2021 Best Practices Study

Adapting to a Rapidly-Changing Environment

Internal Perpetuation Best Practices

What if an equity purchase model with buyer financing does not work for your agency due to your corporate structure or operating model? You can employ other transfer mechanism boosters to place equity and/or equity alternatives in the hands of next-generation talent. Although dilutive to existing shareholders and not without tax complications, the following strategies for transfer mechanisms aid recruiting, improve affordability, and drive retention.

Patch Bonuses

First-time agency equity buyers receive a patch bonus to help to weather the initial negative cash flow typically associated with share purchases. For example, if a buyer experiences a $100,000 note payment shortfall in the first 2-3 years of their share purchase, the agency can provide a $50,000 patch bonus to offset the negative cash flow. This eliminates the need to boost distributions to all shareholders and augments the cash available to buyers. Employees (typically producers) are granted stock in the company when they reach and/or exceed certain thresholds. For example, if a producer reaches a book size of over $300,000, they are granted a $ amount or % of stock in the company that vests over a previously determined period (avg. 3-4 years).

Performance Stock Grants

Note Forgiveness Purchase debt can be forgiven for equity purchases on achievement of certain performance thresholds by the buyers. If the debt is held outside the agency, making note forgiveness impossible, performance-driven bonuses can be paid to cover debt payments.

Phantom Stock (aka synthetic equity)

Phantom stock provides selected employees (typically producers or senior management) a deferred compensation benefit based on the performance of the compan y’s equity, affording them many of the benefits of stock ownership without actually giving them any company stock or units. It has no inherent requirements or restrictions regarding its use, allowing the organization to use it however it chooses. There are, however, difficult tax consequences, which you must carefully research. A book equity plan rewards all producers based on pre-established levels of production. It can take the form of a stock grant or deferred compensation plan in which producers receive equity in their books of business rather than in the agency itself. For example, if a producer reaches a book size of over $500,000, they are granted a 50% ownership interest in their book of business at a predetermined valuation multiple (1.0 – 1.5x commission + fees), vested over time.

Book Equity

Although the prospect of perpetuating in 2021 is certainly more daunting than it was a decade ago, the right mix of perpetuation strategies will enable agencies to maintain independence and continue to thrive in the years to come. Additionally, by drawing on the extensive metrics detailed in this Best Practices Study , agencies are better prepared to face the challenges ahead. The future of internal agency perpetuation is bright, but only to agencies who adapt to current realities and strive towards continual improvement.

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