Did you hear the one about the two daughters who were in the process of buying their retiring dad's insurance agency?

One was excellent at sales, the other, financials. It all sounded good until a consultant asked about the side deals the owner had made with fat-cat producers: contractors who weren't selling anymore, were paid high renewal commissions, and were given ownership of their renewal books — ownership that continued indefinitely. Worse yet, nothing was in writing.

Suddenly, the daughters had no clue of the firm's true value. There wasn't enough profit left to pay off their dad, buy out the non-producing contractors, pay themselves a salary or expenses and invest in technology, among other things.

Unfortunately, this story is real, and these awkward family hand-offs are happening right now all around the U.S., consultants say. Like the rest of the economy, most independent agencies are family businesses. Many wind up being acquired, sold or even shut down because retiring owners haven't developed written, sound succession plans.

Why perpetuate?

Tom Doran with Reagan Consulting says agents wrongly assume that, "An outright sale is such a slam dunk that you'd be foolish not to sell. But the typical annual investment return to an agency is often 15% or more. Even if you sold today at a premium, where are you going to reinvest the sale proceeds to get a 15% annual return?"

"Organic growth generates the best return that principals can get," agrees Dave Tralka, CEO of InsurBanc, which provides financing to independent agencies. More firms, he says, "are using available working capital credit lines to bring in new talent for a future perpetuation or to work out a non-compete contract." They don't strain the operating budget to pay for the transition period.

Start yesterday

If you didn't start the succession conversation yesterday, begin talking today. Succession begins with identifying one or more future owners who will be part of the plan.

"If you want to retire in 10 years' time, you're in luck. That's how long it takes for a well-crafted agency perpetuation plan to come together," explains agency consultant Mary Eisenhart, with Lincoln-Neb.-based Eisenhart Consulting Group. The transition period allows time for the new owners to learn, grow and make mistakes with a safety net in place.

Get real

Don't wing this. Succession plans take financial resources, generated by outside capital or inside profit. Find advisors who can help you navigate the process and hold you accountable for executing the succession plan.

Getting a fair, professional valuation of your firm is an absolute must for tax and legal purposes. There are about a dozen firms or individuals that specialize in independent agency valuations, and figure on spending at least $5,000 on that.

One of the biggest drains on agency profitability is "producers who don't produce," says Eisenhart. "You've been paying those producers 40% renewal commission — even on those little accounts? I say forget it, you're going to be paying 20%, and nothing on small accounts."

Build a bench

Tralka says baby boomer owners often regret not identifying future owners earlier. "They say, "Gee, if I had invested in person A or person B, I would have had more options.'"

Doran sees a perfect storm: Owners in their late 50s or early 60s and a lack of younger producers. "It becomes a numbers game, and it's tough to transfer that much stock at one time. If you have four owners who want to head out, there are not enough young buyers. We need to get better, and we need to get younger."

Furthermore, the succession discussion needs to delve deeper than the ownership level, says Laura Deeley Bren, president of Willards, Md.-based Deeley Insurance Group. "Constantly reassessing your team and reinvesting to deepen your bench of great employees enhances your relationships with your clients," she says.

It takes patience

Deeley Bren joined her father as an agency partner in 2016 after running the operations for more than 10 years. Patience was key, she recalls. "It was 17 years of effort. I was 27 years old, I had three years of experience, and I was a daughter of the owner. It was a trifecta of nepotism and lack of experience. It was a challenge for anyone to embrace.

"But it forced me to have some humility and to ask a lot of questions and decide the path we wanted to go down," Deeley Bren adds. "If you stay focused and are willing to work hard, the result will be clarity and peace of mind for you and your entire team."

Continue moving

Once agencies establish their succession plans, they should continually reevaluate them. Maintain some element of transparency so that employees have confidence in their future with the company, and clients can solidify their trust in you.

This open conversation can help define a positive and desirable company culture. For example, Deeley Insurance Group took on a complete brand refresh. Marketing messaging and the online presence were overhauled to resonate more with the target audiences the agency wanted to grow. "We transitioned our voice to a more direct, conversational tone — one that we felt was ready for the future," Deeley Bren said.

Deeley Bren says she struggled to delegate when she first assumed a leadership role as the next generation. "Giving up control doesn't mean you give up control of the vision and direction. You give up control of the day-to-day pieces. You hinder the progress of people around you when you maintain day-to-day control. I had to learn to let things go along the way."

Peter van Aartrijk ([email protected]) has worked with independent agents for 35 years and is founder of Aartrijk, a Fairfax, Va.-based communications firm focusing on independent agents.

These opinions are the author's own.

See also:

Insurance sales secrets for millennial agents