Most agencies are not run as businesses. Most are run as a lifestyle. Lifestyles are personal, so perpetuation is not possible. Only true businesses can achieve internal perpetuation. Size is not a factor either because even quite large companies have tanked when they were largely dependent upon one single charismatic person and that person leaves.
I did not want to admit this for the longest time. My journey down the road to understanding why agencies are so difficult to perpetuate began with excessive optimism and the idea that perpetuation was a financial issue. I remember my first opportunity to assist in an agency’s internal perpetuation plan. I was excited. I had all kinds of ideas regarding how to finance it, decrease taxes, etc. I was going to be hailed a hero.
It did not happen. I learned about this IRS rule, Revenue Ruling 59-60. RR 59-60 applies to all family businesses. The rule was established in 1959. I find a huge percentage of agency owners and insurance company people promoting perpetuation still do not know this omnipotent tax rule exists. Again, it applies to 100% of businesses, even small ones. The rule dictates that a business can only be passed to the next generation at true Fair Market Value prices and terms. Period. There is nothing in the rule about size. Furthermore, for all practical purposes, it dictates that a qualified (which they define) third-party appraiser must appraise the business.
I initially did not have the credentials required even though I had the education. I then determined I would obtain what I considered the most useful but most difficult appraisal certification. I wanted to give my clients the best value and protection for their money. I still find appraisers today doing valuations for families that do not possess the required credentials which then jeopardizes the families’ estates.
I have done many valuations and transactions for internal agency perpetuations. I have had some successes. But honestly, I have not had enough success. That is because while I had expanded from thinking perpetuation was a financial issue to understanding that it was a valuation/tax/financing issue, I was still missing the point. Perpetuation is always, foremost, a people puzzle.
Good at Sales & More
One piece of the puzzle is that the future owner had to first prove themselves good at sales in addition to other factors. A young person must prove themselves good at sales to earn the respect of employees in a sales organization. This is especially true if the existing owner has a big book and will be retiring. Someone must maintain that book. Sales was, and is, a major step up to seeing perpetuation being successful, but it is not enough.
For a future owner, going from building a book and selling every day, to managing a big book, selling, running an agency, managing an agency and being a high-quality leader is hard. It is hard physically, especially relative to time management. It is hard emotionally, and it is tough intellectually. The challenge is even harder when the time frame for the transition is less than five years.
Understanding these difficulties, I built an eight hour training program, then I built a multi-year training program, and then I co-wrote a book on agency perpetuation all with the goal of helping future owners gain the knowledge and skills required to successfully take over and build their agencies. These new programs worked, but they only worked with agencies that had a certain kind of owner and a certain kind of successor. These kinds of agencies love these programs. The programs are the holistic education they know they need to successfully perpetuate.
Internal Perpetuation Difficult to Achieve
These agencies, though, are in the minority. I wondered why my program only worked with specific personalities. I had insurance company executives asking, too. I could feel the industry’s frustration building with the hundreds of agency sales to serial acquirers. I could not quite put my finger on why internal perpetuation was so difficult to achieve. I felt like I had checked all the boxes required to provide the best perpetuation services in the industry. Frankly, with enough time (and assuming all parties are reasonable), I can probably make the financial aspect always work. With my education program, management and leadership skills can be developed quite successfully for any agency that is run as a business.
However, that was the problem that finally dawned on me. A large percentage of agency owners do not want to run a business. They worked their life to build an agency that afforded them a business and personal lifestyle. This lifestyle included running the agency in a specific manner that purposely avoided becoming a true business. Some people might describe the lifestyle as not becoming corporate or giving people (themselves) freedom (meaning little accountability). I am not knocking what they have achieved (other than those agents who use trust monies for personal purposes).
However, perpetuating a lifestyle within the business environment is not possible. A business can be perpetuated but not a lifestyle. Agencies that are built to support a lifestyle, whether that lifestyle is relative to working short hours, not having true accountability (I have seen high-quality personality profiles that specifically show many owners are owners because their personalities are so resistive to accountability and therefore they become owners so they do not have to answer to anyone), or for a financial lifestyle, these agencies have to be sold to a third party. A third party sale is the only solution because agencies built for lifestyle purposes are hollow. Accountability is a strong foundation and the lack of accountability creates too weak of an organization to perpetuate.
Again, this is not just a small firm issue. Business courses and books show all kinds of examples of large businesses almost wholly dependent on one person that fail when that person leaves. I am not knocking building a personal lifestyle business. Nothing is wrong with this and in many cases, that lifestyle does include accountability to clients. The founder may love working with clients and being held accountable by them, but dislikes dealing with their own business. That is fine but perpetuating that agency is nearly impossible.
For the industry then, if personal lifestyle agencies cannot be perpetuated, what new agency development plan might? In some ways, the new insurtech distributors might present a bigger threat from this perspective than any other because they are largely designed to be a true business from the get-go.
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