Perpetuation is a pretty simple word – 12 letters, starts with a “p,” ends in that nice warm feeling (“tion”). But perpetuation is a very complex animal, and one that needs tamed in every small business in this country.

I’m a 34-year-old owner of an independent insurance agency, and since 1996, when I began purchasing the agency, I’ve been asked about my perpetuation plan. When asked I would usually laugh and say I’m only 25, or 26. Perpetuation seemed like a dead issue with my age being what it was, and still is. Rereading my last sentence, and the words “dead issue,” I think that is what got me really thinking about perpetuation.

What the heck does my company do if I die on the way to my next appointment? As the sole owner of my company, this created a dilemma. Another item of note is that our main business partners are now pushing us for this plan. They have a major investment in our company and thus want to know what happens if there is a death or a retirement. They want to know just what our plan is.

Having just completed our company’s perpetuation plan, hopefully I can share some lessons learned – what not to do when completing the task of creating a plan for your firm.

The Who

The first issue you must deal with when perpetuating your firm is the who. Who is going to take your company forward when you decide to sell, retire, or die? Do you have an internal person or group that is capable of moving your company forward or must you look to an outside firm? Luckily, in our case, I have two quality employees that have proven their loyalty and have a keen grip on the vision of our company.

I must point out that in our particular situation the only plan that we really need to address at this point is my death. I have no interest in selling and I’m sure as heck not going to retire at my age – and thus, of all the perpetuation issues with which one one can deal, my single issue is death. As the years pass our plan will be adjusted to take into consideration other issues, but for now, the big D was our main issue.

In selecting the who many factors must be taken into consideration. Family issues, future children may want to have a stake in your company as well as the children of key employees if your company is a small family-type firm. Future key employees should be considered in that if you are a viable firm you will at some point be bringing in new blood, and a great selling point to this new hire will be participation in your company’s perpetuation plan. When designing your plan the most important thing in the who decision is twofold - Who now and who in the future. Allow your plan to be flexible enough to allow both “who’s” into your agreement.

Another Who

The next issue once you have your who is another who. Who is going to design your plan? It was at this stage in our process that I made a major mistake. For years I have been using an industry-specific law firm. It understood our issues and never failed to provide excellent advice. The firm is located about 90 minutes away and thus there was always that little travel issue. So, I thought a local firm could take care of this “little item.” At a local business meeting I approached an acquaintance and partner in a local, well-respected law firm. He said “no problem” and referred me to another partner who specialized in this area. Upon meeting this partner I had no doubt this would be an easy agreement to finalize and felt comfortable with his understanding of our industry and the mechanics of such an agreement. However, as time passed I frequently found myself retelling my firm’s story, the ins and outs of our industry, valuation models, salesperson compensation issues, etc.

Make sure in selecting your counsel for this agreement that you have an industry-specific firm. I’m very happy with the agreement which we ended up with and I am confident that it is not a “template agreement,” which was my fear in going with our old firm. Our process forced us to think about past traditional methods and create a plan that fit our situation. Had I went to my old firm I probably would have reduced the time it took to complete the agreement, but might have missed out on the creative aspect of the process. There are a few benefits of taking our course but having driven down this road, my advice is to stick to “your industry guy,” who ultimately will understand your issues and save you time and money.

Create Your Plan

Once you have your two who’s, it’s now time to create your plan. Since every business is different, every plan should match the uniqueness of each situation. Start your process in a big visionary way and then work out the details. As we began designing our plan we decided that we had two major issues to solve:

1. How do we transfer ownership in the event of my death to my chosen “knights”?; and

2. Since my “knights” had shown a little concern about my prematurely selling the firm, how do we best contractually eliminate this concern?

Let me tackle the second issue first. In our discussions, I said I’d never sell. “I love what I do; I’m only good at selling things, etc.” Wait a minute, my chosen ones thought. As other similar-sized companies sell for ridiculous amounts of money, if he takes the money and runs, where does that leave us?

Our solution came from a dear friend who suggested utilizing a first right of refusal. If you get an offer you can’t refuse, allow them to match that offer and if unable, sail off into the sunset. This seemed like a simple solution and it was. After a little discussion with my “who’s,” they agreed and we moved on to the next issue.
 
The next problem we had was how do we logically transfer ownership to these two “who’s” and still leave the door open for future “who’s”? We solved that issue in, I think, a pretty creative way. We agreed that at the time of my passing the sum of all “who’s” books of businesses would be computed. Each “who’s” percentage of this sum would then be figured and they would be responsible to purchase this percentage of the company’s stock.

To make sure they had the proper funds we used a little tool called life insurance and I’m happy to say that these “who’s” were able to buy multiple millions of dollars of insurance on me at the most preferred rate available. Let’s see, if you work out, watch those fried foods, and drink just the right amount of wine….you get the preferred rate. (Note to self: continue current behavior!) To address the future “who’s” we created a valued-employee agreement that was sales based and allowed for multiple people to become part of our plan.
 
To conclude, in the event of my untimely death, our company will be valued, the valuation will determine how much my spouse gets for the company and thus my family is financially taken care of.

The “who’s” are required to keep in force the life insurance and required to use that to purchase the company at the time of my demise. As the company continues to grow we constantly will review the amount of coverage needed, but in the event that the life insurance fails to cover the value of the company, we’re confident that some lending institution would step up and fund the remaining 10% or 20% shortfall, with the understanding that the same basic management team would continue our vision and running of our company.

If you’ve read this and do not have a perpetuation plan, pick your who and call your industry-specific law firm today and make your appointment. If you have completed this agreement, pull it out and make sure it is still what you need and that it is properly funded and still has the correct “who’s”. Perpetuation plans are good for you, your employees, your vendors, your customers, and your family.

VU faculty member Andy Thompson (andy@thethompsongroup.net) owns an independent agency in Parker City, Indiana, and writes regularly for insurance trade publications.