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The Connected Business of Insurance

Agency Perpetuation: What You Need to Know

October 27, 2015

by Sarah Lucas

Agency/Brokerage PerpetuationOne of the great things about having your own business is the legacy you create having built it from the ground up. When you’re ready to step back from the helm, you can then either sell it, or pass it down to your chosen candidate to run. In particular, when it comes to perpetuation, our research shows that the insurance industry is lagging behind.

So what can you do to help ensure that you have as many options as possible when it comes time to let go of the reigns? We believe the key lies in positioning – you need a plan, before it becomes too late to create one. Then you’ll need to stick to it.

Start by thinking in the long-term. The future of your business is more than just next year’s sales figures. It also includes investments that make the changes now that will show dividends later in the two most critical factors of your business: your staff, and your technology. Regardless of whether or not you choose to perpetuate or sell externally, by ensuring that you invest well here, you’ll help give yourself the best possible options and outcomes.

In our experience, by running your agency at optimal efficiency now, you’ll reduce the challenges and increase your agency’s value when it comes time to sell.

Step 1: Reinvesting in Staff

Investing in your staff starts with hiring the right people, for the right roles. This may seem simple, but according to our proprietary benchmarking system, Perspectives for High Performance (PHP), only 1 in 5 producers work out in the long-term. Since producers are at the heart of your business, this is an area that requires some sound decision making, financial investment and patience. So why do it? You may have 3, 10, or 50 producers working for you, and maybe you think that’s enough. They all do their work well, and things seem okay. That’s great, and things probably are okay, but is there anyone that stands out as a potential candidate for perpetuation? This is why we believe that investing in your staff is critical. If you eventually want to sell your agency internally, the first thing you’ll need is a buyer, and it’s never too early to start preparing your staff so that a good one is already lined up when you’re ready to sell.

Your producers can be your pool of candidates when you’re looking to perpetuate, so you’ll want to invest significantly in hiring the right people. I’m sure at this point, your main question is, “Who are the right people?” To answer that, start by looking at your current roster. What percentage of your producers are over 50? If you want to create a candidate to buy your business that will be ready when you need them to be, you’ll need to invest in hiring younger individuals.

Often, producers under 50 will be in a better position to take on the debt that comes with buying stock in your agency because they’re likely more able to take risks. To make those risks look more attractive, you’ll need to introduce the best candidates to the idea of purchasing stock in the agency earlier on in their careers. The more comfortable they are with their options, the more likely they will be the ones to help you ensure your option to perpetuate. From there, you also need to make sure that your business is attractive from an investment standpoint.

Step 2: Reinvesting in Technology

Take a look at the technology your agency is utilizing. Making use of current software that handles the automation of your business, and leveraging laptops and tablets to create mobility, can help you attract younger producers looking for modern, digital workplaces. If your website hasn’t been updated in a few years, then refreshing the layout and overall site design should be a priority. Younger producers – and most of your customers – will start learning about your business by looking at your website. A professional, well organized site will make a much better first impression.

Organizational structure can also go a long way toward helping you find, train and keep the most promising talent. We are seeing that more successful agencies are moving away from the traditional producer-controlled workflow toward a more team-based, specialized system. This could mean hiring additional staff, or reassigning and readjusting workflows, to create teams that interact with clients, rather than concentrating the bulk of the customer relationship in the producers’ hands.

Specialization means that you can have a ladder system whereby your service staff supports your producers by interfacing with clients and handling service requests and other more administrative work while your producers concentrate on bringing in new business. Consider implementing intermediary roles like account executives. They can interact with clients on a day-to-day basis, leaving producers free to focus on bringing in new business. This model takes the pressure off producers and allows you have dedicated staff that can give clients the personalized service they need. This makes workflows more efficient, as customers have a variety of ways to get information, access and update their data and file claims. With account technicians/processors to work on any additional administrative work, your customer service representatives (CSRs), as well as your producers can focus on providing the customer service that can help grow your business.

Step 3: Follow Your Plan and Track KPIs

Now that you have a plan, you’ll need to track it to ensure that you’re reaching your long and short-term goals. In our opinion, there are five key performance indicators (KPIs) that will give you a good idea of where you are:

  • New Business Production
  • Organic Growth Rate
  • Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA)
  • Total Commission and Fees per Employee
  • Weighted Average Owner Age

These KPIs are some of the essential methods of determining the overall health of your business, and will likely be important for helping you quickly spot issues in your plan such as hiring or staff problems, untapped growth potential, or compensation discrepancies that might otherwise hinder your efforts. If you review each factor periodically, you should be able to make any necessary changes well in advance, and increase your eventual valuation as profitable systems will already be in place within your business. You can easily extract this data directly from your management system where some of the figures will have been pre-calculated for you. You can then use the rest in the form of financial statements or production reports to create a dashboard of vital statistics that you and your stakeholders can review regularly. Doing this will help enable you to make and meet short-term goals that feed into your overall plan.

You don’t have to view perpetuation as the only option for the future of your business. You may not have come to a decision yet as to what your agency’s future will be, but we believe that ensuring that you have the option to perpetuate is critical. Many agency leaders find themselves forced to sell externally because the chance to perpetuate internally is gone. In our experience, reinvesting in your business and ensuring that your agency is running at optimal efficiency will not only keep both choices open to you, but will also be good for business, increasing your profits, productivity, and overall value within the industry.

What are your plans for perpetuation? Where are you reinvesting in your business? Leave your comments below.

Lucas SarahSarah Lucas, vice president of MarshBerry, is a key contributor to the merger & acquisition and consulting practices of MarshBerry. Her primary responsibilities include merger and acquisition valuation and analysis, due diligence, document review, deal negotiation, integration planning and intangible asset valuation. From the consulting side, Sarah performs agency valuations, consulting projects such as business planning, perpetuation planning and operational reviews, and other financial management consulting.

Securities offered though MarshBerry Capital, Inc., Member FINRA and SIPC, and an affiliate of Marsh, Berry & Co., Inc. 28601 Chagrin Blvd., Suite 400, Woodmere, Ohio 44122, 440-354-3230.  The information contained herein is for informational purposes only. It is not intended as, and does not constitute, an offer or solicitation for the purchase or sale of any financial instrument. Except where otherwise indicated, the information provided is based on matters as they exist as of the date of preparation, and may not be updated or otherwise revised to reflect information that subsequently becomes available, or changes occurring after the date hereof. Past performance is not necessarily indicative of future results and individual results may vary.

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