There is a tsunami bearing down on the insurance industry.

The epic devastation of such a storm will not be unleashed by insurtech, autonomous cars or regulatory changes.


Our great ruin will be succession.

…or rather our complete disregard for succession planning.

Over my 12 years in the insurance industry, both as an independent agent and the CMO of Agency Nation and the Trusted Choice Platform, I’ve come to believe there are three operational issues plaguing our future success:

This is the second article in a series addressing these three obstacles to insurance industry growth.

Why haven’t we solved these obvious operational issues?

[tweet_box design=”default” float=”none” inject=”#insurance” excerpt=”Succession planning takes hard work and deep thought with no immediate result.”]Solving these types of obstacles takes hard work and deep thought with no immediate result.[/tweet_box]

Despite this, we must make solving these obstacles a priority in order to maximize agency performance (and value).

According to Kevin Stipe, president of Reagan Consulting:

“The most valuable agencies in the industry are those that can actually perpetuate themselves.”

But it’s not like successful agency perpetuation candidates are just waiting around for you to retire.

According to a study done by David F Archer, a faculty member at Stanford Graduate School of Business, only 25% of executives surveyed agreed that there was an adequate pool of ready successor candidates for the CEO position at their companies.

“Most company directors greatly underestimate the difficulty, time and cost associated with CEO and C-suite succession planning.” 

Companies plan for succession to “reduce risk” rather than to “find the best successors.”

And thus, because change creates risk, we put off succession planning to focus on more immediate operational concerns.

Until it is too late…

Successful Succession Planning

From a study done by Reagan Consulting:

successful agency perpetuation – whether it is a sale to a thirdparty or an internal transaction – is about protecting the owners’ ability to choose their direction, without having their range of choices limited by factors or circumstances that could have been prevented.

[tweet_box design=”default” float=”none” inject=”#insurance #successionplanning”]The goal of succession planning is for ownership to control their own destiny.[/tweet_box]

READ NEXT: Why It’s Time to Stop Acting Like Independent Agents and Start Acting Like Business Owners

How to Fail at Succession

Here are just a few of the things that can go wrong during agency perpetuation:

  • Ownership Transfer Issues – Often agency ownership is interwoven with personal ownership (i.e. building ownership, automobiles, equipment, etc) which can have tax and valuation implications.
  • Carrier Issues – There is no guarantee carrier appointments will carry over to new ownership.
  • Licensing Issues – New ownership must be properly licensed to continue current agency operations.
  • Product Knowledge Issues – What product knowledge needs to be transferred to new ownership in order to maintain current success?
  • Agency Operations Management Issues – How will operational and process knowledge be transferred to new ownership?
  • Agency Accounting Issues – How will knowledge regarding the financial statements, budget, payroll, payroll taxes, and cash flow of the agency be transferred to new ownership?

Oh, and I didn’t mention the always most difficult aspect of succession planning, agreement on a sale price.

Yeah, that little thing.

fail at succession planning

Here’s the deal, all of these issues are very solvable. They just take proactive work and planning.

[tweet_box design=”default” float=”none” inject=”#insurance #valuation”]Silence on succession can destroy relationships, valuations and your future happiness.[/tweet_box]

How to Win at Succession

successful succession planningStop what you’re doing right now and begin the conversation (with relevant internal stakeholders) on succession planning.

That is how you win.

According to the Big I Agency Universe Study, there are three main methods of perpetuation:

  1. Children or other family members take over (38%)
  2. Other principals buy all or part of the current principal’s interest (29%)
  3. Outside party or organization buys out current principal’s interest (24%)

However, in order for any path to be yield a position result, planning must begin at least 5 years out from the transfer effective date.

If legacy is a consideration, keep your mind open to Gen X and Millennial buyers.

Many Baby Boomer agency owners are choosing large national brokers and private equity firms over younger (less experienced) buyers.

Although multiples may be smaller than what you can get from a PE firm, next-generation owners customer experience may mirror closer to what your customers have come to expect.

The Rub

In order for succession planning to be successful, you must begin the process well before you’re evening considering retirement.

That’s the hard part.

You must be proactive. This is the only way you’ll be able to choose your own destiny while maximizing the value of your agency.

As I know Westfield has a tremendous perpetuation program, I asked Chris Cline, Distribution Leader at Westfield Insurance, to share his thoughts on agency perpetuation:

chris cline westfieldPerpetuation has long been one of the most pressing challenges our industry faces.  But today, the challenge is unique.  It’s not hard to see why many privately held agencies are torn on how to ensure the succession of their agencies, staff, and customers.

Here’s the good news.

More agency principals are being proactive about perpetuation. However, many are realizing it’s actually much harder than they thought for two key reasons:

  1. They haven’t made the investments in hiring the next generation of leaders
  2. They don’t have a well-established a transition plan

Even when work is underway, the internal operation processes, technology, culture, and compensation, tend to generate lower margins making it hard to execute and financially difficult to transition internally. And some lower performing agencies are faced with making decisions out of necessity rather than strategy.

Unfortunately, when nearing retirement, agency owners may find it’s more financially advantageous to sell their agency outright rather than internally. 

This realization can cause even more uncertainty about which path to take.   Westfield has relationships with many of the larger agencies/buyers, but we prefer to remain neutral on suggesting a particular path. 

Instead, our goal is to provide information and tools to help owners make the best decision. Key questions include asking what owners value most and what they want out of the deal. 

If it’s simply the highest amount of money, the answer may be clear.  But many value the family/local brand legacy and would like that to continue. 

Westfield welcomes the opportunity to help owns think through the important topic of perpetuation.

I’ve personally keynoted two Westfield perpetuation events and they’re certainly an amazing resource.

Our industry needs it’s great independent agencies to perpetuate.

You need to make sure your family is financially sound after retirement.

Please begin the succession planning conversation today.

Thank you,

Ryan Hanley

P.S. join over 10,000 insurance professionals receiving the Agency Nation Newsletter.

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