Insurance brokerages often have ownership structures with multiple partners, including family-owned operations and multi-generational leadership. While having multiple partners can bring a variety of strengths that can help drive growth – this structure needs to be supported by strategic planning and a framework around equity structure to prevent dysfunctional dynamics between partners that can hurt the firm.
Equity typically represents capital investment and ownership in a company and is not directly tied to value from labor. However, splitting ownership solely based on initial investments cannot guarantee perceived fairness over time. If you establish a ground rules agreement at the outset to ensure fair and effective conflict resolution and fair updates around ownership, it can help solve challenges down the road where the lines between equity shareholders and key revenue drivers can blur.
Firms without plans for managing partnership equity face potential issues
Firms risk a dysfunctional partnership when they have no plan in place for managing partnership equity, including transitioning equity as part of a perpetuation strategy. Without a plan, it can be harder to create incentives that will attract key talent necessary to grow and thrive. Firms also run the risk of competitors using incentives to poach talent and gain access to their clients.
Lack of leadership and equity structure in family-owned and operated firms can also lead to tension and challenging relationships between different generations of shareholders, causing resentment and hurting productivity.
Conflicts also arise when there is a disproportionate relationship between ownership interest and value driven by partners. Without a plan in place to update equity structure to reward partners who drive greater value, the firm may feel forced to sell to alleviate the need for structure. If an owner’s goal is for their firm to remain independent or achieve long term sustainable growth, it is important to diversify equity among key leaders and major producers.
Common challenges of structural partnerships
- Partner(s) do not contribute the same amount of value to the firm. A major problem happens when a partner is not pulling their weight in comparison to their ownership interest. For example, a firm has two owners (50/50 ownership interest) who each started with a $1M book. One partner added $3M to the book while the other added marginal value. Without a plan to adjust equity structure, the firm is likely to seek opportunities to sell to a third-party with established structure, equity, and ownership incentives to alleviate the existing disparity.
- Owners do not have a clear, strategic plan for perpetuation or effective performance incentives. Lack of effective long-term performance incentives leads to significant risk of competitors looking to poach top producers. It’s helpful to make sure younger producers are buying into the strategy of the brokerage. Firms can benefit from effectively grooming their next generation of leaders. Partners may have a hard time convincing young producers to buy in when producers don’t agree with the strategic direction of the firm as decided by the majority owners. There’s a risk that these producers may be lured away by a competitor offering a better story around equity upside.
- Family dynamics may result in selling to a third-party rather than internal perpetuation. When the older generation owns the equity, but the younger generation is running the firm, a clear strategic plan is needed in order to shift ownership, such as selling equity at intervals. Waiting rather than planning to transact internally can result in the younger generation’s inability to pay, leading to the older generation selling at a discount or looking to a third-party. There are two separate issues that need to be addressed with a strategic plan. First is the succession of operational duties; second is the perpetuation of stock. An owner who believes they will succeed in transferring all the stock internally on a retirement date is mistaken, unless they are willing to essentially gift the shares or sell externally.
Solutions to prevent dysfunctional partnerships and drive growth
A regimented, ongoing plan for managing and transitioning equity is ideally put in place when a partnership is formed. This will include a strategy for buying and selling equity in stages, and should be an ongoing, annual process that is included in legal documents and part of strategic planning. Discussions around equity structure and value contribution should be held regularly, where owners can buy additional shares when warranted.
Clauses in the plan can outline the use of equity to reward success and adjust the firm’s ownership structure based on a partner’s contributions to the firm. Companies may want to have processes in place to annually evaluate distribution to shareholders and selling shares around retirement. Agreements can be implemented whereby underperforming partners can be diluted, or standout performance may result in the option to contribute capital. An original partner does not have to give up original equity but can be diluted by issuing more equity.
Establishing a framework for equity structure and proactively aligning incentives for growth and ownership can help protect a firm from potentially dysfunctional dynamics or forcing a firm to seek third-party solutions.
Investment banking services in the USA offered through MarshBerry Capital, LLC, Member FINRA and SIPC, and an affiliate of Marsh, Berry & Company, LLC, 28601 Chagrin Blvd, Suite 400, Woodmere, OH 44122 (440) 354-3230
