Industry the November 2016 issue

Know Your Role

Distinguish between a “partner” and a “leader” so you can expand ownership opportunities and increase your value.
By Phil Trem Posted on October 24, 2016

But the one title that continues to perplex me is “partner.”

How many “partners” do you have at your firm? What are their responsibilities? Do they differ from each other?

In our view, there’s a distinct difference between being an employee who is a shareholder and being a leader in the firm—but both may have the title of partner. Just because employees buy agency stock and become partners, doesn’t mean they are automatically promoted up the ranks to owner/decision-maker/head honcho. 

There is a difference between the roles of shareholder and leader, but many agencies don’t make that distinction. The failure to distinguish shareholder from leader/manager is one of the driving reasons why owners hesitate to sell shares and diversify ownership even though this could clearly increase the value of their brokerage.

You are not handing over the keys when you provide opportunities for employees to purchase stock. You are not handing out promotions, either. You are selling shares. (Ideally, these shareholders will excel into leadership positions if they do their jobs as employees.)

Clarifying the separation between partner/leader and shareholder/employee can bring tremendous relief to those who hesitate to extend ownership opportunities to employees. By defining what it means for an employee to also be a shareholder, and by running the business with defined governance, you can let go of what’s ultimately holding you back from inviting in more owners: the fear of losing control.

What’s the Value?

Why extend ownership to employees in the first place? For one, providing shareholder opportunities can be an effective strategy for attracting and retaining talent. Valuable employees—the kind you want to grow and stay at your firm—are looking for more than just a paycheck. Through some stock ownership, they become more committed to the success of the business. Their input as employees results in favorable output as shareholders. We have seen agencies that prosper often provide ownership opportunities to employees, who then connect performance and outcomes and are driven to push the firm toward greater success.

We have also seen that external buyers think firms that have more owners invested in the agency’s success are less risky. In our 2016 “MarshBerry Market & Financial Outlook Report,” we looked at brokerages with revenues exceeding $20 million and found they have on average more than 25 owners. Smaller agencies, with less than $5 million in revenue, have an average of one to three owners. We found that the more a firm extends ownership opportunities, the greater its chances are of growing revenues and market share.

We have also seen that external buyers think firms that have more owners invested in the agency’s success are less risky.

What’s Holding You Back?

The problem is many business owners realize they do not have the in-house talent they desire—they don’t truly trust anyone else to buy in. And extending ownership requires deep trust from the owner and buyer perspective. Many buyers do not have the funds to immediately pay for shares, so they must take a note. Therefore, owners must trust that these new shareholders will eventually pay for the stock and be committed to growing the business.

Also, many owners don’t want to sell shares, because they are concerned selling stock to employees will mean these “partners” can question leadership’s decisions. Owners don’t want to answer to their employees. They want to keep running their business as the head, just like always.

To gain confidence in the decision to sell company stock, we believe you need to clearly define what it means to be an employee who owns shares—and how employee shareholders can succeed in your organization. In our experience, brokerages that successfully bring more owners into the fold define how owning shares affects an employee’s status. They manage expectations and run the business with a clear governance structure. They understand some basic rules:

  • Shareholders do not automatically have the right to make strategic planning decisions.
  • Shareholders should not have elite status as employees.
  • Shareholders do not gain access to all of the agency’s private information, and
  • An employee who is a shareholder can still be fired for poor performance.

So how do you create this understanding? It starts with leadership. Create a structure so employee shareholders see their career paths and realize how they can drive value as team members. A board of directors or advisory team can also help define roles. And finally, open and constant communication is important for identifying ways employees who are shareholders can grow and increase performance and, thereby, advance into leadership roles.

Market Update

Deal activity rebounded somewhat in September, with 30 deals announced in the month compared to 19 in August, in line with the 30 deals that were announced in September 2015. Announcements this year, at 311 through September, are still behind the record-breaking pace of 2015, which saw 352 deals announced during its first nine months.

BroadStreet Partners and AssuredPartners are leading the pack of buyers, each with 22 acquisitions announced this year through September. Not far behind are Acrisure (20 announcements), Arthur J. Gallagher (19) and Hub International (19). Of the top five buyers, all but Arthur J. Gallagher are private-equity backed. 
Interestingly this month, seven of the 30 sellers were either program administrators (six) or wholesalers (one). This includes medical stop-loss managing general underwriter ELMC Group, which acquired MGU IOA Re and also sold a controlling interest in its own operations to the private equity investment firm J.C. Flowers.

Program administrators and wholesalers have represented just more than 18% of year-to-date deal activity (57 of the 311 announcements).

Phil Trem President of Financial Advisory, MarshBerry Read More

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