A lot of agency principals speak with passion abouttransitioning the ownership of their agency to their employees,instead of eventually selling to or merging with another firm, butmy guess is that only a fraction of those who say their goal isinternal perpetuation will ultimately pull it off. Why? Because formany a lack of preparation will simply make it impossible–they willbe like out-of-shape athletes attempting to run a marathon.

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If pressed to explain how they'll perpetuate, many freely admitthey aren't sure whether they are on the right track. Preparing forperpetuation is complicated, and many don't even know where tobegin.

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There seems to be a real hunger among agency principals fordiagnostic tools to help them assess their firm's level of“perpetuation fitness” and for prescriptions to help remedy thoseareas where their perpetuation plan is ailing. What if there was a“Perpetuation Fitness Exam” that an agency could undergo?

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What would such an exam consist of? Of course, there would be abattery of tests, but the first thing the doctor would check is anagency's Weighted Average Shareholder Age, or WASA. Like acholesterol reading, if an agency's WASA is too high, it is likelyheading toward trouble. The lower an agency's WASA, the better.

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For most agencies the WASA can be easily calculated–simplymultiply each principal's ownership percentage times his or herage, and add up the results. The total is the agency's WASA. Anexample of a WASA calculation appears on this page.

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Long-Tooth Associates has a WASA of 55.3. What do you think–isthat healthy or not? In our experience, if that were a patient'scholesterol reading, he'd immediately be put on Lipitor!

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The second accompanying table provides some guidelines forevaluating your agency's WASA. We developed this chart afterreviewing the WASA readings for numerous clients–many of whichstill remain independent, and some of which have sold to a thirdparty.

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To give the benchmarks some perspective, we've compared them tothe more widely-known cholesterol ranges. Simply stated, the higherthe WASA, the less the likelihood that a firm will be able tointernally perpetuate.

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So, if the Long-Tooth principals in the accompanying example aretruly committed to internal perpetuation, they'd better get moving!The good news in their case is that they have a couple of 5 percentshareholders in their 30s who are champing at the bit to get moreshares.

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In other words, if Bill wants to get the firm's WASA below 50 (adesirable target), he can do so by selling an additional 15 percentpiece to both Mike and Steve. The third accompanying table showsthe impact of the sale on Long-Tooth's WASA.

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In our example, Long-Tooth's problem has temporarily beenalleviated by Bill's sale of a portion of his holdings, but ifadditional transfers aren't made, the problem will rear its uglyhead again in just a few years.

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So, what should a firm do if it wants to perpetuate internallybut has a WASA over 53? Here are some strategies:

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o Get stock in the hands of key employees in their 30s and early40s, even if you must be generous in offering financing terms onthe sale. And keep in mind that direct sales of stock between olderand younger employees are most efficient in pushing down the WASA(as shown in the Long-Tooth agency example).

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o If you don't have any key employees in their 30s and 40s,start looking!

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o Consider offering stock options to high-performing youngeremployees as a way to spread future growth in the value of thecompany.

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o If you are a shareholder nearing retirement, recognize thatthe longer you wait, the more flexible you'll need to be in pricingyour shares and in the terms of financing.

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Like any other statistic, the WASA is far from infallible as apredictor of a firm's ability to internally perpetuate.Nevertheless, if you are looking for a tool to stimulate some hardthinking about your perpetuation plan, the WASA is a pretty goodplace to start.

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If you've reached the point where you feel like giving up oninternal perpetuation, keep in mind that even if you plan onselling the firm to a third party, the most powerful way tomaximize the value of your agency is to position it to perpetuateinternally.

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Agency buyers know that the toughest possible competitor in theM&A marketplace is not another third-party buyer, but rather atalented and motivated group of key employees.

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