Aligned Interests-Agency Perpetuation through the Leavitt Group

Insurance Journal asked me to spend 2,000 words on the Leavitt Group’s agency perpetuation philosophy. So, after rattling off some rather sterile company background, I’ll describe how we and our co-owners manage succession in our agencies, and how the Leavitt Group helps perpetuate other agencies.

Background
The Leavitt Group is an organization of affiliated independent insurance agencies. At year-end 2003, Leavitt had 71 agencies with 84 locations in 12 states. Consolidated revenues for 2003 were $77 million on $600 million of premium. Consolidated revenues for 2004 are expected to exceed $90 million.

Each Leavitt Group agency is a separate corporation, typically owned 40 percent by its on-site manager (the agency “co-owner” or “partner”) and 60 percent by parent company Leavitt Group Enterprises (LGE). LGE is owned by the Leavitt family and a number of close associates. Dixie Leavitt started the business in 1952 in Cedar City, Utah, where the business is still headquartered.

LGE creates, builds and perpetuates independent agencies in concert with its co-owners. LGE also provides legal, financial, accounting and other services to Leavitt Group agencies.

Leavitt Group agencies vary in size from $300,000 to $9 million in annual revenue. The agencies are located in the states of Arizona, California, Colorado, Georgia, Idaho, Montana, Nevada, New Mexico, Oregon, South Dakota, Utah and Washington.

Leavitt Group agencies collectively own and govern Leavitt Group Agency Association (LGAA), which owns a general agency, a premium finance company and a central placement facility. LGAA also holds Group-wide insurance contracts and provides automation, training, payroll, and other services to agencies. LGAA’s service costs, business profits and capital ownership are allocated among the member agencies. In addition, 62 Leavitt Group agencies own PacWest Captive Insurance Co., an Arizona-domiciled reinsurer of selected workers’ comp risks.

Each Leavitt Group agency creates its own identity in the community it serves. Agency co-owners exercise significant autonomy in organizing his or her agency’s affairs. Each agency maintains its own insurer contracts to the extent it can support those contracts, and may participate in LGAA’s insurer appointments as well. All contingency considerations flow to the agencies, either directly or through LGAA.

Succession in agencies
In each Leavitt Group agency, we have one or more partners. We’ve had partners in agencies since 1959 when Dixie sold 40 percent of his Las Vegas branch to his brother Bert. Dixie and Bert’s relationship structure has proven to be balanced and sustainable. Much of what we do is built upon the experiences of this initial relationship.

We prefer that our partners neither retire nor die—but haven’t yet found a way to realize this desire. Hence, we and our partners have to plan and prepare.

A key planning element is a shareholders agreement that provides for agency valuation and grants LGE an option to purchase the co-owner’s shares within 12 months of the co-owner leaving the agency. Co-owners hold a right of first refusal that protects them against LGE selling its agency interest to someone repugnant to the co-owner.

LGE holds a “may buy,” opportunity rather than making a “must buy” commitment so co-owners are motivated to help with a smooth succession of agency leadership. The “may buy” provision makes it less likely we’ll be surprised after a long weekend by a co-owner’s voice message saying: “Dane, I’ve moved to Mazatlan, send me a check—or better yet, wire the money.” Co-owners share risk and return with LGE until the perpetuation is complete.

The “may buy” provision is one expression of our “aligned interests” philosophy. We seek to structure relationships and transactions so LGE and its partners are similarly served by profit, growth and smooth succession, and similarly disserved by loss, decline and chaos. Co-ownership aligns interests. Making compensation deeply profit sensitive—for both LGE and co-owners aligns interests. Contingent considerations flowing through agencies (LGE retains no contingencies) aligns interests. Alignment of interests not only encourages good results, but also prevents and reduces relationship friction.

Another planning element is life insurance. Whenever possible, each agency purchases insurance on the life of the co-owner to fund the co-owner’s buyout should a co-owner die in the saddle. Over the last 45 years, three Leavitt Group partners have died before retirement. No life insurance was in place on the first partner death. The last two deceased co-owner buyouts were funded by life insurance.

As our partners move towards retirement, most want to exit in stages and enjoy a few victory laps. A small number want to sprint (or at least jog) to the tape and be done. We seek to accommodate either by planning together years in advance. In instances where co-owners want to wind-down gradually, the key is to tie continuing compensation to productivity in a way that is fair to all concerned.

It is not easy for some partners to discuss aging and the need to prepare for leadership perpetuation. As needed, we initiate the discussion. Co-owners appreciate the fact that we do. Everyone feels better when there’s a sound plan in place to which all agree.

For example, 18 months ago we persuaded a partner of 30 years, now age 60, that it was time to invest in a young producer in his $400,000 revenue rural agency. We found a bright university senior with a strong sales disposition that hailed from the same community and wanted to return. Our partner was introduced to and liked the student. The student went through our internship program during his senior year. Upon graduation he was placed full-time in the agency as a producer. He is doing well. Our co-owner suspects we have found his successor, and so do we. The co-owner and new producer have years to work together before a leadership and ownership transition takes place—but things appear to be in place.

Usually, the next co-owner is already in the agency, and has worked along side the present co-owner for years. Often, the ownership transition happens in stages, perhaps 10 percent or 20 percent at a time—allowing the retiring co-owner to work at his or her desired pace, while shifting compensation and opportunity to those pulling an increasing production and leadership load. Even after being completely bought out, former co-owners frequently choose to continue to work in the agency, with compensation that parallels production.

The typical sales terms between selling and buying co-owners are 20 percent down, balance over 10 years via equal monthly payments at market interest. LGE usually finances the new co-owner’s down payment and guarantees the new co-owner’s payments to the selling co-owner.

Each perpetuation is different, because people and circumstances vary. However, there are well-worn patterns with which we have become increasingly familiar. I believe we get better as an organization with each passing year in helping provide sound transitions within our own agencies. One of our present areas of focus is to improve our internal recruiting capacities and the existing internship program, both of which are important to growth and sound internal agency succession.

Perpetuating other agencies
The Leavitt Group’s consolidated revenues have grown from $15 million at year-end 1994 to an expected $90 million at the close of 2004—a compounded 10-year annual growth rate of 19.6 percent. Two-thirds of this growth has come from agencies joining the Leavitt Group by LGE purchasing a controlling interest (usually 60 percent) in the agency. No single affiliation transaction has added more than 7 percent of the Group’s total revenue at the time of the transaction. We have sought to grow in gradual prudent steps.

Agencies join the Leavitt Group for many reasons; however, perpetuation planning is nearly always a big part of the owner’s decision. Assisting with perpetuation needs or planning is one of LGE’s core competencies.

The Leavitt Group’s 60/40 ownership model fits well with the perpetuation goals of many, but certainly not all, agency owners. The Leavitt Group is particularly apt to be a good fit where:

The agency owner wants to continue as the agency’s leader, stay on as a 40 percent owner, but diversify asset holdings by selling 60 percent of the agency. Such transactions are often attractive to agency owners in their late 40s or 50s who want a general direction for perpetuation, but without tying down their exit-timing or eliminating their ownership incentives to build the agency and accumulate added personal wealth in the business.

The agency owner wants to sell part of the agency to a solid and deserving long-time associate within the agency, but is hesitant to do so because of the personal financial uncertainty caused by relying on repayment from an individual without adequate capital. LGE often buys 60 percent and then guarantees the payments of a successor within the agency who purchases the remaining 40 percent. Sometimes the selling owner retains 20 percent for a time, and transitions leadership and the final 20 percent to his or her successor at some future time. The presence of LGE as the financial backer opens up many alternatives.

The agency owner wants to grow by acquisition, but lacks the capital or experience to properly put together transactions. LGE has put together more than 200 agency or book of business acquisition transactions over the last 20 years—most of them bringing the acquired agency or book of business into an existing Leavitt Group office. It is not uncommon within the Group to have the value of a minority owner’s 40 percent interest come to eclipse in value [of] the 100 percent interest owned prior to selling 60 percent to LGE.

For sake of simplicity, the typical transactions I have outlined speak of a single selling shareholder. Often our affiliation transactions accommodate multiple shareholders in different career stages with divergent goals. We enjoy the adventure of seeking to meet these varying needs in a way also consistent with our own interests.

A phone call to LGE is the typical way affiliation discussions begin. The general information exchanged in the phone call is usually enough to determine if there may be a good fit. If the result of the phone call is continued mutual interest, LGE sends a confidentiality letter and a summary information list, to which the agency responds with easily-gathered summary information. With the summary information, LGE crafts a concept draft and schedules to meet with the agency owner(s) to present the initial concept.

If the process progresses, it goes through several stages, including refining LGE’s understanding of the owner’s goals, amending the concept draft, jointly developing a valuation model, intermediate due-diligence, preparation and review of draft documents, final due diligence, valuation confirmation, and closing. In some instances the process takes only a few months—but six to nine months is more typical, and at times stretches out even longer. Some agency owners seek us out several years before they are interested in talking seriously about affiliation.

LGE’s interest in a potential affiliation is influenced by many factors. Integrity of character is indispensable, as broad trust is extended to co-owners under our arrangement—though certainly not without prudent checks and balances. Prospective co-owners need demonstrated patterns of sales success and customer loyalty. In transactions likely to merge into an existing Leavitt Group office, we have no minimum transaction size, though focus is driven by competing opportunities. In states where we have an existing presence, we are interested in affiliating with agencies as small as $400,000 in revenue—or even smaller when associated with an extraordinary producer. (We are not afraid of start-ups in the right circumstance.) In states where we are not yet present, but which appear promising, we desire to start with a base of at least $3 million of revenue, whether from a single agency or several in reasonably close proximity. Clearly, our affiliation interests include agencies and communities off the radar of some organizations. We are also interested in developing strategic affiliations with the right larger agencies.

Dane Leavitt has been CEO of the Leavitt Group since 1992. He previously served as its counsel and COO. A licensed agent since 1979, Leavitt was legislative counsel to the 1985-86 revision of the Utah Insurance Code. Dane and his wife Ruth have six children and one grandchild. He can be contacted at (435) 586-6553,
dane@leavitt.com, or visit www.leavitt.com. “Each perpetuation is different, because people and circumstances vary. However, there are well-worn patterns with which we have become increasingly familiar.”

Topics Profit Loss Agencies