Succession in Life Insurance Agency

People go into business primarily to make money. Obviously, their intention is to earn more than working for others.

Therefore, they are willing to grind long hours without complaining and they are constantly thinking of ways to expand their businesses by improving quality and efficiency, adding more products, opening branches and marketing aggressively to make more money.

If things go well over many years, the businesses will flourish and grow in value due to additional investment and goodwill. The Chinese have a saying that goes, “Building a business is difficult; maintaining it is even more difficult.” That is because it is not easy for owners of small businesses to find and groom their successor

Many business owners have not actually figured out what to do with their businesses when they call it a day. At the back of their mind, they suppose they will pass it on to their immediate family members.

In another word, they do not think about how to exit their businesses until they have grown very old or fallen ill.

Succession plan
Every business owner should have a business exit plan so as to secure a good value for the enterprise he has built with hard work, dedication and sacrifice. Otherwise, his family will receive scrap value for his business assets other than real properties.

To exit a business, there are basically two options.

The most common and preferred option is to pass on the business to the next generation. But there may be problems. The owner may not have children or even if he has, they may not be interested in the business or capable of managing it.

The other option is to sell the business. Some businesses, especially professional practices, are not easy to sell. It can be difficult to secure a fair value for the business. For example, if an aging dentist does not make arrangement to sell his practice, including his patient list, or take on a partner with the intention to sell it to him later, who will buy things like his dentist chair and equipment?

Generally, life insurance agencies do not have any value as their agency contracts usually authorise their principals to decide whether or not they will recognise the successors. With such a restriction, potential buyers are reluctant to buy the agency. In most instances, the principals absorb the businesses without paying anything. Generally this statement is true unless the Agency Manager finds a solution to overcome the problem. Today - the solution is available but unfortunately many Agency Managers are either too ignorant or too arrogant to acquire the know-how.

Travel agencies, however, are different in that their principals will accept other buyers provided they don’t have bad records.

Kevin is our family friend. He started a travel agency in the late 1970s and grew it to be among the five largest agencies in Malaysia. After operating the business for 20 years, he sold the business for a few million ringgit and emigrated to Canada to join his children who had gone there to study and settled down.

Whether a business has zero value or is worth millions depends on whether there are legal encumbrances.

Mergers & take-overs
If the business is large and profitable enough, additional options are available.

There are many large companies, especially the public-listed ones, constantly looking for profitable and well-managed businesses to merge with or take over. The retiring business owner can negotiate for a reasonable value for his business to be taken over for cash and/or shares of the company doing the acquiring.

He business owner who is selling his company has the option to take a lesser role and continue to receive remuneration as an adviser or leave all together.

Another viable option is to take the route of making an initial public offer (IPO) of the company’s shares and list the company on a stock exchange. This route usually takes a few years to materialise but it certainly offers exceptionally good value to the business owner.

It is common to have the net worth of a company jump anywhere from 50% to 300% if the IPO is executed properly and marketed aggressively.

Alibaba IPO
A case in point is the recent IPO of Alibaba Group of Hangzhou, China, that saw the wealth of its founder, Jack Ma jump from US$7.1bil (RM23.1bil) last year, to US$25bil last week, making him the richest man in China today, from eighth last year.

After a company has been successfully listed, subject to a moratorium on the shares he holds, the business owner can sell them when the share price is favourable. In the meantime, he can hire professionals to manage the business and then groom a selected candidate to take over his responsibilities.

He may choose to keep his shares and sit on the board of directors to set the directions of the company. When he feels the time is right, he may divest his shares to his family members or bequeath them in his will.

Ideally, a business should reward its owner with maximum value for having slogged for it. This will
only happen if there is a viable business exit plan. Do you have one?