What’s your succession plan? Ensuring success for your business after you retire

When you’ve worked decades to build an agency, it’s important to plan how you’ll leave your small business—and turn over your legacy—when you retire. Developing a succession plan is one of the biggest decisions you’ll make in your career as an insurance agent. And experts say, the sooner you start planning, the better.

More than half (56 percent) of agents don’t have a solid succession plan, according to the 2021 State of the Senior Market Independent Agent Survey. Perhaps even more alarming is that 44 percent of agents over age 50 don’t have a plan.

Of those who do have a plan:

  • 43 percent plan to pass their small businesses on to a family member or friend
  • 29 percent plan to sell their business
  • 28 percent plan to let their policy renewals ride out until they’re gone

Starting the planning process

There are many reasons to create a formal succession plan. In addition to planning for retirement, it’s important to consider the unexpected like a serious medical issue or losing a partner. A smooth leadership transition is essential for maintaining customer relationships and continuity.

Here are some tips and ideas to start the process:

  • Start planning as soon as possible
  • If there’s more than one owner, discuss a shareholder or partnership agreement that details how equity would be transferred in the event of death, permanent disability, termination, or retirement of one of the owners
  • Consider your succession and exit strategy each year as part of your annual business plan, and update it as needed
  • Plan for a slow transition to adequately prepare your team and identify successors with intention
  • Consider grooming junior producers as leaders
  • Train and coach your managers and staff, and give them input into the agency’s strategy development and growth
  • Advance enough leaders so there’s more than one option for your succession in case circumstances change
  • Introduce candidates for succession to the home office (if you have one), industry organizations, and other important contacts

Lean on professionals to perfect your plan

Agency principals don’t need to have all the answers when it comes to succession planning. Set up your plan with guidance from an experienced accountant, a tax specialist (who also may be your accountant), an attorney with experience with succession planning for independent insurance agencies, a valuation specialist, and other industry professionals. Another option is to hire a consultant to review your small business and provide guidance.

Be sure to find out:

  • What the rules are regarding the succession and transition of an agency within your company
  • If your contracts and benefits include succession information
  • What compensation is vested, and what portion is transferable
  • If you can name a successor and enter into a succession agreement
  • If contingencies like retirement, disability, death, and termination covered
  • If you are legally able to sell your agency and under what conditions

Keeping it all in the family

It’s believed 43 percent of agents plan to pass their small businesses on to family members. This isn’t shocking, since independent insurance agencies are often family-owned businesses. Here are some tips for turning over the keys to your kids:

  • Involve your family members in the succession planning process
  • Help your planned successor develop the skill set necessary to lead the business
  • Make sure your offspring actually want the role
  • Discuss how your children will purchase the business
  • If your son or daughter already works at your agency, ensure you’ve set high standards and accountability for them by partnering them with a third-party coach or mentor
  • Have your successor start at the bottom rung working for someone else first

Selling your book of business

Nearly one-third of agents said they plan to sell their small businesses (2021 State of the Senior Market Independent Agent Survey). If that’s your plan as well, formalize your intentions in writing. Experts say that buyers often hope that an agency owner doesn’t have a succession plan so they can step in and leverage that lack of preparation. Here are some tips for planning to sell your business:

  • Get your “house” in order before looking for a buyer, especially if the plan is to sell to an aggregator or private equity firm
  • Be sure you can show you’ve been able to grow sales year over year, develop new business lines, and leverage technology to be more efficient
  • Start making a shortlist of internal and external candidates for when the time comes
  • Determine the valuation of your small business. The value will depend on a variety of factors. In general, your business will likely be valued at 1.5-2 times your gross annual commissions.
  • Consider meeting with a business broker experienced in selling insurance agencies for help
  • Project what a potential deal would look like to both buyer and seller, ideally three years in advance, so there are no surprises for either party
  • The purchaser may want you to stay at the agency for a while to ensure transparency and a smooth transition. Make sure you understand those expectations.
  • Accept that the business may be run differently under the new ownership
  • Consider the impact of the sale—and new owner—on your staff

The plan to fade away

The last option, and the one that experts recommend the least, is not to have a plan and just let the agency limp along until customers fade away. In this scenario, the agent doesn’t do anything: they don’t follow up with their customers, they don’t schedule annual reviews, and they just let their business die a natural death.

While it’s easy to do nothing, experts say it’s a terrible way to treat your customers—and the reputation you’ve worked so hard to build through the years. And, if you do decide to sell, you’ve devalued your business before even starting negotiations.

Your best option is to have at least some plan in place.

You have a plan. Now what?

Once you or your agency complete legacy planning for the business, it may be time to let your staff know. Experts say it’s important to keep staff informed about the agency’s long-term strategic goals. Unless a confidentiality agreement binds you, you should let your key staff know you’re planning to transfer the business.

If you don’t plan to sell the business, knowing that information can help keep the staff motivated, according to experts because they won’t be as worried about their job security. Also, be sure to explain your plan to your carrier partners. In short, head off rumors with open, honest communication.

Lastly, make sure you’ve thought about your life after the agency. Going from a leadership position that requires working every day to suddenly leaving all of that behind can take an emotional toll. So while a well-planned exit strategy provides a roadmap for the future of your small business, it should also reflect the quality of life you want after your name is no longer on the front door of the agency.

Thanks for reading our educational resource! Any above reference to a specific company, method, or product is meant for educational purposes only and is not specifically endorsed by Pie.