All in the Family.

Independent agents have owned their insurance agencies for decades, but their children are finding it difficult--if not impossible--to keep the businesses in the family.

When the principals of the W.G. Leavitt & Son Insurance Agency Inc. decided to retire, it seemed only natural that they would hand over the reins to their children with the expectation that the younger generation would run the 63- year-old agency much as the elders had for so many years.

Although Scott Leavitt, the son of principal Donald Leavitt, and Christina Miceli, the daughter of principal James M. Miceli, had plenty of solid experience from the years they had worked at the agency, they still ran up against some economic roadblocks. After weighing their options, the two decided that selling the Stoneham, Mass., agency to a holding company, while retaining the agency's name, location, staff and status as an independent, was the best way to go.

They are not unique in their predicament. Increasingly, the children of those who owned and operated independent agencies for decades are finding it difficult, if not impossible, to keep the businesses in the family. They face daunting costs for technology and mounting pressure from carriers clamoring for greater sales volume, as well as competition from banks and aggressive direct writers--in short, a number of challenges that their parents seldom, if ever, encountered.

"Business is definitely harder now than it was in the 1960s, '70s and '80s, when these people's parents were coming into it," said Al Diamond, president of Agency Consulting Group Inc., a Cherry Hill, N.J., consulting firm for independent agents. "Unfortunately, the tenor of the insurance industry has changed along with the revenue base." Children who may never have learned sales methods are coming into their own, buying agencies from their parents and expecting things to be the same, he said. "They become disillusioned very quickly."

Fewer Agencies

The numbers help tell the story. There were 42,000 independent insurance agencies operating in the United States last year, down from the 44,000 that the Independent Insurance Agents of America counted in its 1996 study. Moreover, the IIAA's 2000 study found that 29% of independent agencies were involved in mergers and acquisitions. Diamond said that since more than 90% of U.S. insurance agencies are still family-owned businesses, it's apparent that their numbers are declining each year.

Lately, in fact, he has been seeing more and more buyouts of smaller agencies. "Almost all of the little guys are family-run businesses being absorbed into the banking system," he said, adding that he was not casting any aspersions on banks. "The banks are going to get into the insurance business, and they're going to pick their targets where it is most convenient and comfortable with them," Diamond said.

In the case of the Leavitt agency, in fact, the younger generation came close to selling the business to a local bank, a course of action that they thought would be wise in light of the problems they were facing.

Insufficient Cash Flow

The bottom line, Leavitt said, was the cash-flow issue. They had found it impossible, based on the value of the agency, to afford a bank loan large enough to buy out their fathers. "There was no way that Tina and I could carry the note for two retiring principals at the same time," Leavitt said. "If one or the other had gone out, we probably could have done that. But with both going out at the same time--one being 65 and the other being 70--it wasn't going to happen."

Another problem was raising enough funds to provide for their technology needs. Furthermore, they were under strong pressure from insurance companies to raise premium volume at the same time that the carriers were reducing agents' commissions. Also, as a company that wrote more than $5 million in property/casualty premiums in 1999 with a heavy emphasis on auto insurance, they had to contend with the instability of the Massachusetts auto market.

"So we just decided that maybe an internal perpetuation was probably not the best route to go," Leavitt said. "We started to look at what our options might be outside of our own internal operation, and we thought about maybe approaching another agency."

But with this arrangement, they were concerned about job security. The two worried that they'd walk into work some morning to find that someone else was handling the day-to-day management and that they were out on the street, Leavitt said.

"We were also worried about our own employees," he said. "We've got employees who have been with us for years, and we didn't want to take the chance that we might jeopardize their careers. So that was not an option that we wanted to look at."

They next decided to contact the local bank, which had approached Leavitt's father several years earlier with an interest in buying the agency. "Very serious negotiations" ensued, Leavitt said, culminating in the fathers' signing of a purchase and sale agreement. But when bank officials sat down with the principals' children to discuss how the future would play out for them under the new deal, the offspring didn't like what they heard. For one thing, the bank wanted the two agents out on the road selling products five days a week, Leavitt said.

"They had a different philosophy on the direction of the independent agent than what Tina or I felt we could live with," he said. "So we decided to back out of the agreement before it went too far."

The Perfect Solution

That was when Don Southwick came on the scene. Southwick, the president of BCS Holdings Inc., a subsidiary of Boston-based Plymouth Rock Assurance Corp., had heard from Leavitt's marketing representative that the agency was negotiating with the bank. In fact, BCS Holdings was formed in late 1999 with the express purpose of acquiring independent agencies, particularly those facing succession or perpetuation issues.

Southwick called Leavitt and told him he had another option to discuss. The two met, and this time Leavitt liked what he heard.

"Don understands our business," Leavitt said. "The difference between the bank negotiation and the BCS negotiation was knowledge. Don comes from an agency; he understands what problems the independent agent may be facing now and in the future. The bank has no idea. It's a whole philosophy difference--it's a whole sell, sell, sell." Banks look at acquiring insurance agencies as a means of cross-selling their products to the agency's existing clients and don't understand the personal relationship that the independent agent needs to foster with his or her clients, he said.

Leavitt said one of the advantages that BCS brought to the table was competitive funding with flexible terms. BCS also pledged to provide technical support; with just a phone call, agents could get help with problems involving software, hardware or a Web site.

The holding company also promised management independence, allowing Leavitt and Miceli to run the day-to-day operation, including paying bills, choosing markets and placing policies. Also, BCS would not dictate that all of the agency's business be directed to auto insurer Plymouth Rock. In effect, the agency would still operate much as before, only the two fathers would not be around to give their valuable input, Leavitt said.

The proposal sounded so good that Leavitt and Miceli decided to present it to their fathers. "They said, 'OK, it's your decision to make; it's your future; it's your livelihood. We're walking away. So go in whatever direction you feel more comfortable with,'" Leavitt said.

The sale to BCS was finalized Sept. 12, and terms of the transaction were not disclosed. This was the second acquisition for BCS. The first was Amherst, Mass.-based Blair, Cutting & Smith Insurance Agency. Since September, BCS has gone on to acquire two more Massachusetts independents: MacNeil Insurance Agency Inc. in Lexington and Babson-Elwell & Davis Inc. in Gloucester, making W.G Leavitt & Son part of a network. "We pretty much operate as one of four agencies," Leavitt said, noting that linking with these sister agencies has opened up additional markets for his firm. The Leavitt agency's book of business is 85% personal lines and about 15% commercial lines, with some dabbling in life insurance, he said.

Since the sale, Leavitt, the agency president, has been on a learning curve regarding the financial side of the business, formerly his father's domain. For Miceli, the agency vice president, it's meant having to be on the road a little more to handle the commercial clients that her father used to visit. So the transition has amounted to "an internal adjustment, not something just coming from the sale. It was more from the retirement," Leavitt said.

Difficult Decisions

As succession and perpetuation stories go, this one has had a happy and speedy resolution. But as Diamond and Southwick both know, that isn't always the outcome.

Last year, Southwick was in contact with 50 agencies in transition. From that experience, he has learned that an acquisition can prove more difficult if multiple partners are involved. "Some want to stay, some want to leave," he said. While the Leavitt deal took only three months to complete, one of BCS' transactions stretched out for a year, Southwick said.

In the more difficult cases, South wick has found that his intervention can ease the conflict. "I can come in at some stages to help with some money, and I can be the resolution to some of those problems," he said.

During his 30 years in the insurance industry, Diamond has pretty much seen it all. His monthly newsletter, Pipeline, recounted in March how one couple planned for their two daughters to succeed them as owners of the family-run insurance agency. This was the only succession plan that the parents had ever entertained, even though they were approached numerous times about mergers, sales and alliances with financial institutions.

Recently, Diamond wrote, he received a call from one of the daughters who said her parents were ready to retire and wanted to pass the agency to the two sisters equally. The woman said that years ago, neither she nor her sister had any desire to get into the agency business, but the parents insisted they needed them and offered them good pay. She said her sister had grown to enjoy the freedom she had working in the family business and developed some expertise in automation in the office. She was inclined to come into work late and leave early.

But the caller said she had worked in the agency as a customer-service representative, producer and backup manager of personnel and company relationships. She earned life and property/casualty underwriting certifications and was active in agents' associations. Ambitious and hardworking, she had ideas for changing the agency along with the times.

"Now, my parents want to give us the business equally," she told Diamond. "I love my sister and my parents, but I have done much more to assure the success of the business than my sister has, and I feel that, without my parents as arbiters, my sister will take advantage of me and the situation, leaving me with the majority of the workload and taking half of the proceeds." Her parents refused to consider a buyout of her sister, either. "I do not know what to do," she said.

This wasn't the first time he'd en countered this kind of situation, Diamond said. The upshot usually is that both siblings will stay on." One works, the other one plays for the rest of their careers," he said. "They become estranged from each other. And it's a very uncomfortable 40 years."

As happened with the two sisters initially, many children of agents are reluctant to enter the business, but the parents prevail.

"You know why they are brought in? The money is good," Diamond said. After they graduate from college, the father offers them a job in the agency at a starting salary they couldn't make anywhere else. Before long, the off spring realize that they can pretty well run their own lives at work with few requirements to meet, he said.

"Most parents are very bad at firing their own children, and once they're in there, they have jobs for life," Diamond said. "Well, those jobs for life can turn into a very sad event. There's a big difference between a 30-year career and a 30-year jail term. For some, it's a career. For others, it's a jail term that happens to pay very well."

He thinks that's why he encounters so many agents in their 50s and 60s who hate being in insurance. "These are second- and third-generation people who weren't forced, but coerced, into taking over Daddy's agency, and they can't let go. The pay's too good. But they don't like the job," Diamond said.

Doers and Slackers

Since so many U.S. agencies are small, family-owned businesses, most of the calls for help that Diamond receives come from that sector. Every week, he said, a father is likely to call and ask what he should do with his son who has been with the business for 10 years." I feel that I've committed the agency to him, but I'm not sure that he can run it," the caller is apt to confess. Diamond also is president of AAIMCO, the American Association of Insurance Management Consultants. The group meets annually to talk about issues like this and finds that "this is a very common thread," Diamond said.

Less often, he has seen the flip side--the agent's child who is a nose to-the-grindstone go-getter. "If they're motivated, then they are going to take over and their sense of pride is going to require them to do as good a job as the father did, if not better, in order to make this a good investment," he said.

Lawrence H. Wentz would say that his son fits that last description. The elder Wentz is the second generation to operate Kaye Kindt & Wentz, a Horsham, Pa., independent insurance agency that sells mostly personal lines with a very good book on homeowners. Of Wentz's 13 children, only three showed any interest in working at the family business and only one of those, Edward A. Wentz, 30, stayed on to make it his career. Edward "is a hard-working guy" with a Chartered Property and Casualty Underwriter designation, his father said.

Larry Wentz, who has put 38 years into the agency started by his father and two partners, turns 65 this year and knows that a decision is looming about the firm's future. "We still do a Main Street-type of business," he said, proudly pointing out that up to 95% of policyholders renew with them each year. "We have a dozen or more third-generation customers, too," he added. In the last 10 years, the business has grown by 20%, Larry said. Still, he noted, "we've probably seen the last of the glory days of business, the way it was in the '60s."

"What the future will bring for us--Ed and I have many discussions about this," Larry said. "We're at a crossroads now."

It helps that the younger Wentz and his wife are technology-savvy. "That's something that insurance companies like young agents to be able to do," the father said. He couldn't help noticing that when a representative of Hartford Financial Services Inc. visited the agency recently, "he and Ed were on the same track on automation," Larry said.

When Ed takes over, he may want to run the business from home, perhaps adding a wing onto his house to serve as an office, his father said. "The point is, I think he could survive that way, if he continues to be a counselor to his customers," Larry said. "Somebody who is good at this work will always be in demand."

Diamond thinks it's crucial to the success of an agency that the owners' offspring be committed to taking over the business. Considering how margins, commission rates and contingency programs are being cut, an agency will have to generate at least $1 million in revenues within the next few years to be a viable business, he said. Most agencies in the United States are not at that level, he added.

"The ones that are stagnant or declining don't have much chance, because they won't be able to afford to provide the services, let alone the management, to sponsor the kind of business that insurance is turning into," Diamond said. "If they're above $1 million in revenue, or around $6 million to $7 million in premium and if they are continuing to grow, then they certainly do have a chance of perpetuating, internally, a succession plan. However, if they're going to do that, they have to have a commitment from the next generation."

That's why, he noted, he has found that internal perpetuations are more successful when employees--rather than the owner's children--want to buy the business from the owner.

"I'm not against children taking over insurance agencies--I'd love to see it happen--but I need them to be motivated by the same reasons that anyone else who would like to take over an insurance agency would be," he said.

"It's not the security of the parent's agency, it's the potential for doing something on their own. That's usually the difference in how an employee who wants to assume control of an agency and a child of an owner think."

While the offspring's attitude is one of entitlement, the employee is willing to take a big risk, put his money on the line, and then know he has to prove himself, Diamond said. "If the child can take on that same kind of attitude, that would be great," he said. "But I see too many second- and third-generation agencies going down because they don't have the motivation or the skills or talents for sales or insurance that the first generation had."

Southwick is beginning to witness this, too.

"One of the amazing things I'm finding," he said, "is that children of agency principals are not all that excited about taking risk and buying out their parents and moving forward."

Tactical Moves

Although the number of family-owned agencies may be decreasing, there are some tactical moves that can fortify those small agencies that still want to maintain ownership of the business, keep much of their independence and make money from their own operations and resources.

One survival strategy is clustering, which appeals to small agencies that want to evolve and grow but don't have the funding that their larger counterparts do to pay for marketing or to support the additional carriers needed. By banding together into cluster groups, the small agencies can maintain ownership and full control over their businesses while reaping the marketing benefits of much larger organizations, Diamond said. For more than 20 years, he added, his consulting firm has been helping agents locate other agents to create a cluster group for marketing or other common purposes.

The next level beyond clustering--what Diamond calls the "virtual insurance agency"--has come into play in the last three or four years. This amounts to a megamerger of from 10 to 20 smaller agencies that are united from a corporate and marketing standpoint, but that continue to operate in their original locations.

"So the agents themselves are running their shop in their town and they make their money based on their performance," Diamond said. "If they perform well, they make money. If they don't perform well, they don't. But they're a part of a large corporation that's owned by those agencies with some central resources like automation, finances and marketing that make sense to be centralized."

Even strategic mergers on a small basis can make a difference. Several years ago, Diamond was called to a Texas town to advise the offspring of three independent agents who had been longtime rivals.

"The fathers were taking business away from each other on a fairly regular basis over a 25-year period," Diamond said. "The children decided that they didn't need to fight amongst themselves, and once the fathers were out of the picture, they merged. It was a wonderful thing."

He said that the fathers didn't care as long as they got paid and--as much as they liked their competitors as people--didn't have to do business with them.

Although following through on this option produced one large agency in place of three smaller ones, it "can still keep the people in the business and keep the business healthy," Diamond said.

BCS Holdings Builds a Network of Mom-and-Pop Shops

Plymouth Rock Assurance Corp. made Don Southwick two offers he couldn't refuse. First, the insurer persuaded Southwick to sell his successful business--Blair, Cutting & Smith Insurance Agency in Amherst, Mass. Plymouth Rock, one of the agency's lead carriers, knew that the independent agent was planning for perpetuation. Furthermore, Jim Stone, the company chairman, was concerned about banks entering insurance and wanted to protect Plymouth Rock's distribution system.

Southwick thought it over for two years, but he finally agreed, and the business changed hands in November 1999.

"I'd been in the agency business for 27 years, and I was ready to do something different," he said. "We reached an attractive price, and I was able to leave the staff and the location in place." The agency also kept its name and status as an independent agency working with multiple carriers.

The second offer was a new job for Southwick as president of BCS Holdings Inc., its newly formed subsidiary, and now the owner of Blair, Cutting & Smith. The prospect of building a new company for the insurer was "very exciting," Southwick said.

He was an ideal choice, because BCS Holdings is in the business of acquiring independent agencies. "What we're looking for is independent agencies with perpetuation issues and owners who would like to get their equity out," Southwick said.

Under his leadership, BCS Holdings has gone on to acquire three more agencies.

In choosing which ones to approach, Southwick's first requirement is profitability. "I look at a lot of agencies that have a strong presence in the community and strong financials," he said. "We like to acquire agencies that are quite profitable and quite good. We also like to acquire a local name--it's an asset we like to keep out front."

As happened with Blair, Cutting & Smith, BCS keeps the acquired agencies in place with local people running them and making the decisions. In effect, the firm does business as a local agency but with multicarrier representation and no favoritism to the insurance-company owner.

Southwick said that he hears about prospects through his own marketing efforts or telephone solicitations. And once agencies hear about him, they will call, he said.

BCS is a recent arrival among companies that buy independent agencies. Perhaps one of the best known is Brown & Brown Inc. of Tampa and Daytona Beach, Fla., now one of the nation's largest insurance brokerages. Brown & Brown is still riding a wave of acquisitions it began in the 1980s. In the last three or four years alone, the company has made between 25 and 30 transactions.

Like BCS, Brown & Brown requires that an agency be proved profitable before it will consider buying it. But unlike BCS' approach, Brown & Brown requires the newly acquired entity to take on its name and often combines the new business with its existing operations. The management and staff of the acquired agency are integrated into Brown & Brown's nearly 2,300 employees, who work at more than 100 company offices in 24 states.