Pass it On: Planning Agency Perpetuation

By Gary W. Miller | September 5, 2005

A Modest Proposal for Transferring Your Agency to the Next Generation

Selling a small- or mid-sized insurance agency is relatively easy. An abundance of banks and larger agencies are salivating at the opportunity to get into the agency business or get a jump-start on growing their existing business. However, what if selling your agency is not your goal, but instead your plan is to perpetuate your business and pass it to your next generation of agents?

The two biggest problems associated with perpetuation are “mental” and “money.” First, these future owners need to possess the mentality of owners. Rising stars within the agency must learn not only to be successful in selling insurance; they must also view their relationship to the business as bigger than themselves and their paycheck. Tomorrow’s leaders within the agency must realize that the key to long-term success is in building an agency that:

  • Succeeds in recruiting and training talented young professionals;
  • Creates expertise within the agency in a variety of areas;
  • Encourages agents to generate new business, and;
  • Constantly looks for ways to increase owner equity and value.
  • Challenges in perpetuation
    Many small agencies get passed down to family members within the agency and still more are sold to unrelated third parties outside the agency. Perpetuation outside the family is a challenge. Typically, when the owner of a small agency gets together with the younger agents on the topic of buyout, discussions get stuck on the price of the agency and timing of payment. The existing owner expects to receive something similar to what would be paid in the sale of the agency to a third party, and the next generation does not have the cash.

    Incentives for owners to produce
    There may be several paths to success with respect to perpetuation, but here is one very specific method that has worked for a particular mid-sized agency that I will call “Gold Rush Insurance.” Gold Rush has approximately 10 shareholders, the largest of which has about 20 percent of the agency. Stock originally was distributed to the shareholders in exchange for their book of business. Each year, in addition to their individual commission percentages received on a monthly basis, shareholders of Gold Rush receive an annual profit distribution based in part upon their personal production and in part on their share ownership. The ownership-based distributions provide a real benefit to shareholders on an annual basis, as opposed to just if and when the agency sells.

    As the years passed following the creation of Gold Rush, its leadership realized it was possible for shareholders so inclined to sit back, relax and depend on their annual renewals and profit distributions generated by the efforts of the other owners for compensation, rather than aggressively seeking new business. The leadership realized that this was not only reinforcing negative behavior on the part of some shareholders, but further, it was not providing proper incentives for the hard-working owners or for the up-and-coming superstars who were not yet shareholders.

    Leadership of Gold Rush needed a plan that would cause the company to be owned by the people most contributing to the profits of the company, while fairly compensating those shareholders required to give up a portion of their holdings in a redistribution of the stock. The plan needed to be fair to everyone, because it had to be approved by all of the shareholders.

    The Biennial Agreement
    The foundation of the plan created for the company was the concept that agencies work best when stock ownership and percentage of production go hand in hand. If one shareholder owns all the stock but produces only a fraction of the business, it breeds contempt of the agents producing the business but not sharing in a fair portion of the profits. In order to achieve the goal of matching stock ownership with percentage of production, the shareholders of Gold Rush adopted what they call the Biennial Agreement.

    Under the Biennial Agreement, management of Gold Rush brings in a national consultant to value the agency every two years. The price of the consultant is not insignificant, but it is manageable and paid for by the company. The charge to the consultant is to tell Gold Rush what the agency would be worth if it was sold to a third party.

    Gold Rush takes that number and multiplies it by a factor of 80 percent, a discount designed to account for the general absence of liquidity and for the minority ownership status of individual shareholders within the agency. Gold Rush then compares in pure mathematical fashion the percentage of total shareholder production for which each shareholder is responsible to the shareholder’s existing ownership of the agency. If a shareholder’s existing ownership is within one quarter of a percentage point of total shareholder production, that shareholder is neither a buyer nor a seller of agency stock. Each shareholder whose production is at least one quarter of a percentage point less than his share ownership must sell back a percentage of his ownership, so that production and ownership match.

    The agency is the bank; it promises to buy back the excess shares for 80 percent of fair market value, payable over five years at a fair interest rate. The purchase price is funded by the purchase of shares by shareholders permitted to purchase additional stock, as described below. While shareholders may not be excited about being forced to sell some of their holdings, they are getting a purchase price that compares to what they might have received if the agency was sold.

    A list of shares available for purchase along with the price and a list of shareholders eligible to purchase shares are then distributed to all the shareholders. Those shareholders whose production exceeded their ownership by at least one quarter of a percentage point are then given the opportunity to purchase shares in the company. Like the sellers, they pay for their shares in five equal annual installments due about the time annual profit distributions are due to be passed out among the shareholders. Those shareholders who choose to purchase have reason to expect that the added distributions they receive each year with the increased share ownership will go a long way toward paying their annual note payments.

    Selling shareholders receive a lien on the shares they have sold to the company until the notes are paid, and buying shareholders grant a lien in favor of the company on the shares they have purchased. Selling shareholders receive what most consider a fair price for their stock; purchasing shareholders pay what the stock is worth but are afforded a reasonable time to fund their purchase. Ownership of the company is adjusted over a period of time such that it is vested in the hands of those shareholders who are best supporting the growth and prosperity of the agency.

    The agreement works not only for shareholders whose production slips, but also for shareholders who retire. The company buys back the shares of the retiring shareholder based upon 80 percent of the appraised value of those shares. For shareholders who choose to voluntarily reduce their ownership, the company has the option to purchase back the requested number of shares, but is not required to do so.

    Continued challenges
    This perpetuation agreement is not without its challenges. The possibility always exists that there will not be sufficient shareholder distributions to fund the money needed to pay for new shares for purchasing shareholders. There is also the possibility that the number of shares bought by the purchasers will not be roughly equivalent to the shares the selling shareholders are required to sell, a situation that would challenge the company in funding the price of the shares it purchases.

    Nevertheless, the agreement continues to work for Gold Rush. It provides a mechanism for getting ownership out of the hands of shareholders who are pulling less weight or who are choosing to slow down or retire, and it is getting ownership into the future of the firm. The Biennial Agreement is just one way to accomplish perpetuation, but it is working wonders for Gold Rush.

    Gary Miller is chairman of the Business Group of Boyar & Miller, a law firm located in Houston, Texas. He can be reached by e-mail at

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