“I am … inevitable.” Thanos—the big bad in the Marvel Cinematic Universe—utters this line at the end of Avengers: Endgame, to show that his act of wiping out a trillion people with a literal snap of his fingers was an act that could not be stopped. Interestingly, this line also could apply to agency perpetuation in the insurance industry.
The MCU started in 2008 with the release of Iron Man, which contained a stinger scene after the movie’s credits. It featured Nick Fury’s discussion with Tony Stark/Iron Man about the Avengers Initiative. Iron Man laid the groundwork for The Avengers, a movie that would not come out for four years. Similarly, the stinger in The Avengers gives us our first glimpse of Thanos, a character who would not appear to any material degree in an MCU film until six years later. What is the lesson here? It is never too early to plan.
Just because the endgame is inevitable does not mean it has to be something to fear. The worst thing you can do is wait until retirement to decide the future of your agency. Procrastinators never prosper. Prudent planning now will relieve many headaches later. The longer you wait, the more limited your options become. Once you’ve decided on your perpetuation plan, it’s a good idea to consider a number of legal actions that will make the transition smoother. For the sake of space, I will concentrate on the internal passage of an agency by sale or inheritance.
Selling your agency to someone internally (i.e., a family member or another employee), has the benefit of a smooth transition. The person at the top is changing, but everything else will stay the same (hypothetically). This method also grants the agency owner the greatest amount of control. To do this, consider entering into a contractual arrangement with the would-be purchaser, which also will give him or her some skin in the game.
Typically, this is done by allowing the would-purchaser some ownership interest in the agency’s book of business—or if your agency is set-up as a corporation, some ownership in the agency via stock. This not only satisfies the skin-in-the-game benefit, but it also lowers the eventual final price of the agency for the would-be purchaser. The would-be purchaser will be buying the agency less the value of the book or the value of the stock he or she already owns. Note: While this is good for the would-be purchaser, it might not be as good for the current agency owner as the final payout for the agency will be less than if the purchaser was buying the complete book or all the stock in one purchase.
That said, this type of purchase agreement does have the benefit of maximizing the amount of money a seller can get for the agency. By structuring the sale over a long period, the purchaser can make smaller yearly payments, a structure that will lower the tax consequences for the seller as well. However, the shorter the selling period, the higher the payments will be and the more likely it becomes that internal perpetuation is not possible.
If this type of internal perpetuation is the scenario you do pursue, it is important to establish a few contractual safeguards to protect the agency in case the relationship with the purchaser sours and he or she no longer wants to purchase the agency.
One protection you should consider is a right-to-buy clause, which will allow the current owner to purchase the employee’s book of business and/or stock if he or she decides to leave the agency. This ensures that the producer cannot walk out the door with the book or retain an ownership interest in the agency to the detriment of the agency. However, if the agency does need to buy the book of business or stock back, the cost to the agency could be substantial, depending on the size of the book or the amount of stock owned.
Another option is to have a phase-in on the ownership of the book of business and stock. The contract could be structured to give the purchaser a larger percentage of ownership in the book/stock the longer he or she works for the agency. For example, after five years the producer would own 10% of the book; after 10 years, 20%, etc. This sort of arrangement is even more effective if you couple it with the right-to-buy clause mentioned in this article. This makes the producer earn the book or the stock while making the buy-back option cheaper for the agency. In addition, the longer a purchaser stays at an agency, the more interest he or she has in it, which will make it less likely that he or she will walk out the door.
Not ready to retire to a farm on some distant planet to pick space fruit? Then, you could employ the above methods for the sale of the agency and execute an employment contract with the next owner to guarantee that you have a place at the agency until you feel it is time to leave.
Succession through inheritance
If you preferred to execute your agency perpetuation through inheritance, don’t forget to update your will. People don’t like to think about death, especially their own, but it is inevitable. The more planning we can do for it, the better. You should review your will annually, since life has a habit of changing. Have a new grandchild? Did a spouse pass away? Do you want to pass your shield on to your best friend, Bucky, or your loyal sidekick, Sam? As life changes, your will should change to reflect it. If your intentions aren’t clear in your will, then you run the risk of your wishes not being honored once you’ve passed away.
Then, tell the person you want to inherit your agency your plan. This is especially important if the person is not a licensed insurance producer. I have fielded many member calls from unlicensed spouses who inherited agencies and don’t know what to do. Not being licensed restricts what the inheriting person can do. It would be like leaving your Infinity Gauntlet to someone who isn’t powerful enough to wear it.
I won’t discuss the intricacies of licensing law in this article—you can call PIA if you want more details. Generally, an unlicensed inheritor can receive renewal commissions earned by the estate, but cannot transact any new business or offer services to any current or new clients. Most states will grant an inheritor a temporary license, but it usually lasts a few months. What does that mean? It means that the inheritor has to get his or her license quickly, or more likely get a temporary license. The latter puts the inheritor at a disadvantage if he or she is trying to sell the agency. The potential buyer will know that the inheritor needs to sell soon or risk losing business by attrition. Negotiating from a place of desperation is not ideal. So, for a smoother transition, make your wishes known early and allow the inheritor to negotiate from a place of strength, if selling the agency is the long-term plan.
Whatever your plan is, start putting it into action now. If you don’t have a plan, start developing it now. It is never too early to start planning. Once you get to the endgame, it often is too late—unless you have a way to pull off a time heist.