by Kevin Stipe, December 2005

National Underwriter

A lot of agency principals speak with passion about their goal of transitioning the ownership of their agency to their employees, instead of eventually selling to or merging with another firm.  My guess is that only a fraction of those who say their goal is internal perpetuation will ultimately do so.  Why?  Because for many a lack of preparation will simply make it impossible - they will be like out-of-shape athletes attempting to run a marathon.

If pressed to explain how they'll perpetuate, many freely admit they aren't sure whether or not they are on the right track.  We perceive a real hunger in the marketplace for diagnostic tools that can help agency owners assess their firm's level of "perpetuation fitness" and for prescriptions to help remedy those areas where their perpetuation plan is ailing.

What would a Perpetuation Fitness Exam consist of?  Of course there would be a battery of tests, but the first thing the doctor would check is your agency's Weighted Average Shareholder Age, or WASA.  Like a cholesterol reading, if your agency's WASA is too high, you are likely heading toward trouble.  The lower your agency's WASA, the better.

For most agencies the WASA can be easily calculated.  Simply multiply each principal's ownership percentage times his/her age, and add up the results.  The total is the agency's WASA.  Below is an example of a WASA calculation.

 

So Long-Tooth Associates, a firm whose leader, Bill, speaks passionately about his commitment to internal perpetuation, has a WASA of 54.1.  What do you think - is that healthy or not?  In our experience, if that were a patient's cholesterol reading, he'd immediately be put on Lipitor! 

We've built the following chart to provide some guidelines for evaluating your firm's WASA.  We developed this chart after reviewing the WASA readings for numerous clients, many of which still remain independent, and some of which have sold to a 3rd party.  To give the ranges some perspective, we've compared them to the more widely-known cholesterol ranges.  Simply stated, the higher the WASA, the less the likelihood that a firm will be able to internally perpetuate.

So, if the Long-Tooth principals are truly committed to internal perpetuation, they'd better get going!  The good news in their case is that they have a couple of 5% shareholders in their 30's who are chomping at the bit to get more shares.  If Bill wants to get the firm's WASA below 48 (a desirable target), he can do so by selling an additional 15% a piece to both Mike and Steve.  The table below shows the impact of the sale on Long-Tooth's WASA.

Like any other statistic, the WASA is far from infallible as a predictor of a firm's ability to internally perpetuate.  For example, we've seen firms with WASAs well above 60 perpetuate internally.  But in a high-WASA situation, the retiring shareholders must typically be willing to be more flexible in both the price and the terms surrounding the shares they sell.  And the WASA does not capture the most important perpetuation issue of them all - leadership.   Nevertheless, if you are looking for a tool to stimulate some hard thinking about your perpetuation planning, the WASA's a pretty good place to start.

Kevin Stipe is a senior vice president and principal of Reagan Consulting, Inc., an Atlanta-based management consulting firm that developed and produces the "Independent Insurance Agents and Brokers of America Best Practices Study."  The Best Practices Study may be accessed free of charge at Reagan Consulting's website www.reaganconsulting.com.  Kevin may be reached at (404) 233-5545 or by email at Kevin@reaganconsulting.com.