As a small business owner, you have a responsibility to prepare your business for the time when you are no longer there to run it. Whether it’s a planned retirement or an unforeseen event such as illness or premature death, you put everything you have worked for at risk if you don’t leave a contingency plan for your business. A written succession plan serves multiple purposes:
- It creates stability and continuity for your clients.
- It ensures you and your family are compensated financially for the value of your business
- It gives you and your family peace of mind knowing they won’t have to grapple with what to do with your business if something happens to you.
There are two primary options to consider for succession planning:
Option 1: Name a Successor to Your Business
You may want to choose a family member or another agent to take over your business. In unforeseen circumstances, such as your premature death, you need to legally document your successor through a will or trust. An attorney can advise you as to the best method for achieving your goals.
While it may be your dream to pass your business on to a family member, you need to be sure it is their dream as well. Do they understand the training and licensing requirements, as well as everything involved in running a successful insurance business? Ideally, you want to have a transition plan in place so you can train your successor and introduce them to your clients. If that’s not possible due to unexpected circumstances, it will be important that your successor is willing and quickly able to take on the job.
All policies will need to be transferred to the new Agent of Record (AOR). To do this, the new AOR must be licensed and certified with each of your carriers. Each carrier has its own specific procedures and forms for this process. In the event of your death, the carrier will need a copy of your will and death certificate to complete the transfers.
How will you or your family pay for your business if it is transferred? You will need to create a payment plan for the AOR to transfer funds to yourself or your family. The details of the payment agreement should be agreed upon by both parties in advance and documented in your will or trust.
Suppose you transfer your portion of the business to an existing partner. In that case, terms of the transfer can be specified and payment for the business can be facilitated by a preestablished buy-sell insurance agreement.
Option 2: Sell Your Business
Alternatively, you can choose to sell your business outright to your upline or FMO, or to another trusted agent. If you decide to go this route, one of the first steps will be figuring out how much your business is worth.
There are several factors to consider when valuing your business. This includes how much income your book of business has produced over the last several years, the product mix and policy types, policy age, and client demographics. If you are selling your business to your upline or FMO, they will probably have an established valuation process in place. It can be more difficult to value your business if you are selling to another agent. Consider consulting with an advisor or industry expert to ensure you determine a fair and accurate valuation for your business.
Once your book of business has been valued, you need to determine how you will be paid. There are several payment options available that you and the buyer need to agree upon. If you are selling to your upline or FMO, you may choose to be paid out in one lump sum. If you are selling to a family member or another agent, this may not be an option. In this case, you will need to work out a payment structure that is beneficial for both parties, such as receiving a percentage upfront, with the balance being paid out over a pre-determined time period. You will want to speak with a tax professional or accountant to understand any tax implications from selling your business.
All policies will need to be transferred to the new AOR based on each carrier’s process.
Maintain Good Records
Whether you choose to name a successor to your business or sell it outright, you will need to maintain good records to transfer to the new AOR when the time comes. This includes client and policy information, SOAs, and call recordings. You will find it more difficult to sell your business if you have not fully digitized your business records. Make sure someone in your family knows how to access your records in case of an unexpected event. You want to ensure a smooth transition and ensure that no information is lost.
Thinking about retirement? Our Skillbuilder webinar on Succession Planning can help you start to plan. No matter where you are in your career, Western Asset Protection is here to help. Contact us today.