Plan your UMA with the future in mind

According to Sydney James, client manager at Centriq Insurance, one of the biggest mistakes entrepreneurially owned UMAs (Underwriting Management Agencies) can make is not to plan and implement their business’ exit strategy during the start-up phase.

Fail to plan, and you plan to fail

“No UMA business strategy is complete without an exit strategy,” says James, adding that the implementation of an exit strategy will help UMAs to visualise and plan for any future scenarios that may come into play.

Scenarios to consider when planning an exit strategy for your UMA include:

“The idea that your business will need to provide you, your family, or other key role players with an income after you are no longer able or even there may seem distant during the start-up stage, but is very much a reality you need to plan for,” notes James.

He explains where the key individual is the sole proprietor or partner of the UMA in terms of the FAIS Act, the license will lapse and the UMA will cease to exist.

“Where the UMA is a separate company or close corporation with more than one key individual however, the passing on or disability of one of the key individuals will not have any effect on the status of the FSP (Financial Services Provider),” he says.

Where the close corporation or company has only one key individual and death or disability occurs, the business will continue to exist, but only once a new key individual – as authorised by the FSB (Financial Services Board) - has been appointed.

Separation or Departure

“Business partners who do not get along are very much a reality and should be planned for in the exit strategy,” says James.

Aspects to consider include:

· How are you going to go your separate ways without financially ruining each other, bearing in mind that some partners may not be a part of the dispute, yet they may be affected financially.

· The course of action you are going to take in terms of the following should a partner decide to take life easier and slow down or leave the UMA for another more viable business opportunity:

a. Who is going to do his/her work?

b. What amount is owed to the leaving partner?

c. Where is the above-mentioned money going to come from?

d. Lapsing of the license will be a consequence of the above-mentioned circumstances. How are you going to deal with it?

Passing of ownership

“Whilst the ‘who, what, where and when’ of the situation will most likely only unfold once the above-mentioned decision to actively pass on ownership to another person has been made, the fact of the matter remains that the strategy of just how you intend to pursue the above needs to be outlined in your exit strategy,” notes James.

Selling of the UMA

“What may complicate the valuation and selling of a UMA business is that the key individual of the UMA is usually ‘factored into’ the conditions of the sale,” says James, explaining that UMAs are predominantly a function of the individual underwriter who has an existing relationship with his/her clients and business partners. “As such, the UMA may be of little or no value should the key individual no longer be involved in the business, and this aspect should be debated and outlined in your exit strategy,” he says.

Acquisitions and Mergers

“The upside is that with an acquisition or merger, you negotiate the price. If you choose the right acquirer, your value can far exceed what would be reasonable based on your income. In order to select the right company however, you would have to look for a strategic fit between you and the acquirer,” he says.

“The downside to the above-mentioned option comes in when there is a bad fit between the acquirer and the acquiree - because then the combined companies can self-destruct. The acquired UMA team can also end up working for the combined company, and if things head south, they would have to watch their business implode from within,” adds James.

“Hence, when including acquisition in your exist strategy, be sure to discuss how you are going to make yourself attractive to acquisition candidates, taking the pros and cons of each possible scenario into consideration,” advises James.

Voluntary Winding-Up

James warns that the voluntary winding-up of a UMA could have dire consequences if the decision is made without proper approval from the Registrar. “The approval will only be given if adequate arrangements to meet all the obligations towards your clients are in place,” he concludes.