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2012 Succession Planning Conference

Financing, human capital and succession models were some of the key topics at the 5th annual Succession Planning Conference

As the Baby Boom generation reaches retirement age, many are looking to Generation X for potential successors. But, according to Statistics Canada, GenX is a relatively small age cohort of only 2.8 million people. One of the many challenges Boomers face, therefore, is a shrinking candidate pool to choose from. In the face of this, the demand for informative, practical succession planning advice has perhaps never been greater.

This year’s Canadian Insurance Top Broker Succession Planning Conference took place October 11 at the Royal York Hotel in Toronto. Delegates learned how to combat succession challenges and create the best possible plan. Key sessions included: how to ensure your firm has a plan for when key positions become vacant, a panel discussion on broker contract law, and real-life succession stories from a panel of broker owners.

Note: The presentation materials can be downloadedhere 

Keynote: Growing Pains

Boaz Shilmover, CEO of ARTE Group in conversation with Ian Portsmouth, editor of PROFIT Magazine.

When Boaz Shilmover first reviewed the accounts of his father’s roofing company ten years ago, he was shocked to find the company owed $250,000 to creditors, one of which was the Canada Revenue Agency. For a home-based company with only $500,000 in annual revenue, this spelled big trouble. “We had two choices,” said Shilmover. “Grow or die.”

Shilmover told delegates how he and his father, David, turned the failing business around to become one of the fastest growing companies in Canada. In 2011, revenue for ARTE Group neared $13 million. Shilmover is now co-owner and CEO of the building-envelope company and David is president.

Though he says his father has no plans of retiring any time soon, the two have developed a thorough succession plan. With the help of advisors, they developed a family trust that owns their operating and holding companies.

“The nice thing about this is that there is no more emotion between my father and I about ‘How am I going to buy you out? When am I going to buy you out? How much is the company worth?’ It’s irrelevant. The trust owns everything,” explained Shilmover. “So when he passes on or I pass on, whoever is left running the company, as that money funnels up to the trust, it’s going to go to the beneficiaries.”

Though the business is currently headed by a father and son team, Shilmover was clear that ARTE Group is not a family business; it’s a corporation. In the event that one of his sons decides they want to work at the company, he will have to earn his way to the top. “You can’t just parachute somebody in and say, ‘Here you go,’ ” Shilmover emphasized. “I don’t care what size of business you are. If you’re a large business and you bring a child on board, I think they need to work in the trenches. How can you manage something you don’t understand?”

Getting a Deal Across the Finish Line

Colin Clahane, director, Broker Financial Solutions, Intact Insurance Company

In formulating a winning succession plan a broker must review a few considerations that often get overlooked in the haste of attempting to push the deal across the finish line. They also need to explicitly identify a succession formula to ensure that momentum is sustained after the deal transition closes.

Once ready to move forward with succession, brokers need to contemplate the mechanism of exactly how the business will be transitioned. These deals may be more complicated than a plain vanilla “A” purchase of “B,” however, with the aid of advisors they often close seamlessly.

The Lifetime Capital Gains Exemption concept is commonly discussed in succession deals and preserving the use of such an exemption is advised. In addition, sellers should be flexible with respect to the financing deal structure required to welcome an incoming successor into the operational fold. A share freeze is one strategy used to freeze value for existing ownership with the allowance of a successor to participate in the future upside of the business.

A broker must also plan for the ongoing success of the brokerage by preparing the future operational brains of the business as early as possible. Try to create a systematic process to identify, select and coach your successor.

But owners shouldn’t look to clone themselves. After all, going forward, the business may need skill sets that vastly differ from your own. Instead, contemplate the true needs of the brokerage. This process is made easier by formalizing the evaluation process into an objective assignment of each candidate into “buckets” based on measurable criteria. Be mindful of a candidate’s ability to manage all aspects of the business (HR, marketing, sales, finance, regulatory etc).

Finally, coach your successor towards performance results. Be explicit with what you feel can be improved organizationally to expedite the successor’s ability to deal with any situation. Expending the appropriate amount of time identifying, selecting and mentoring a successor will help ensure the viability of the brokerage that you have cultivated over the past several years.

Getting Your Business “Finance Ready”

Joe Micallef, CEO, FIRST Insurance Funding of Canada 

The insurance industry is aging. According to the Insurance Institute, the retirement challenge is back-end loaded, meaning the retirement wave will hit hardest during the 2012 to 2017 period. With 25% of our peers set to retire within these next five years, it is evident that a bulletproof succession plan has become a critical component to the overall business plan.

Many brokers engage lawyers, accountants, financial advisors, and consultants to help them develop and implement their succession plan. But, engaging a finance company can have dual benefits: ensuring that you effectively realize your plan while maximizing the value of your business. Getting your business “finance ready” can improve your chances of achieving your goals and reviewing the requirements of a loan application can enable you to focus on key areas of value improvement. By understanding the finance options that are available, owners can structure a plan that meets their succession planning goals.

The loan application process does not have to be cumbersome. It is a tool that owners can use to maximize the value of their business. In order to get a business finance ready, owners must first understand their business structure. A solid share structure will enable flexibility and ensure continuity so you can take advantage of any opportunities.

Next, increase your Earnings Before Interest Taxes Depreciation and Amortization (EBITDA). Continue to increase cash flow and grow your business, as various factors will determine the fair market value.

Thirdly, manage your accounts receivables by minimizing administrative burdens, and avoid the risks of lost profits and damaged client relationships. Owners should also assess their “concentration risk”: the reliance of their business on a few major clients or insurance carriers. They should understand the impact this will have on the value of their business.

Finally, owners need to determine the quality of staff and management. Identify the best people within and outside your business who could possibly take over or buy your business.

When determining the best structure for your succession plan, it is important you understand the factors a finance company may consider to enable your plan as this may greatly assist your potential buyers or succession planning partners.

Take the time to evaluate your options and consult the professionals with the expertise to guide you in the right direction. Don’t underestimate the value that a finance company can offer by engaging them early in the process.

Strategies to Enhance Value

Eric Walker, partner, WFT Corporate Finance & Valuations Ltd. 

Prudent owners of insurance brokerages include succession planning as an integral part of their annual and strategic planning process. This aspect of business planning creates options for an internal and external sale with the potential for enhanced sale transaction value.

Some of the best practices typically followed by planners help increase the value of a brokerage. First, brokerage owners should seek the advice of their professional advisors in order to develop corporate structures that would minimize corporate and personal tax and, as such, maximize net proceeds upon sale. These structures may need to be in place well before a transaction occurs.

Brokers must also maintain strong balance sheets. A firm should have sufficient short-term assets (cash or near cash) to meet its obligations as they come due. Liquidity, or the availability of cash, gives brokerages the flexibility to invest in growth, purchase capital assets to improve productivity and take advantage of business opportunities such as acquisitions. Notwithstanding, brokers have a tendency to build up cash from tax paid profits in their business that, if sufficient, could disqualify a claim under the taxable capital gain exemption rules.

In order to achieve benchmark or higher levels of pre-tax net income, broker compensation needs to be structured on a pay for work-performed basis. A producer compensation structure should be designed to encourage growth and profitability, and be based on sales effort and service work. Brokers often overpay producers on the renewal of an account for service, while paying support staff to actually do the work.

Low loss ratios represent quality business and strong levels of contingent profits. Managing the placement of insurance business protects markets, reduces E&O exposure and enhances the potential for superior underwriting experience. Successful brokerages have a system of front-line underwriting that is monitored and controlled. All potential risk exposures are addressed prior to policy issuance and updated on a regular basis. Preferred clients are profiled and a policy established for those who do not satisfy this profile.

Producers should be required to sign employment contracts outlining compensation structure and the ownership of client lists and business. Ownership should be reinforced and protected with non-competition and non-solicitation agreements.

Contracts and Litigation

Steve Borlak, owner/operator, Borlak Law Office;
Stephen Gleave, partner, Hicks Morley;
Allyson Fischer, partner, Hicks Morley

The policy of protecting employee mobility has been upheld by the courts in Canada and reaches back to the Magna Carta in England. Most employers fail to understand that the courts jealously guard free competition and mobility by employees. Employers who want to protect their business from exiting employees must adopt a prudent and cautious strategy in both the context of the purchase of the business and the hiring of employees.

Every industry has different rules for free competition. In the insurance brokerage industry, there are special rules due to the unique nature of the industry, the role of brokers and the duties of producers. But there are tools available to brokers to protect their clients from producers who compete unfairly.

When hiring a producer it’s important to include a restrictive covenant, non-compete clause, non-solicit clause, confidentiality agreements and liquidated damages.

If there is no restrictive covenant in the contract, there are ways for a broker to protect his business from current producers, including common law obligations and injunctions/court orders.

When buying a brokerage, it is important to consider the protections available in the sale agreement for brokerages and books of business, minority shareholder agreements, and what is new in business valuations.

While the law of free competition is enduring and stable, there is a certain degree of change in the law which every employer in the insurance brokerage industry must be aware of to adequately protect their business interests.

Perpetuating your Brokerage from Within

Rodney Hancock, CEO, McFarlan Rowlands

There are fewer independent brokerages today and the percentage is decreasing as non-brokers, principally insurers and consolidators, continue to buy the brokerage distribution system.

However, many—if not most—broker principals in Canada see the value in perpetuating the independent model. That said, most brokerage principals do not have a perpetuation strategy. While the succession process may seem complex, principals can develop a sound basic strategy by following a few simple steps.

First, start planning your perpetuation long before you need it. Beginning 15 years ahead is not too early.

Second, identify individuals who value independence and have the same principles as you do. You want a broad range of owners. Consider high performing managers as well as producers and customer service brokers with high client retention ratios and strong customer satisfaction ratings. Also, remember your finance and information systems people.

In order to fund your succession remember that “broker companies” have a vested interest in maintaining and supporting the independent brokerage model. Most of their business comes from this model. Insurers will help fund brokerages that plan to stay independent.

There are two important considerations when funding new shareholders. First, sell only a small percentage or small portion of shares to a new shareholder. Second, require every new shareholder to buy a portion of the shares with their own money. They need to have “skin in the game.”

Next, establish a brokerage valuation formula that is equitable and fair.

Shareholders must be employees and required to sell their shares back to the brokerage when they leave and the brokerage must buy them back using the agreed valuation formula.

Finally, the present day multiples do not need to be used. A lower valuation makes sense in two ways. First, the multiples to buy in are the same used for the buy out. This is fair to all as it makes the purchase price affordable and establishes the exit price. It also helps the brokerage attract strong performers and young brokers to our business and makes financing for those retiring easier to plan.

Perhaps most importantly, shareholders can manage their retirement. They can sell some or all of their shares; transfer management to the new team and then continue to be compensated if they contribute to the brokerage. Alternatively, they can sell all their shares and relax and enjoy the fruits of their labour.

Indeed, selling shares and continuing to contribute to the business will likely be more rewarding than a pure buy out from a consolidator/insurer. It may even be more attractive financially.

Building Your Bench

David McCauley, senior vice-president, human resources, Northbridge Financial Corporation 

Regardless of the type or size of your business, spending some time on succession planning, or building your bench, is an investment in the long-term success of your organization. People are your best source of competitive advantage and the war for talent is still very much a reality. And it’s not just a problem for large companies either. Their aggressive pursuit of talent is shrinking the pool available for small to medium-sized companies to battle over.

Succession planning is all about identifying the kind of talent you need, developing the talent you have and how to attract and keep the best people. It’s a complete talent management strategy that helps ensure you have the right people in the right roles to meet your business needs for today and tomorrow.

In order to strategically manage your talent, it is important to set goals. Have each employee set goals that are aligned with your vision, mission and strategy.

You must also manage performance. Whether or not you have a formal process in place, the objective here is to determine whether your employees are below, meeting or exceeding your expectations. 

Now that you’ve measured performance, you’ll also need to determine the potential for each of your employees. Potential is determined by aspiration and ability. Another important factor to consider is whether or not the employee is engaged in the success of your organization. 

You can now create succession plans. Identify successors for each key role and figure out where the gaps are. To fill those gaps, you need to determine who you’re going to develop internally or whether you need to bring in someone new.

Finally, you must develop your talent. People mostly develop through on-the-job experience, so investing heavily in courses or training isn’t always the best approach. You’ll get the biggest impact by creating experiences for them on the job (e.g. job shadowing, temporary assignments, special projects etc.).

Succession planning is the best way to ensure your business is prepared when key people leave by providing a continuous supply of qualified, motivated people (or at the very least a process to identify them) who are ready to take over. 

Broker Panel

Aaron Nantais, CEO, managing partner, Jones DesLauriers Insurance Management Inc.; 
Larry Later, president and CEO, The CG&B Group Inc.; Bruce Rabik, chief operating officer, Rogers Insurance Ltd.

“Do we do succession? Do we sell to a competitor? Do we look at an insurer-led deal?” These were the options facing the management team at Jones DesLauriers Insurance Management (JDIMI) when they began planning for the succession of the brokerage. Ultimately, the company’s co-founders, Bob Jones and Rick DesLauriers, decided to divest some of their ownership in order to secure the firm’s perpetuation. “I think, at the end of the day, we became stronger. We engaged a lot more employees at that level, gave them stock opportunities and built a model that will not only carry the brokerage into the future, we think it’s truly a model that will work to attract new talent and retain talent,” said Aaron Nantais, CEO of JDIMI.

Bruce Rabik, COO of Rogers Insurance Ltd., in Calgary, Alta., discussed how his company has transitioned from a family firm to an employee-owned company. Rogers Insurance has more than 210 employees, 60 of whom are shareholders. The brokerage offers every single employee who has been with the company for at least two years the opportunity to become a shareholder. Of course, there are some stipulations. Employees must pay 100% cash for the shares and there is a minimum buy-in that is currently pegged at five shares. Rabik said “very, very few” of the company’s employees have ever turned down the share ownership offer. He also associates this ownership model with employee satisfaction and the company’s business distinction. Along with other awards, Rogers Insurance has been named one of the Top 50 employers in Alberta seven years running. “I believe our share-ownership plan is a big, big part of creating the employer brand that we’ve built.”

Larry Later, president and CEO of The CG&B Group, joined his family firm in 1978 and purchased it from his father 10 years later. In 1998, he sold his business and merged with the CG&B Group. Since then, the Group has acquired 15 firms in 13 years and Later has certainly learned a lot about succession planning. “There are so many things that are important when you’re looking at an acquisition. Obviously, sustainable earnings are key to support the prices that are being paid,” he said. “But we’ve walked away from more deals than we’ve done and the biggest reason we walked away was that we didn’t see there was a culture fit,” says Later.

Nantais also emphasized the importance of culture when purchasing a company. “Don’t discount the culture that you’re assuming into your culture. You have to make sure that you don’t dilute what it is that’s driving [the] success [of that company]. It’s one of the biggest pitfalls you can walk into, outside of the financial implications of an acquisition.”

On the topic of financials, all panelists agreed that owners need to consider a multiple of earnings when valuing a brokerage. However, they did not all agree on what that multiple should be. Three times earnings was widely acknowledged to be the industry standard, but Rabik argued this was far too high. “I’ve lived through three eras of merger and acquisition activity. About 25 years ago… [the multiple] was 1.5 to 1.7.” He called the second era that of the “consolidators,” such as Vector, Equisure, and Canada BrokerLink. “They went out and did a ton of deals. All of those deals were about two times and a little bit over. An interesting thing happened if you look back in hindsight, all three of those entities and lots of other brokers, basically went broke. They couldn’t afford two times and over. Now we’re in the third era of three times and over,” he said. “Three times for a broker buying a broker is insane. …. It doesn’t remotely work.”

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Copyright 2012 Rogers Publishing Ltd. This article first appeared in the November 2012 edition of Canadian Insurance Top Broker magazine.

Transcontinental Media G.P.