Brokerage Ops the November 2019 issue

Succession Planning Isn’t Enough

What do you really want in life? If you haven’t considered this question as you plan for perpetuation, now’s the time.
By Phil Trem

And it’s something many owners overlook as they consider business succession and perpetuation. There’s a focus on what’s next for the company, but those goals are not necessarily aligned with what’s next in life for the owner. Owners naturally tend to focus on operations and financials without getting to the heart of why they’ve invested a life’s worth of time and resources to build their companies.

Many owners struggle to be honest about what they want the future to look like.

  • “I want to get top value for the business.”
  • “I really don’t want to hold a note.”
  • “I want to continue working until I’m well into my 70s—I’m not ready to step out of the business.”
  • “I’d like to travel and enjoy family, and I don’t see working past age 65.”

These ideas are often kept so close to the vest that they never emerge as owners engage in succession planning. And then the plan can fall short of meeting owners’ personal and financial goals.

We often see owners who are so focused on growing their businesses that they never stop to engage in exit and succession planning. They haven’t seriously considered what they want next in life and how they will exit their businesses. But when this happens, a business exit can feel like an abrupt slap in the face to people in the organization. Then they must deal with the fallout of a decision rather than feeling prepared to move the business forward.

The topic of succession and exit planning is especially relevant today with the average organic growth the industry is currently experiencing. It’s higher than ever because of a healthy economy and a hardening property and casualty rate environment. With the growth in profitability and very aggressive acquisition multiples, owners recognize that they could potentially get top value for their firms. The market dynamic has jump-started succession planning for owners because of the opportunity that exists today.

But the problem is that, when owners jump into succession rather than plan for it, when they focus on business succession without aligning that strategy with an exit plan, they may miss out on getting a “full value” for the business. And that full value includes the lifestyle they want to lead, the financial freedom they expect, the involvement they want or don’t want in the business, and the legacy they’ll leave behind.

We often see owners who are so focused on growing their businesses that they never stop to engage in exit and succession planning. They haven’t seriously considered what they want next in life and how they will exit their businesses.

Succession and exit planning must happen together because these processes address different issues. And the plans must be aligned. By definition, succession is the right, act or process by which one person succeeds the office, rank, estate or like of another. Succession planning focuses on meeting the needs of the business, and success is measured on business continuation. If the firm perpetuates, the plan worked. On the other hand, exit planning focuses on meeting the needs of the owner and requires a conscious effort to grow the firm in a way that efficiently converts ownership into personal financial freedom and peace of mind.

Awareness is ultimately the first step to engaging in a succession and exit planning process that is strategic, is thoughtful and aligns your goals in life with your vision for the business. How seriously have you considered these questions? What steps have you taken to begin planning for the future? Now is the time to stop and take a hard look in the mirror. Take stock of where you stand in this process and commit to working through the planning so you can take advantage of market opportunities without sacrificing your own needs, the needs of your people and the potential for your business in the long term.

The 2019 year-to-date announced transactions are continuing to outpace 2018. Through Sept. 30, there have been 451 transactions announced, compared to 429 announced transactions through last August. The number of announced transactions in 2019 is still well on its way to passing 2018’s total of 580 deals and likely exceeding 600+.

The majority of the deals continue to be dominated by private-equity backed buyers (56% of the total). However, independent brokerages still make up about a third of all announced transactions (28%). Hub International, BroadStreet Partners and AssuredPartners make up the top three most active buyers through September, each with at least 25 transactions. The 10 most active private-equity backed agencies are responsible for 194 of the 451 total transactions year to date (43% of the total). Nearly 83% of all acquired agencies were retail, while managing general agents (13%) and wholesale agencies (4%) make up the remaining portion of acquired agencies.

Public brokerages have seen a slightly diminished presence in the M&A market when compared to September of last year. They have completed 39 transactions year to date (8.6% of the total), which is down from 43 total deals done in the same time frame last year. Arthur J. Gallagher & Co., on the other hand, has been more aggressive in 2019. It has participated in 22 deals through September 2019, up from 19 in 2018.

On Sept. 23, Baldwin Risk Partners, a private-capital backed brokerage, filed its S-1 Form with the SEC in preparation for an initial public offering. The S-1 details an aggregate offering price of $100,000,000 made up of Class A common stock. Upon completion of the offering, members of management will hold shares of Class B common stock. Class A and B stock are both entitled to one vote per share, and as a result, the pre-IPO LLC members will be able to control any action requiring the approval of stockholders. The offering will be conducted through an “Up-C” structure, which is aimed at providing tax advantages to the public company and existing owners when they exchange their pass-through interests for shares of Class A common stock. Baldwin Risk Partners is proposed to trade on the Nasdaq under the symbol BRP. More to come on this change in the capital structure for BRP as information is released through its public offering.

Phil Trem President of Financial Advisory, MarshBerry Read More

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