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Succession: Ready or Not

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Many agents and advisors are aging out of the business, but are often failing to plan a transition for their agencies until they approach retirement.

But Scott Bishop has a plan about two decades in gestation — his son, Nathan, a 20-year-old college student majoring in finance and accounting, who wants to follow in his footsteps into the business. Nathan is already interning at Northwestern Mutual.

Bishop is 50 and closer to retirement than is partner, Cy G. Cattan, at STA Wealth Management in Houston. Cy is 40 years old and has children much younger than college age.

The partners are actively thinking about transition, perhaps because they learned the hard way that change comes whether or not you plan for it. They had an ugly parting with an earlier agency and learned to have a contingency plan.

But many agency owners are not doing planning for the biggest transition they all know will come — when they leave, either by choice or by some other kind of fate.

An InsurMark survey showed that 83 percent of advisors consider their business a part of their retirement plans. Yet, even though their business is a part of their retirement plans, 65 percent have no succession plans and 89 percent have no appraised value for their business.

“Many people get into the business in their 20s or early 30s, and they’re bulletproof. They’re going to live forever,” Bishop said. “One of the things that makes it especially urgent for me is our industry is graying. If we’re financial planners and we’re telling our clients to take care of these things, how can we not take care of them ourselves?”

And if they have not taken care of matters to make their agency salable, they need to look at growing their succession plan either by biological or agency family.

Learning The Hard Way To Plan

Bishop had a falling out with his previous business partner in 2012 and paid a heavy price. Bishop and Cattan left the company and took team members and clients with them.

“It became an ugly deal so Cy and I decided that we wanted to make sure that all the contingencies were covered when we got back together in 2013,” Bishop recalled. “So we rewrote the buy-sell agreement to take into account all those things.”

They have a buy-sell agreement, a very detailed document that is continually changing. The pair — who manages about $400 million in assets under management — plan to add a disability buyout component by year’s end.

At its core, the Bishop-Cattan buy-sell agreement is a combination of triggers and what-ifs, with insurance built in to protect the partners.

Bishop’s plan is to work until 60 and then gear down and do less for the following decade. He has a general plan to retire around age 70. With the planning work the partners have done, they are prepared for any situation.

For example, if one of the partners should die, insurance will help with the required payout to the survivor’s family members. Absent that insurance, the surviving partner must find the cash while also worrying about nervous clients bailing on a suddenly unstable agency.

“We have insurance to fund that portion of our buy-sell agreement and I’ve already paid the premiums,” Bishop explained.

One important aspect of the Bishop-Cattan agreement: They brought others into it. They shared it with family, and even their employees. That openness spreads confidence, security and happiness throughout their orbit.

“By sharing the agreement with our team members, that makes sure that if something happens to either Cy or me, the company is in good shape and the team members are taken care of,” Bishop said. “They know that their job is secure and that is hopefully something that will keep them from going to another firm for another $1,000 a year.”

They expand that transparency to clients.

 “Whenever I bring in a new client, they know we work as a team,” Bishop explained. “That is my succession plan that I am building long-term internally for an easy transition upon my death, disability or retirement.”

Buying From Within

FP Transitions, in Lake Oswego, Ore., continues to do more nuanced business succession plans, said Brad Bueermann, FP CEO and principal. The company does valuations and succession planning, and operates “the largest market for buying and selling financial practices.”

In the past, succession was largely about passing the business on to family members, he said, especially on the insurance side.

Absent any capable and interested family members, agency owners looked to an outside buyer. And usually too late to execute the most beneficial sale, Bueermann said.

“One of the things that we’ve really worked hard to introduce was a succession planning that was an internal sale,” he explained. “Particularly for larger practices, a practice that has more than, say, a million dollars in revenue, they needed to be developing a plan around how their junior advisors could become owners.”

This type of business succession is becoming a strong trend in the succession planning world, Bueermann said. The key is you are not taking anything off the table, he added, meaning that the external sale is still in play.

“We are just seeing more and more people, maybe it’s awareness, maybe it’s other things, coming in and starting to do that type of planning,” he said.

The net economic gain from succession planning is easy to see after the fact. Tax impacts can be managed. Clients are satisfied and retained. Fair market value can be realized.

But agency owners who opt to consider an internal succession are seeing additional gains, Bueermann said, from more engaged advisors.

“You’ve taken employees or junior partners and made them owners,” he said. “You’ve given them a goal as to where they’re going to go as far as buying into the company. You no longer have to worry about them walking across the street, or taking the next best offer. Instead they’re invested in building this business.”

Those agency owners who have no family succession and no strong internal options are the ones who need succession plans the most. Many of them never intended to be business owners at all.

The InsurMark survey found that 74 percent of respondents identified themselves as “advisors who own a business,” versus 26 percent who said they are “business owners who happen to be advisors.”

“Advisors do a great job of measuring their clients’ assets and progress to goals,” said Jay Vinson, executive vice president for sales and marketing for InsurMark. “But they have not taken the basic steps to prepare their business for a transition.

“We don’t think this means they are all planning to ‘die at the desk,’ but rather could use the help from strategic partners to maximize their business planning.”

 ‘Sell And Stay’

FP Transitions is handling planning for a “practice on the East Coast in the $3 to $4 million range.” The owner and the practice’s junior advisor are both looking to stay on. The owner’s time frame is three to five years, while the junior advisor has 20 years to go.

“These are people that know the clients, so it’s a perfect acquisition,” Bueermann said.

After doing 20 to 30 of these kinds of sales, FP Transitions created a moniker for the unique deals. It’s now known at the office as a “sell and stay” and it makes sense for a lot of advisors.

“This is a great time for people,” Bueermann said. “If you’re an owner in your 60s, or certainly in your 70s, even owners in their 50s, thinking ‘I’m going to want to sell in the next five or six years’ … you could do it now.”

Doing so means de-risking and capitalizing on the equity in the business, while still pulling income from the business. And selling an agency with quality advisors and experience attached “is a plus,” Bueermann said.

FP Transitions is doing a lot of agency transactions because it’s a seller’s market. The firms involved in FP transactions this year are showing 12 to 13 percent growth on average, Bueermann said, adding that those figures might be skewed by the fact that successful firms are more likely to be sold.

In the RIA world, 2017 was a record year with 152 mergers and acquisitions recorded by the DeVoe RIA Deal Book. At the midway point this year, David DeVoe called it “even money” whether a new record will be set in 2018.

“No business can stay static and you’ve got to develop a plan that makes you unique,” Bueermann said. “The people who are doing that are doing extraordinarily well. And we do approximately a thousand valuations a year.”

Firms with recurring revenue are selling at multiples in the 2.4-2.5 range, he said, while nonrecurring revenue multiples stayed in the 1.2-1.3 range.

“One of the most interesting ones is insurance-based revenue, or first-year commissions’ income,” he added. “That income, provided that they have consistency, growth and an integrated growth management, those practices are showing .96-.97.”

Strong Business Climate

The time is good for succession planning and agency sales due to the underlying business climate. The economy continues to expand, taxes are low and regulations are in abeyance.

In particular, the Department of Labor fiduciary rule was knocked out by a federal appeals court in March. It is dead. The Securities and Exchange Commission and the National Association of Insurance Commissioners are working on “best-interest” rules, but neither is expected to be a major hindrance on the industry.

The number of households making at least $100,000 in the U.S. stands at roughly 40 percent. The number earning $200,000 increased to nearly 15 percent.

“You’ve added several million people who are now making enough money that they are saving and need to plan,” Bueermann said. “We’ve added a lot more demand into the total economy for the services that are provided by investment advisors and insurers.”

Bishop, who hosts a radio show on financial planning and often delivers talks on succession planning, said the market to sell an agency has never been better.

“There are boatloads of private equity money and people looking to acquire financial planning and insurance firms,” he said. “If there ends up being a slowdown in the economy, the financing may dry up. So if you’re a baby boomer or a late baby boomer and have been contemplating it, now is the time to start taking a look at it.”

InsuranceNewsNet Senior Editor John Hilton has covered business and other beats in more than 20 years of daily journalism. Follow him on Twitter @INNJohnH. John may be reached at [email protected].


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