As agency owners, we have been told that, from the moment we start our agencies, we should be thinking about our exit strategies. But if that's the case, then why do so many of us drag our feet when it comes to succession planning?
Usually, we say we are too busy to plan our retirement. We believe that if we spend too much time focusing on the future, we'll lose sight of what our agencies need today. But if you want to ensure your agency's long-term stability and avoid the painful sting of selling your biggest investment at below market value, then you need to start creating a strategic succession plan right now.
See also: 5 Key Mistakes in Long-Term Planning
Why a succession plan matters
We work in an industry built on a foundation of risk management. So, it's fascinating that many of us sometimes don't see the value of creating our own contingency plans. I know this firsthand. I'm "that guy" who waited to buy a life insurance policy until after the birth of my first child — and I've been in this industry for more than a decade.
In the same way a life insurance policy gives you confidence that your family will be cared for financially, a succession plan gives you peace of mind about your agency's future. It prepares you for the unexpected, such as a life-changing diagnosis or an abrupt change in your personal circumstances. It also provides an off-ramp when the day comes that you're no longer motivated to come into the office each day. Plus, it ensures the continuation of your life's work, allowing you to leave a legacy for future generations.
Adopt a future-focused mindset
The first step in creating a succession plan is to change your perspective. If you are an owner who believes you're irreplaceable, you're not thinking about your role correctly. Instead, you should aim to create an agency that's so efficient it can run without you. When you make this mindset shift, you free time to set the strategy and vision for your agency.
Next, start building your agency's bench strength. Identify a core group of employees capable of taking the reins should you leave tomorrow. Then, create well-documented processes and procedures — and socialize them agency-wide — so all employees can contribute to the agency's success.
Move beyond "dump and run" thinking
Sure, when it comes time to retire, you might find a large broker or a private equity company that will write a big check for your agency up front so you can walk away free and clear of any future responsibility associated with your agency. But while it's possible, it's not probable.
Most succession plans involve selling the agency to a family member, shifting ownership to an internal management team, or selling to another agency. In most cases, these deals will require long-term financing, whether through a Small Business Administration loan or other means, indicating that your successor will likely be using your agency's cash flow to pay you partly upfront, with a deferred amount paid over multiple years depending upon the specific terms of your deal.
You could also choose to sell a percentage of your agency — say, 80% — and roll the remaining 20% equity either into your agency or the larger organization of which you become a part. With this approach, you essentially become a minority investor in your former agency or the larger organization.
To account for these scenarios, consider the value of your investment two to three years after the deal closes. Make sure there's a clear path to how you'll be able to liquidate your equity when that time arrives.
See also: The Long Game of Inflation – Dynamic Portfolio Strategies
Go beyond the valuation
Getting an accurate valuation is a critical step in succession planning, whether planning for internal (e.g., family or management) or external (strategic or private equity) perpetuation. It's also incredibly important to ensure that the company buying your business is a cultural match with your current agency. This is an area that too many owners overlook, often to the detriment of their agency's transition. If your successor and their organization don't match the values, principles, and work ethic of your current agency, conflicts will ensue, hurting business results. And if your exit deal is built on ensuring a certain level of financial success — or if you choose to stay on as an investor or adviser post-deal — you'll feel the effects directly.
Plan for a seamless transition
A strategic succession plan will help you avoid the potential pitfalls of agency transitions. Follow these five best practices when building your plan.
- Set a timeline. Ask yourself today what an ideal retirement looks like. Then, map a path to get there based on your financial goals.
- Find worthy successors. Determine whether you will look internally or externally for successors. If you choose to sell externally, start networking. Ask potential suitors about their operations and their culture, and seek professional references from your carrier partners.
- Gather multiple perspectives. Ask recently retired agency principals and small business owners how they planned their exit strategies. Seek resources from agency alliances and other groups.
- Partner with experts. Create a team of specialists who can help you execute the deal. Choose an attorney and a CPA who works on mergers and acquisitions regularly and enlist the help of investment bankers or brokers to help guide you through the transaction process.
- Review your plan regularly. Do so at least once a year to make sure your plan still matches your goals. Also, review your plan any time you make a material change in your agency, such as bringing on a partner, acquiring another organization, or losing a major customer.
Start planning your exit today
Don't let the pressures of day-to-day agency business derail your future financial security. By crafting your agency's succession plan today, you'll give yourself plenty of time to adapt, adjust, and refine that plan and ensure a smooth transition into retirement (or your next career).
