What would you sacrifice to maintain the independence of your brokerage long after you retire?
McFarlan Rowlands Insurance Brokers, located in southwestern Ontario, has an interesting shareholder arrangement designed to prevent owners and/or family members from selling the brokerage outside the channel. The model has been the subject of recent presentations within the broker community, and it may have some brokers thinking about how to perpetuate their own brokerages.
The brokerage’s perpetuation model has two key elements:
• a relatively even spread of ages and generations among the shareholders;
• when shareholders exit the business, they are paid the value of their shares, but the actual shares stay within the business. Exiting shareholders’ shares are either bought by other shareholders or by the brokerage; shareholders sign an agreement saying they won’t sell their shares to anyone else.
So where does the sacrifice come in? (continued)
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Younger shareholders often have less money available to purchase shares than their elder counterparts. Recognizing this, the brokerage does not pay market value for the shares. Instead, the brokerage values the shares each year at less than the multiple the shareholders would receive than if they sold their shares in the open market.
The purpose is to keep the share price low enough that high-performing young employees – IT people, client services representatives, producers or claims people – can afford to buy into the ownership of the business. “The reason we keep the price lower is to make sure that more people can get in,” Rodney Hancock, chief executive and co-owner of McFarlan Rowlands, told Insurance Business.
The flip side is that when shareholders exit the business, they will not receive full market value for the shares that they own. Nor will their family members or friends get to keep the shares: they have to sign an agreement stating that the shares belong to the brokerage, not to them.
“I think the thing that surprises brokers the most [about the McFarlan Rowlands model] is the agreement on the way you get in and the way you get out,” Hancock said. “They ask, ‘How do you ever get people to agree to pay the three times [multiple to become a shareholder]?’
“I say, ‘We don’t use that number.’
“They say, ‘Why not, because that’s what it’s worth.’
“For us, if you want this [brokerage] to go on, you have to learn there is going to be give and take. I know that when I go out, I’m going to get paid a lot less than if we just put this on the open market. But it’s important to me, and to us, that this doesn’t become part of an insurance company.”
Currently, McFarlan Rowlands has 13 shareholders, with ages spread between 33 and 64. An executive group of four people manage the day-to-day operations at the brokerage.
Share ownership is as small as half a percent and as large as 30%. Shareholders will recruit other people to be shareholders, but generally speaking, employees will not be approached about becoming shareholders until they have worked with the company for a minimum of five years.
Shareholders are looking for fellow individuals who share a strong commitment to the perpetuation of the brokerage.
“The key is to get people who believe this is a good way to do business,” Hancock said. “I used to say of family businesses selling their businesses to insurers, ‘If your father, who gave you that business, thought the same way as you, you wouldn’t have had anything to sell.’”
For selected individuals, they may help to try and arrange loans to purchase the shares. These loans always go to the shareholders; they never go to the brokerage.
