Business Continuation Planning for NAILBA Members

An Interview with Three Agency NAILBA Owners

Karl Bareither, Wealth Transfer Specialist, President FBR System, Inc.

Business succession planning sometimes illustrates the old adage of the shoemaker's children going barefoot. Many times the very experts advising business owners about succession planning, and overseeing use of financial products and legal documents to accomplish it, neglect similar planning for their own businesses. Curiously, insurance agency owners often don't seem to understand the need to plan for the next generation of leadership for their own businesses. The need, however, is very real.

The Brokers Source, Ltd

The Brokers Source, Ltd., is a business succession story that illustrates a common planning problem - getting everyone to actually sit down and create the plan.

Ray Phillips worked for his father-in-law, Mac McCalmont, for a number of years with the tacit understanding that "someday" the agency would be his. Everyone agreed that Mac would one day retire and Ray would take over, but committing the plan to paper was another matter.

Ray's efforts to get Mac to formalize an agreement were initially unsuccessful. Mac's intentions were good but his entrepreneurial spirit simply wouldn't permit him to seriously considering bowing out. Ray says, "Since I entered the business, I had heard stories about the entrepreneur who couldn't leave the business he founded, and here I was, actually living it." Mac talked a lot about retiring but was reluctant to act on it. Ray faced a real dilemma. In the back of his mind, he couldn't help but wonder if he should remain tied to the agency with the hope of one day owning it or cut the cord and look elsewhere for opportunity.

Things came to a head when Mac was diagnosed with a form of terminal cancer. Suddenly, creating a succession plan became urgent - but now it had to be done under very difficult circumstances. As Mac's health failed, planning became increasingly difficult as illness sapped his energy. Nevertheless, a formal plan did emerge. In the end, Mac was unable to execute the legal documents required, but Ray was able to complete the purchase of the agency from Mac's estate with the help and understanding of the rest of the family.

Today, Ray owns the agency in which he invested so much of his working life. Considering the challenges the family faced in creating a formal succession plan, he counts himself lucky. He credits strong family bonds for the fact that family relationships remain amiable to this day.

The unfortunate thing is that Mac had a successor identified and a succession plan in mind but didn't follow through. Had he completed the plan and handed over operation of the agency to Ray, he could have spent his last years enjoying himself in retirement rather than dealing with the pressures of running an agency. Difficult as it may have been, the best solution for Ray, Mac and the agency, in this case, would have been to formalize the plan and begin the transition. That solution, however, would have required Mac, the entrepreneur, to walk away from the business.

Agency Services, Inc.

Agency Services, Inc. serves as an example of a plan that effectively dealt with many of the same issues faced by Ray and Mac.

Jack Dewald, the current ASI owner, worked side-by-side for a number of years with his father, John, when they developed and implemented a succession plan. The primary goal of the plan was to permit John to retire comfortably while passing control of the agency to Jack. To their credit, the Dewalds considered the emotional issues involved in leadership change in their planning, as well as the technical issues.

One emotional issue, often overlooked in planning, is the entrepreneur's adjustment to retirement. Entrepreneurs frequently find that bowing out of the business they built can be very difficult. To address this issue, John made certain that he would enjoy an interesting and fulfilling retirement. The solution was to continue to develop his interests in activities like golf and the multiple civic and faith based charitable efforts he supported. The goal was to assure himself a continued challenge and a sense of mission in retirement. As John says, "Those folks who are happy in retirement set the stage long before 65."

Another aspect of the ASI plan, often overlooked in business continuation planning, was preparing the agency staff. The emotional impact of the entrepreneur's retirement affects staff as surely as it affects family members. Working closely with employees during planning and implementation helps assure a smooth transition.

In the case of Agency Services, Inc., the careful planning paid off. The transition was implemented as planned and today, Jack operates the agency while John enjoys an interesting and worry-free retirement. However, as might be expected, even the best-laid plans sometimes fail - as demonstrated by our next business succession story.

The Palmer Agency

The case of the Palmer Agency illustrates another aspect of succession planning. Palmer is a large brokerage agency that recognized the need and developed a formal plan, but experienced a shock that illustrates the importance of careful plan design.

The Palmer Agency had a typical family ownership structure. Alan, the son of the founder, was actively engaged in day-to-day operations of the agency and was, by family consensus, heir apparent. Alan's sister, Myra, also active in the business, was initially more concerned with family responsibilities than pursuing a leadership position in the family enterprise. The succession plan called for Alan to eventually succeed his father, Howard, as majority stockholder and agency head.

Although the Palmer plan was sound, it did not provide for the unexpected. When Alan suddenly died, the family experienced a double calamity. Not only did family members have to cope with the loss of a loved one, but they also found the business succession plan effectively destroyed.

The existence of a succession plan had lulled the family into a false sense of security. Since Alan was slated to be the new leader, and was obviously qualified, everyone assumed no further steps needed to be taken. As a result, no one was groomed to step into Alan's shoes. The plan did not recognize the need for depth of management talent.

In the case of the Palmer Agency, the family was fortunate in that Myra, was in a position to pick up the baton. Her family responsibilities had decreased to the point where she was able to step into her brother's shoes.

While up to the task, Myra's position could have been vastly improved had she been included in the original plan as a potential successor leader. Ideally, Myra should have been working closely with her brother on all agency issues and been fully informed about agency operations and decision-making. Even though Alan was slated to become the agency head, ideally, both Alan and Myra should have been developed as potential agency leaders. Had that been the case, Myra would have been better positioned to assume agency management at Alan's death, minimizing stress and potential disruption of agency operations.

The resulting struggle for the Palmer family provides a two-fold lesson. While creating a succession plan is important, it's also important to develop a plan that is sufficiently flexible to address the unexpected. It's not enough to identify a single successor leader, it's also important to develop depth in the leadership ranks. The best succession plan is one that takes the long view of management needs by identifying and developing a number of potential successors.

These three examples illustrate the importance of developing a well thought-out business succession plan for family-owned agencies. One that works for everyone involved - the family, the successor owner and the agency employees. Next issue we'll discuss a planning process that can not only facilitate planning for agency owners, but also constitutes a valuable service agents can offer their family business clients.

About Karl R. Bareither, CLU

Karl Bareither, Wealth Transfer Specialist is founder and president of FBR System, Inc., a fee-based family business planning firm. FBR System uses the Family and Business Renewal Process, a holistic approach developed by Bareither, for business continuation and estate planning. Karl is now teaching other financial service professionals how to use the wealth transfer process to serve their family & business clients while adding a new source of revenue. He is the author of two books, Planning a Family & Business Legacy and Becoming a Wealth Transfer Specialist.

In addition to his 20 years in private practice he served as training director and regional sales director for a major financial service company. He is a Life Member of the Million Dollar Round Table and has been admitted to the Top of the Table.

Karl believes the FBR approach would be especially useful in helping brokerage agency owners plan for the next generation of agency leadership. Readers can learn more about Karl Bareither and the FBR Process at www.fbrsystem.com. He can be contacted at karl@fbrsystem.com or by telephone at 805 595 2089.

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