations will become the reality of the future. As such, they simply do not consider other perpetuation possibilities, even to weigh their potential against the 'plan' that they consider most obvious.

This denial often results in opportunities lost that could have benefited the owners, their families, the agency, and its customers more than the original 'plan.'

In this case, over the years we had the opportunity to speak to the agency owners several times when mergers, sales potential, and association with financial institutions were available to them. Each time, the parents, from an emotional standpoint, resolved to pass the agency to their daughters -- to provide them a good living as it did to the parents. There is no way of knowing how the other offers would have played out since they were dismissed out-of-hand.

We recently received a call from one of the daughters. It seems that the parents are ready to retire and want to pass the agency to the two daughters equally. We had not been involved in the agency operations and had never had the opportunity to know the daughters. The story that the daughter told us was as follows:

"Neither my sister nor I had any desire to get into the agency business, but my parents insisted that they needed us when we graduated from college and the pay they offered us was good. My sister especially enjoyed the freedom she got from the position in the family business. She still has no particular love for the insurance business or for dealing with clients, but has developed a good grasp of automation in the office. Meanwhile, I was a CSR, producer, and backed up my mom and dad in the management of personnel and company relationships. I have achieved my CIC, CPCU, and will have my CLU this year. I have been active in the Association and know a lot of other agents. I have ideas about how to change the agency along with the times, but neither my parents nor sister want to hear about them.

"The fact that we still have few local competitors has kept us profitable, and our loss ratio is always good, so we seem to financially do better each year. My sister calls me a workaholic, but that is because she likes coming in late and leaving early.

"Now my parents want to give us the business equally. I love my sister and my parents, but I have done much more to assure the success of the business than my sister has and I feel that, without my parents as arbiters, my sister will take advantage of me and the situation, leaving me with the majority of the workload and taking half of the proceeds. I do not know what to do. My parents will not accept my idea of buying out my sister. They think that I'm being greedy. They think my sister does more than she actually does and she feels that she should have half the agency because she has put in as much time as I have."

The sister called me because she felt that I had her parents trust and she wanted to know if she had any other way out besides leaving and going to another agency or starting her own agency.

I won't tell you the end of this story. Unfortunately, this wasn't the first, and won't be the last, time I have been contacted with similar situations. This type of agency succession problem resolves itself in a variety of ways, none of which satisfies all of the parties involved.

Can you, for a moment, imagine your trusted family doctor bringing his child on to take over his practice in the future? What would happen if the child were found to have little or no interest or talent in the practice of medicine? Dad can put a great deal of pressure on offspring to follow in his footsteps. A college curriculum may point out this deficiency -- or it may not. I would not want to become the patient of one of these Succession Plans.

The point is that your agency is a means of earning a living for you and is also an asset that should provide you a return when you retire or decide to sell. There is a big difference between treating a business as a way of supporting your family and lifestyle and becoming so emotionally involved that the business becomes the reason for living rather than as a good way of supporting your lifestyle.

The parents in this example invested a revenue generating business with their dreams of the future for their children. They never considered the possibility that the children might not want to be in this business or that they might not be good in a service career. They could not accept that the equality that they had in the business might not fit their daughters' situation and they were certainly not objective in their view of their daughters' performance.

The key to succession of a family business is to set and monitor objective, realistic and measurable goals for the next generation every year. Measure, note and discuss whether or not the goals have been accomplished and why or why not. If the next generation's goals were being missed every year, why would you think that they could independently become more successful once they had control of the business? Setting, monitoring and discussing the goals and results every year will indicate the ability of the successors to manage objectives within the organization. Hopefully, this will prove that they are capable of managing when the parents are out of the picture.

However, owners and the next generation must learn to accept the fact that not all agents' children are cut out to become insurance professionals. Of course, this "Goal Setting and Goal Getting" process is perfectly suited to any agency employees who expect to become owners. Not only will they prove their skills and successes to the owners and to themselves, but also any agency with annual objectives will naturally become more successful than the "seat-of-the-pants" agencies that still abound in our industry.

The most difficult time in a 'Succession vs. (outside) Perpetuation' issue involves the regular investigation and analysis of alternatives to the generational succession plan.

Alternatives:

1. Under certain circumstances an agency sale will bring more and more secure funds to the retiring owners than they may get from turning the agency over to a generation that may deteriorate, rather than grow the agency.

2. Regardless of asset value, many agents' children would make very reasonable employees, but lousy owners. A merger or sale could accomplish the objective of cashing out the asset while still gainfully employing the children if those circumstances prevail.

3. Merger for Perpetuation - We have been involved in many mergers in which former competitors come together because one of the owners is the likely successor to the other, whether or not other offspring of either participant is involved.

4. Hiring your Successor - If you have no successors -- or if you recognize that your expected successors (family or not) will not be able to maintain the agency's integrity -- acquiring a talented producer, manager or even a smaller agency that has talented owners makes sense to strengthen your perpetuation plan.

5. Investigate any and all acquisition and Association opportunities - Even if you and your successors agree on the future of the agency, look at every deal offered. You always have the right to say no, but you can't evaluate your situation and value if your head is firmly buried in the sand whenever an offer passes by.