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How Principals Prepare for Takeoff

Clifford P. Ryan is looking forward to his next parallel life.

An avid bicyclist, runner, hiker and boater, the 57-year-old also recently earned his private pilot’s license in the active life he enjoys in Maine as he builds his financial and insurance agency. He plans to transition further into that life over the next decade.

It will not be the first parallel life for Ryan. He started as a financial advisor in 1983 and started his own agency, Elder Planning Advisors, in 1996 while in the Naval Reserve. He retired from the service in 2003 after more than 25 years in the Navy and Reserve.

But about eight years ago, much like clients who realize they have to plan for the inevitable, Ryan started to think about the “what ifs.” What if he never made it into the office in beautiful Cape Elizabeth? What if he just never woke up?

That got him planning for the two possible transitions — the abrupt or the gradual.

Ideally, he envisions a time when he can still participate in an organization but in a different way, maybe spending more time thinking about bigger-picture challenges instead of tending to all-consuming day-to-day matters.

“If I find the right person and it works out, then I imagine a three-to-five-year transition period, and then I just fade away,” he said.

But what about an exit of the more sudden, unplanned variety?

That prospect got him talking to other agency owners and principals, and it wasn’t long before he’d drawn up a “standby agreement” with a counterparty who stands ready to buy Elder Planning Advisors in case of Ryan’s early demise, he said.

The nonbinding agreement was etched with the help of FP Transitions in Lake Oswego, Ore., and Ryan says he’s had discussions with another suitor. Ryan’s even talked to his stepson in college about what the profession entails.

Elder Planning Advisors also functions as a registered investment advisor, and Ryan said he’s given some thought to splitting the RIA from the insurance agency functions, an arrangement that he calls a “partial sale.”

The pressure on agency principals to sell is coming from many directions.

With about 75,000 advisors working at insurance agencies, brokers and producer groups around the country, the channel is the largest of the advisor channels, larger than the independent broker/dealer and wirehouse channels, according to figures compiled by Tiburon Strategic Advisors.

Many of those producers and principals belong to the baby boom, members of which are opting to sail off into retirement by the hundreds of thousands every year, according to industry researchers and consultants.

It’s also no secret that the world is changing for insurance and financial professionals with shrinking compensation and expanding regulation. Commissions were already decreasing when the Department of Labor let loose its conflict of interest rule, designed to reduce and standardize compensation.

Combine that declining compensation with an ever-growing stack of required documentation and you are left with ample motivation for agents and advisors to be eying the door.

Insurers have also been dialing up the direct-to-consumer channel, according to Aite Group consultant Samantha Chow in a report published earlier this year.

“The agency distribution channel is no longer the most commonly used channel by life and annuities carriers, as 94 percent of respondents report using direct-to-consumer channels versus 83 percent using an agent,” Chow wrote.

Independent agencies and brokerages still haul in about 70 percent of annual life insurance premium, according to LIMRA, so the independent channel is still going strong, although not as strong as in decades past.

RIAs Also in Merger Mania

Financial advisors are not immune to the pressures. RIAs had a record year for mergers and acquisitions in 2015, with RIA transactions increasing 37 percent to 123 transactions, according to DeVoe & Co.’s RIA Deal Book.

Other financial advisors “may accelerate their exit or seek to combine forces if and when competition increases” from robo-advisors, new competitors entering the segment and heavier regulation, wrote David DeVoe, managing partner.

A firm in Oregon that helps agencies with succession planning expects a 35 percent increase this year in transitions in which a first-generation advisor sells the practice to a second generation made up of the advisor’s children or employees.

“We’ve seen demand up way high,” said Brad Bueermann, CEO of FP Transitions, adding that his company this year will do more than 200 formal succession plans.

FP has added to its analytics and legal teams to handle the documentation necessary for long-term stock transfers.

Recurring Fees Boost Values, Luring Buyer

If agents and advisors have raised a stink about tougher regulation, the good news is that the movement toward fees and trails has added to the value of agencies, said Bueermann.

Agencies with recurring revenue generate values of 2.5 times to more than three times trailing 12-month earnings, while agencies that rely on transaction revenue may fetch only 1.2 times and as low as 0.5 times trailing 12-month earnings.

“If you have an agency doing $1 million in first-year commissions on a variety of insurance products, it could be priced sub-$1 million easily,” Bueermann said. “But if you have a mix of fees and trails coming in the door, the business could be priced at two times or more.”

Oak Street Funding, a commercial lender to financial services businesses, including insurance agencies, said that it had more than quadrupled revenue over the past five years and that its maximum loan size had also gone up $20 million.

“Emerging industries with intangible assets like future commissions and fees continue to create demand for cash-flow financing,” said CEO Rick Dennen in June while announcing the company’s relocation to larger quarters in Indianapolis to accommodate the growth.

Cash-flow lenders have typically been absent from agency transactions in the past because insurance agencies traditionally had no hard assets to post as collateral.

A Bittersweet Moment

When a family business transitions out of the family, it can be bittersweet. Steven J.

Aronson sold Aronson Insurance in Needham, Mass., earlier this year to the brokerage Acrisure Agency Partners. None of Aronson’s three children were interested in continuing what Aronson’s grandfather Samuel started in 1919.

Aronson, 63, started thinking five years ago about looking for an outside buyer, and two years ago he began talking to publicly held brokers, private equity-backed brokers, banks and private buyers about a sale.

“It’s sad that there’s not a fourth generation,” Aronson said. “I would have preferred one of my children take it over, yes, for the sake not only of longevity but to go on and create something bigger and better with them.”

As it turns out, Aronson will be working with his children on other projects, but as far as the family insurance business is concerned it’s pretty much the end of the line.

Aronson and his sister, Bunny, bought the agency from their father more than 30 years and grew the agency to more than two dozen employees. They arranged for an orderly and eventual exit after selling the business earlier this year.



They and longtime managers each have a three-year contract to continue running Aronson Insurance, after which Aronson and his sister have the option to renew, and Aronson says he wants to continue working in the business for another decade.

“The first thing after deciding to sell is you want to know what your life and career will be like in five to 10 years,” he said.

Selling the agency from father to children, and then from the children to an outside broker involves special expertise, which Aronson had courtesy of mergers and acquisition lawyer David A. Bakst at Morrison Mahoney in Boston.

When the agency passed on to Aronson and his sister in the mid-1980s, Aronson recalls how they did everything they could to allow their parents to ease out of the agency when the time came — having them work five, four, three and then two days a week.

He credits his father with having the foresight to arrange for a smooth landing out of the industry — so smooth was the handoff that clients didn’t even notice his father, Norman, was no longer in charge.

“Dad not only made it easy, but he made it seamless,” Aronson said.

“It was a 10-year process because he was doing some very careful planning and he wanted to do it the right way for everybody,” Aronson also said.

“He wanted to be fair, and he took in-kind payments over a 10-year period of time, discounting them for the value we had brought to the business,” he said. “There was no reason the public should know who owns the business.”

Fast-forward 20 years, and the Aronson Insurance agency sales cycle is repeating itself, this time to an outside buyer, which Aronson settled on because Acrisure had no intention of tinkering with Aronson’s business model.

In true Aronson fashion, though, Steve and Bunny have secured their quality of life well in advance, and have even taken care of their sibling who long ago decided she wasn’t interested in the business.

Pressure to Sell

Not every agency sale is as smooth as the Aronsons’. Nor are principals necessarily looking to provide continuity for clients or to protect the quality of life for former owners or key personnel.

Many agency owners prefer selling to the highest bidder, while others prefer leaving simply because they don’t care to remain in the business.

But in any case, principals preparing their agency for sale before they retire should be ramping up instead of dialing down.

Just gliding to a stop or hitting the brakes means the agency isn’t likely to sell for as much, and it is not in the best interests of the people the agency serves, said Brett Amendola, president of Aegis Wealth Partners in Connecticut, an agency of Guardian Life Insurance.

“Don’t let your clients suffer,” said Amendola, 47, who recently merged his practice with National Financial Network in New York.

“Keep your eye on the ball,” he said. “Go out on a high note, like Michael Phelps.”

That also helps set a higher price on the business.

 “The hardest thing in insurance is how to value your practice — assuming you build your agency around customer service and relationships,” said Dwight N. Lankford, 71, president and owner of MidAmerica Estate & Insurance Services in Houston.

Lankford, who is passing his agency on to his son Brent, who joined the practice four years ago, says he has a solid client base but his referral network is “incredible.”

The strengths of an agency’s future earnings are referral networks, strategic alliances, the makeup of the client base, the lines of business and the agency’s brand.

For traditional asset-based lenders, these assets were difficult to value, but with the expertise of cash-flow lenders, that’s begun to change.

New sources of financing agency sales have opened the possibility of selling the agency in two distinct marketplaces: external, as Aronson chose to do this year, or internal, as his father chose to do a generation ago.

The fastest growth at FP Transitions is coming from internal succession plans, said Bueermann, and he attributes that to the industry shifting from selling an insurance or investment product to selling a service or advice for long-term protection and financial planning.

For decades, insurance agency producers and principals sold insurance company products, but with the rise of advisory and planning, agents and advisors collect fees in exchange for looking after the financial health and well-being of clients over a long period of time.

“The kind of talent that holds the relationship to the practices needs to be incentivized, so we’re moving from an external sale to an internal sale,” Bueermann said.

“That’s good for clients, quite frankly,” he said. “You’re not dealing with somebody who says, ‘Here’s your new advisor.’”

Good news not only for clients but also for agency sellers.

Selling Your Business — At a Glance

The clearer the goals of an agency principal selling his or her business, the more likely the sale will accomplish the objectives. Here’s a checklist for agency principals thinking of selling their business.

• Professional help: Look to seasoned tax, succession and planning professionals with years of experience in selling agencies, even if that means going out of town or out of state.

• Multiplicity of options: Understand different avenues for sales, partial sales and contract options.

• Valuation: The market value of an agency is often derived from among many angles, and there is more than one appraisal method to value the business.

• The successor: Develop a clear succession plan with regard to the successor. Are you passing the agency on to a relative, one or more in-house employees, or selling the agency to an outside buyer?

• Your clients and employees: What do you want to happen to your employees and your clients after you have left the business? How do you want them to be treated, and will the future buyer meet those goals?

Advisors Are Susceptible to the Same ‘Mental Foibles’ As Are Clients

Agency principals and advisors preparing for nearly every succession plan but their own has become something of a truism within the industry. Yet the botched succession handoffs continue.

In the Olympics, dropping the baton will get a relay team disqualified or cause it to lose the race. But in the agency business, bungling the transition means — at best — walking away from hundreds of thousands of dollars. At worst, it could be an invitation to costly litigation in the future.

Agency owners spend decades making sure they have prepared their clients to transition their assets to the next generation. Yet these same agency owners seem strangely paralyzed or forgetful about preparing for the day they pass on their own life’s work.

It’s as if principals no longer have the energy, the drive or the interest to orchestrate their own exits on the highest possible note.

After applying the basic rules of estate planning to their clients, somehow those same rules don’t apply when it comes to their own practices.

“They don’t spend enough time on their own affairs. They always take care of their clients, but they never take care of themselves,” said financial planner Gary L. Pittsford, author of Your Family Business, Your Family Net Worth. Pittsford is founder of Castle Wealth Advisors in Indianapolis.

Deals structured to benefit the seller often seem rushed. A job the owner should have planned three to five years ago ends up being cobbled together in nine months, like a misfiring engine running on three cylinders instead of four.

“I think advisors are subject to the same weird mental foibles that our clients are sometimes,” Clifford P. Ryan, an insurance and registered investment advisor in Cape Elizabeth, Maine, told InsuranceNewsNet.

“It’s a widespread problem in the industry.”

Agency principals who look no further than their well-worn “territory” for help often end up with accountants and lawyers who are neither estate planners nor mergers and acquisitions specialists. This often leaves owners stewing about what might have been.

Pittsford said owners of large agencies in small towns need to find accountants, lawyers and estate planners who manage agency transitions for a living, even if it means going out of town or even out of state to find them.

Principals then need to press the tax and legal professionals to come up with more than one way to sell the business, he said.

Best-practices templates and strategies for succession planning are available from broker/dealers, insurance companies, the National Association of Insurance and Financial Advisors, Million Dollar Round Table, estate planning specialists, and consulting companies.


Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected] [email protected].

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