Forming a partnership might seem to many as a simple exercise. Two or more people decide to start a business. They jointly own and run the business. The business grows. They split the profits equally. Everyone’s happy.
Actually, it’s not that simple, says Al Diamond of New Jersey based Agency Consulting Group. “If there are 40,000 insurance agencies,” he says, “there are 40,000 different ways to structure a partnership.” Equal ownership is one way to do it, but it is far from the only way.
For example, some partnerships are based on each partner’s productivity and results. An individual’s long-run ownership is determined by his or her long-run results. Those who produce more end up with a greater share of ownership.
Similar to that approach is a structure in which an agency retains a successful producer by giving him equity proportional to the value he brings. Diamond jokingly refers to this as a form of “golden handcuffs.” The more his book grows, the greater his share of ownership. This gives young producers a strong incentive to stay with the agency.
Another method is to divide up responsibility based on areas of expertise, with each partner responsible for a defined part of the agency, such as commercial, personal, or benefits. Diamond calls this a “wonderful reason to have a partnership.” The partners are compensated based on the results of their respective areas. Jon Persky of Optimum Performance Solutions in Tampa, Florida, agrees that this can work. “People should do what they do best,” he says.
However, he warns that profit sharing must be calculated fairly. “Partners should be compensated for the fair market value of their services and then have the net profit divided based on share ownership,” he says. The services provided may not be of equal value, so dividing compensation equally may not be equitable.
Agencies can also divide up responsibilities based on each partner’s role. For example, a two-partner agency may have one partner as the producer and the other one running the day-to-day operations. The first partner brings in the revenue, and the second one ensures that the agency spends it efficiently and takes care of customers and carriers.
In an agency with multiple offices, each partner may run a separate office, with compensation based on the office’s results. Diamond says this gives each partner a strong incentive to make an office successful. It also makes transitions easier; if the partner running an office leaves or retires, the agency can hire a replacement without necessarily disrupting the operations at the other offices.
Persky says this type of structure can be advantageous because agency employees will see an owner at the office every day. He cautions, however, that agencies should guard against different partners treating employees differently.
Another structure is one in which the agency has an inactive partner who puts up capital but has no other role. Neither Diamond nor Persky favor this approach. Diamond has seen this lead to litigation and breakups in family-owned agencies. Persky explains, “For this one-time investment, the investor partner is entitled to his share of the profits and sales price for as long as he owns shares in the agency. The ‘working’ partner is showing up every day and doing all that he can to increase the value and profitability of the agency.” Eventually, Diamond says, the active partners will come to resent this.
Persky says the advantage of this structure is the investor may supply capital that the agency might not otherwise obtain. However, “People needing capital should always take on debt rather than taking on an investor partner, unless there is clearly a way to buy out the investor partner whenever the working partner wants.” Diamond agrees. “There are a lot of other sources of money.”
Ultimately, an agency partnership should be structured so that it meets the needs of all partners, says Diamond. He also stresses putting the structure in writing. “Anything codified so that a third party can understand it will work. A verbal agreement will never work.”
The bottom line: As Persky says, “Any partner can own from 1% to 100%.” If the arrangement works for all partners, it should work for the agency.