ACG - Agency Consulting Group

The PIPELINE

A national monthly newsletter for agency principals dedicated to agency management topic

RETIRED IN PLACE

Much of our work at Agency Consulting Group, Inc. revolves around agency perpetuation. We help families pass ownership, transfer ownership to employees, merge agencies, and we sell them at the most favorable prices available. One of the stumbling blocks we encounter in this process is an employee (or owner) who wishes to “Retire In Place”. That is, they want to be relieved of the pressures of:

Pick One or More: ( ) Management

( ) Dealing with companies

( ) Dealing with customers

( ) Dealing with employees

( ) Selling

( ) Paperwork

( ) Change

However, they will graciously stay on to “help with the transition.” How do you deal with an owner or a key employee who desires to stay with the firm with less responsibility? How is morale affected, value, and cash flow of the agency as it attempts to change to a new set of owners? The way you answer these questions can spell the difference between success and failure of perpetuation plans in the short and long term.

In the case of an employee, the answer should be simple. Regardless of the value of that employee over the years, the future compensation of that employee is determined by his/her value to the agency in the future – not in the past. While this sounds like a simple answer, it is not so simple for loyal owners who feel that they owe much to employees who have been with them for many years. That loyalty does not extend to the new owners after a sale or perpetuation and they will not want the liability of maintaining an employee who served the old owners well, but is no longer is productive in his/her role.

The solution is by defining the productive value of an employee’s role as it transitions. If a producer decides to RIP he may fit into the role of Account Executive, responsible for the maintenance of a book of business, but no longer expected to generate new business goals. This is certainly a valued role, but not one valued as highly as that of a producer. The compensation level should be adjusted accordingly. A CSR who decides to RIP may be qualified to process, but no longer wishes the responsibility of customer contact. She should also be given the opportunity to remain a viable and valued employee, but at an adjusted compensation. In both cases, the employee’s desire to diminish his/her role is accommodated, but not at an excessive cost to the agency.

A more prevalent problem is when employees (or an owner) feel that they have ‘paid their dues’ and now wish to maintain their compensation levels and image in the agency, but no longer want to do the job for which they were paid in the past. No agency can afford to maintain ‘dead wood’ in the employee ranks, regardless of past service. The employee was PAID for that past service. Whether it’s the employee or it’s the owner, the greatest impact on the agency from an RIP is not in their financial cost. The greatest impact to the agency is in the cost to the morale of the employees who remain to manage and operate the agency. They will either immediately or eventually feel cheated when they must, in effect, do the work while the employee (or the owner) continues to be paid without the responsibilities that formerly came with the job. This cannot be permitted in the employee ranks. The agency owner has the ability to take a pay cut and replace his efforts with a new employee hired for that purpose. However, even owners will find that employees react much better to working and productive owners than they do to owners who are perceived as RIP, living off the efforts of the agency’s other employees.

Another part of the RIP problem with respect to owners occurs in the sale of the agency following which the old owners remain with the agency for a time to “transition” the accounts. If their role is not truly productive and active, they will be perceived by both the new owners and by the employees as RIP.

The simplest approach in the case of a buy-out is to retain the owner for a specified period for the ‘transition.’ If both of you know that he will be in place for one year and one year only, it relieves the pressure of carrying his salary ad infinitum. This is usually an excellent idea because he can assist in the renewal process of some of his business under new ownership.

But how do you deal with the partner who just wants to ‘scale down?’ This may or may not include sale of stock. We feel that if any owner wishes to change his work efforts, it must be correlated with a change in compensation, regardless of the ownership of the agency. You get paid for what you do now, not for what you have done over the last forty years. The reward for past efforts lies in the enhanced value of the asset. If the scale down is in concert with the sale of his stock, the new owners must be assured that the selling owner intends to scale down his efforts, not coast. This requires the execution of a new job description, portraying the new duties and responsibilities of the job.

Obviously, an owner or employee who has ‘Retired in Place’ negatively affects your cash flow. You are, in effect, paying someone without an appropriate return on the investment. The agency’s value is not affected unless the individual is RIP with the added benefit of an employment agreement. Unfortunately, many of the buy-outs and acquisitions that we see include an employment agreement that not only legally binds the agency to payments, but simultaneously lowers the value of the business by the gross amount due in the employment agreement. This is not a negative implication if the agreement supports an active, valuable employee. However, if the agreement supports an RIP, you are being hit by the double whammy of lowered cash flow and reduced value.

Finally, an RIP will certainly affect the morale in the office. Imagine a busy office with one individual having no responsibilities. In the best case, he simply would not be visible while everyone else is working. In the worst case, he could disrupt the office with socializing or with pet projects that yield no return for the business. Whether the individual is a family member, partner or formerly a key employee, the other employees will know that he is being carried. This will lower morale and cause frustration to the other hard-working employees in your business.

If the RIP situation may arise in your office as the ownership transfers, control the situation by defining the value of the retiring owner. His value in the business will be coming to him in the payout of the stock being sold. His future value to the firm must be decided by determining those duties and responsibilities that he is willing to assume or maintain. A job description and measurable objectives will go a long way in resolving the difficulties before they arise.