Perpetuation: It Isn’t Just a Money Thing

When agency owners think of perpetuation planning, they often think only of the financial aspect: Selling their agencies. In some circles, among some advisors, perpetuation planning is really another term for acquisitions. But perpetuation is much, much more than buying and selling an agency.

Years ago, many agencies were so small that perpetuation really was nothing more than a financial transaction. The buyers were large enough and the sellers were small enough that the seller’s book was easily absorbed by the buyer. Any people who came with the deal were interchangeable or soon expendable. The sellers were so small, infrastructure issues were not a consideration. Those agency perpetuations really were just simple financial transactions.

The same basic story applied to many internal perpetuations. The agencies were small enough that management and leadership were – I hate to write this – of minimal importance. As long as the buyer did not screw up retention, the agency took care of itself.

Not so today. Larger agencies, more complex accounts and the economic downturn have seen to that. Agencies today will not manage themselves, so regardless of whether the agency is perpetuated internally or externally, successful perpetuation is no longer just a financial transaction. Leadership, management, and producer involvement on significant accounts are required for long-term success (short-term success can be achieved a myriad of ways through shortcuts). This has been a painful lesson for a number of large and sophisticated serial buyers of independent agencies.

For example, let’s say a buyer purchases a typical agency that will remain standalone. The agency has five producers, two former owners and likely another 10 people. In this size of an organization, management and leadership are definitely required if success is the goal. The former two owners are likely in their late 50s or 60s, so their timeline for managing and leading the agency is limited. The timeframe for finding and replacing them as managers and leaders is also limited.

Will a large corporation located someplace else, perhaps in another state, be able to successfully manage the agency? How will they manage local company relationships? Hire and train CSRs? Manage the daily activities of an office handling millions of commissions? The lesson some serial buyers learned, and others still need to learn, is that these agencies need local management and leadership.

Even if the agency could manage itself with just the help of the producers, the buyers need the producers to focus hard on production if the acquisition is truly to make an adequate return on investment. Additionally, under some serial buyers’ models, they cannot afford to develop and train enough new producers to take up the slack because this would cut too much into their profits.

It is interesting as an outsider to see firms that sold to large buyers several years ago facing significant issues now because the original owners are gone or going, and they have no one to perpetuate the relationships or leadership. Their position is absolutely no different from the one the original owners faced when they decided to sell. They did not know how to develop the people necessary to perpetuate the agency internally, so they sold externally. It seems some buyers thought new talent would develop by some miracle because they certainly have not made much effort to develop it cognitively.

The fact is, it takes three to five years to develop the skills to successfully perpetuate an agency, assuming the incoming leader(s) already has the necessary base skills and experience.

The incoming leader usually also needs time to learn the necessary accounting and report management. Even if the location is owned by a large entity, a local manager needs to know accounting. While tax issues may not be an issue, cost accounting and allocation quite often makes or breaks the local manager’s bonus. And while an internally perpetuated agency needs management to know how to get accurate, quality reports from the agency’s agency management system, an externally perpetuated agency needs a manager who can generate and read the same reports, plus all the additional reports home office will require.

Developing Management

Agencies, even many of the large serial buyers of agencies, still operate under the auspices that management is secondary, an afterthought. In today’s environment, developing management is the key to success, and developing managers and leaders is crucial to perpetuation. What is your plan for developing people who can effectively manage and lead people? Manage company relationships? Understand and manage accounting? What steps are you taking to develop people who can manage and lead the agency to take great advantage of those competitors who took shortcuts, have a leadership/management crises pending, and cannot afford to invest in the future?