We can buy insurance for just about everything. There's no end to the crazy things people want to insure. Unfortunately, one of the greatest risks facing private businesses, the loss of value resulting from partnership disputes, is not insurable.
With such coverage unavailable, partners must essentially self-insure what is probably their most valuable asset. And that means they'd better practice incredibly good loss control when dealing with partnership issues.
Many agency disputes revolve around partnerships. These conflicts tend to be complex, and no single solution for them exists. The following suggestions may help your agency avoid potential partnership difficulties, however. Less conflict, of course, means more time to focus on the more enjoyable aspects of running an agency--like bringing in new business and making money.
Robert Frost wrote, "Good fences make good neighbors." That's because they delineate areas of authority and responsibility. That saying should be applied to partnerships. In their case, the fences are constructed not of stone, as in the Frost poem, but rather by the following materials:
--A buy-sell agreement.
--Job descriptions.
--A compensation agreement.
--A formal communication agenda.
Any agency with partners should include all four components from the start. Everyone must know where the fence is. The more detailed the agreements, the fewer misunderstandings. The more accurate the measuring of partner performance, the more accountability for results. The more accountability, the less chance for quarrels and the greater chance for success.
To those who claim that trust in a partnership is paramount and that formal agreements only undermine it, I say hooey. Yes, trust is always important. But eventually, trust almost always is tested. Then, the aforementioned agreements become vital. Let's consider them individually.
The buy-sell agreement: Every partnership probably has a buy-sell agreement. However, many I've reviewed have significant problems. Far too often an agency's attorney has taken a shortcut and written (or copied) a generic buy-sell agreement. Generic agreements frequently fall apart when any aspect of the arrangement is triggered. Usually they lack:
--A reasonable definition of value. I've seen agency value defined as everything from two times premium to the worth of the desks and chairs. Most attorneys simply do not know enough about insurance agencies to write a proper valuation clause. The definition of value can vary, but whatever is decided upon must be practical. (An article discussing definitions of agency value can be found on www.burand-associates.com.)
--Reasonable terms. Terms that demand the full cash price at closing are not realistic. It doesn't matter how delighted the partners are with the buy-sell agreement if it bears little resemblance to actual buying and selling practices and creates onerous obligations for those who continue to run an agency after a partner is bought out.
--A thorough "cause of sale" clause. Too often the only "cause of sale" specified in a buy-sell agreement is the death or voluntary retirement of a partner. That's too limited. A partner, or his or her heirs, should be required to sell upon the partner's death, incapacitation, disappearance, retirement, criminal behavior, loss of necessary licenses or even poor job performance.
That last item is almost never included as a cause of sale, but it's frequently the cause of major partnership blowups. Serious violations of law are not always addressed, either. Suppose your partner is convicted of a felony, but you're still joined at the hip with him because your buy-sell agreement has no provision for forcing him out?
Job descriptions: Just because "owner" follows someone's name doesn't mean he or she doesn't have a specific job to do. Most agency partners don't have job descriptions, however, so when they get angry with each other for allegedly failing to perform, who's to say who's right? Maybe one partner has gotten lazy--or maybe it's just that the complaining partner is a workaholic who expects everyone to keep his 60-hour-a-week pace. Without clear job descriptions and expected standards, there's no way to measure performance objectively.
Does one job description fit all partners? I hope not. If so, the agency is not taking advantage of each partner's unique strengths. Every partner will likely have sales responsibilities, but some will probably have specific management responsibilities as well. Duties and expectations should be set in writing, and one partner's performance should be monitored by the others.
Compensation: Like other employees, partners should be paid based on results. Primary compensation should never take the form of an equally shared agency bonus, since individual accomplishment is divorced from reward and friction inevitably ensues.
Formal communication: Direct, clear communication does not occur in a busy office where partners see each other only in passing. I've found partners communicate much more effectively if they commit to meet formally at least once a month. It's best to hold the meeting off-site--maybe at a restaurant or coffee shop--because communication is always better while breaking bread. Also, there are no interruptions or distractions, so the partners can fully focus on the discussion.
I also recommend a formal agenda. Otherwise, aimless chatter may be the result. Include discussion on financials, carriers, sales and personnel. Talk about annual goals.
In a perfect world, partnership insurance would be available. But since it's not, do what you encourage your clients to do when they self-insure: practice loss control to the greatest possible extent. Your agency will grow and your business will thrive. Good fences make good neighbors, and they also make good partnerships.
Chris Burand is president of Burand & Associates LLC, an agency consulting firm. Readers may contact Chris at (719) 485-3868 or by e-mail at Chris@burand-associates.com.
With such coverage unavailable, partners must essentially self-insure what is probably their most valuable asset. And that means they'd better practice incredibly good loss control when dealing with partnership issues.
Many agency disputes revolve around partnerships. These conflicts tend to be complex, and no single solution for them exists. The following suggestions may help your agency avoid potential partnership difficulties, however. Less conflict, of course, means more time to focus on the more enjoyable aspects of running an agency--like bringing in new business and making money.
Robert Frost wrote, "Good fences make good neighbors." That's because they delineate areas of authority and responsibility. That saying should be applied to partnerships. In their case, the fences are constructed not of stone, as in the Frost poem, but rather by the following materials:
--A buy-sell agreement.
--Job descriptions.
--A compensation agreement.
--A formal communication agenda.
Any agency with partners should include all four components from the start. Everyone must know where the fence is. The more detailed the agreements, the fewer misunderstandings. The more accurate the measuring of partner performance, the more accountability for results. The more accountability, the less chance for quarrels and the greater chance for success.
To those who claim that trust in a partnership is paramount and that formal agreements only undermine it, I say hooey. Yes, trust is always important. But eventually, trust almost always is tested. Then, the aforementioned agreements become vital. Let's consider them individually.
The buy-sell agreement: Every partnership probably has a buy-sell agreement. However, many I've reviewed have significant problems. Far too often an agency's attorney has taken a shortcut and written (or copied) a generic buy-sell agreement. Generic agreements frequently fall apart when any aspect of the arrangement is triggered. Usually they lack:
--A reasonable definition of value. I've seen agency value defined as everything from two times premium to the worth of the desks and chairs. Most attorneys simply do not know enough about insurance agencies to write a proper valuation clause. The definition of value can vary, but whatever is decided upon must be practical. (An article discussing definitions of agency value can be found on www.burand-associates.com.)
--Reasonable terms. Terms that demand the full cash price at closing are not realistic. It doesn't matter how delighted the partners are with the buy-sell agreement if it bears little resemblance to actual buying and selling practices and creates onerous obligations for those who continue to run an agency after a partner is bought out.
--A thorough "cause of sale" clause. Too often the only "cause of sale" specified in a buy-sell agreement is the death or voluntary retirement of a partner. That's too limited. A partner, or his or her heirs, should be required to sell upon the partner's death, incapacitation, disappearance, retirement, criminal behavior, loss of necessary licenses or even poor job performance.
That last item is almost never included as a cause of sale, but it's frequently the cause of major partnership blowups. Serious violations of law are not always addressed, either. Suppose your partner is convicted of a felony, but you're still joined at the hip with him because your buy-sell agreement has no provision for forcing him out?
Job descriptions: Just because "owner" follows someone's name doesn't mean he or she doesn't have a specific job to do. Most agency partners don't have job descriptions, however, so when they get angry with each other for allegedly failing to perform, who's to say who's right? Maybe one partner has gotten lazy--or maybe it's just that the complaining partner is a workaholic who expects everyone to keep his 60-hour-a-week pace. Without clear job descriptions and expected standards, there's no way to measure performance objectively.
Does one job description fit all partners? I hope not. If so, the agency is not taking advantage of each partner's unique strengths. Every partner will likely have sales responsibilities, but some will probably have specific management responsibilities as well. Duties and expectations should be set in writing, and one partner's performance should be monitored by the others.
Compensation: Like other employees, partners should be paid based on results. Primary compensation should never take the form of an equally shared agency bonus, since individual accomplishment is divorced from reward and friction inevitably ensues.
Formal communication: Direct, clear communication does not occur in a busy office where partners see each other only in passing. I've found partners communicate much more effectively if they commit to meet formally at least once a month. It's best to hold the meeting off-site--maybe at a restaurant or coffee shop--because communication is always better while breaking bread. Also, there are no interruptions or distractions, so the partners can fully focus on the discussion.
I also recommend a formal agenda. Otherwise, aimless chatter may be the result. Include discussion on financials, carriers, sales and personnel. Talk about annual goals.
In a perfect world, partnership insurance would be available. But since it's not, do what you encourage your clients to do when they self-insure: practice loss control to the greatest possible extent. Your agency will grow and your business will thrive. Good fences make good neighbors, and they also make good partnerships.
Chris Burand is president of Burand & Associates LLC, an agency consulting firm. Readers may contact Chris at (719) 485-3868 or by e-mail at Chris@burand-associates.com.
