Perpetuation Planning: No Time Like ThePresent

All signs indicate that commercial property-casualty insuranceis moving away from the hard market of recent years and towardmoderation. Experienced agents might be asking, “Is now a good timeto begin my perpetuation plan?”

The answer hinges on what the agent wants their perpetuationplan to look like and how quickly they want it to happen,consultants say.

The moderating market could impact revenues and thereby decreasethe value of the agency, affecting a decision to sell outright. Butfor the owner looking to continue the agency and ease out of thepicture with a stock retirement portfolio, market conditions areless of a concern than making sure that good planning is set inmotion years ahead of retirement.

“Changes in the market cycle do affect an agency in terms ofpricing,” said Shirley Lukens, senior vice president and partner ofReagan Consulting, based in Atlanta. “In a hard market cash flowincreases and that does make it difficult to put a price on” anagency for someone who is looking to sell the agency.

However, a well-run agency puts itself in a league of its own,unaffected by market conditions.

“The opportunity never passes for a good agency,” noted Ms.Lukens. “If an agency is well run, and continuously enhancedthrough good management that returns profits to the agency, thenthere is never a bad time.”

She added that “someone always wants to get their hands on agood agency. Banks and regional brokers always want to buy suchagencies.”

The primary reason that a bank or broker makes an acquisition isbecause the agency fits into its expansion plans. A top-flightagency can get a premium price because “there is a real shortage ofreally good, well run agencies,” Ms. Lukens said.

However, for the average agency, she continued, the market cyclecan have a negative impact because its value has declined. It is amissed selling opportunity, she admitted.

During the hard market, “an average producer may feel it is agreat time to hold onto the agency,” she noted. “During the softmarket, the producer might begin to think about selling,” she said,adding that the agency lost value because it failed to make thenecessary reinvestments while it was flush with cash during thehard market.

The good agency, and the good agency owner, is someone who,during the better market cycle, has returned the extra profits intothe agency, investing to improve the agency with an eye towardinternal perpetuation. The best perpetuation plans, the consultantsnote, involve years of planning and working toward perpetuation, nomatter what the market is doing.

“You should never wait to plan,” said Al Diamond, president ofAgency Consulting Group Inc., based in Cherry Hill, N.J.“Unfortunately, some owners feel that formal planning is notworthwhile. They don't want to survey the forest; they just want tocut down the trees.”

A perpetuation plan should be started three-to-five years beforethe agent is looking to retire, he said. Agents who look to retirein less than a year usually end up selling their agency or mergingwith another agency, which normally entails the seller staying onfor an extra year to supervise the transition.

“Whenever there is a transition in the marketplace from onecycle to another,a certain number of agents throw up their handsand say, 'I'm getting out,'” Mr. Diamond said. “When agents are inthe throes of the hard or soft market, there is less [merger andacquisition] activity than at changeover of either” cycle.

However, if an agent does have internal perpetuation plans, asoftening cycle, bringing less profit to the agency, could have aneffect on the planning, noted Albert Lloyd, senior vice presidentat Marsh, Berry & Company Inc., the management consulting firmbased in Concord, Ohio.

“In the context of market softening, you have the same amount ofexpenses, but profits are down,” he observed. “This profit squeezemakes a lesser balance sheet, and this does not allow an agency togo out and get better producers, which is a prime ingredient to anyperpetuation plan.”

But it does not mean the plan won't work, so long as theprincipal remains committed to it, he continued.

“It's a process, not a transaction,” he advised, adding that inbringing in new people, the principal must teach them how to runthe agency, which takes time.

Bringing new blood into the agency also gives the principal moreoptions, he continued. The principal can look to sell the agency tothe new producer, at some point, or sell it outright.

New talent can help to increase the agency's value “because toan outside buyer, they can see more worth in an organizationbecause it has the people there,” he said. “Either way, it helpsenhance the value of the owner's stock.”

One problem with internal perpetuation planning, he admitted, isthat principals are having trouble finding new talent.

“That is why a lot of acquisitions are taking place?because theycan't find people to buy them out,” Mr. Lloyd said.

David Bauer, principal of Capital Bauer Insurance in Albany,N.Y., merged his agency in 2003 with the focus on the future. Inhis case, his partners are older and were looking for younger bloodto come into the agency.

Today, the firm has commission revenue of $5.2 million andemploys 33 people. The agency deals in personal and commerciallines insurance, employee benefits and a small amount of financialservices.

“We are looking for organic growth and to make acquisitionsregionally,” he said. “And we are looking for talent,” he added,noting that talented individuals can be 20, 30, 40 or 50 years old.“We are looking to build a sales organization and to build withmore sales individuals. We are also looking to diversify ourlines.”

As for the market cycle, he noted, it is not significant otherthan to ask oneself, “Do we have enough market to satisfy ourclientele, and will we be a viable organization 10-to-20 years fromnow? You have to get rid of your shortsightedness and ask yourselfthose questions.”

Mr. Bauer said he remains concerned about finding the people tokeep the agency going in the future. Companies are not bringing newpeople into the insurance industry as they merge and trim theirranks, and that is causing problems for independent agents andbrokers to recruit a new sales force, he said.

“The magic bullet is to find individuals in their early 30s whoare committed to this business and are looking for equityownership,” he noted.

“There is no recruitment from the carriers. That stopped about12 years ago. There's a vacuum right now that needs to befilled.”

“All agencies, regardless of size, are looking for perpetuationanswers,” he observed. In “the next five-to-ten years, it will beinteresting to see where we will pull these individuals from. It isgoing to be a challenge,” he said.

Reproduced from National Underwriter Edition, May 28, 2004.Copyright 2004 by The National Underwriter Company in the serialpublication. All rights reserved.Copyright in this article as anindependent work may be held by the author.