Four Elements of High Value Agencies

While the pace of agency mergers and acquisitions has not changed much in recent years, the value of the average agency has.

Today, buyers greatly outnumber sellers, so you would think that the average agency value has gone up. But unfortunately, it's actually gone down.

Why? Partly because buyers are now more selective in their acquisition search. Other

contributing factors include low profit margins, lower contingents and market uncertainty.

We've found in our experience working with agency owners across the country, that there are certain key elements in the firms that achieve the highest value.

Even if the agency owner has no intention of selling or merging, incorporating these characteristics will improve the agency's profitability.

Agency value is influenced by two main elements. First is the ability of the firm to generate a profit. Second is the market demand for the operation due to its uniqueness.

Keeping these elements of value in mind, agency value can be improved by taking action in four different areas.

ELEMENT #1
GOOD STAFF MANAGEMENT
Personnel compensation and employee benefits account for about two thirds of total agency expenses. The quickest way to increase agency value, then, is to eliminate overstaffing. It is important, however, not to just downsize but to "rightsize."

The first step to "rightsize" is to review employee productivity, meaning evaluate each employee's workload and then set performance standards. It may sound strange but most employees do not know what is expected of them.

By "rightsize" then, we don't just mean downsizing necessarily, as the term has come to mean for many. Rather, it can also mean adding employees to your agency staff. In addition, each agency employee should know how many accounts and how much commission volume needs to be handled in order for the agency to be an average or well-run firm. Moreover, the employees should alert management if they see a need for additional or fewer staffers.

Effective Organizational Structure
A firm's success partly depends on how well it can coordinate efforts and effectively manage personnel. With a streamlined organizational structure, talents of the best individuals are utilized, service activities are delegated to the least costly, qualified employee and salespersons are supported with good technicians, which frees up their time to sell to prospects.

The best producer structure for service support is dependent on the book mix, size of accounts and expertise of staff. The most common types are the following:
-Alphabet splits;
-Large versus small accounts persons;
-The producer-unit concept; and/or
-Specialty units or departments.

Management Issues
Good personnel practices for the firm should include:
-Regular staff meetings to facilitate communication:
-Delegating authority and responsibilities to middle managers;
-Holding at least annual performance review sessions using a critique form;
-Establishing written job descriptions and performance standards for each employee;
-Hiring an office manager (when affordable) to handle administrative items and other duties, such as computer or accounting or personnel.

Adopting these practices will put the firm ahead of the competition. They should also improve morale and make employees more satisfied with their jobs.

ELEMENT #2
EFFECTIVE SALES MANAGEMENT
It's important for agency owners to regularly analyze the firm's book of business. This should determine the following information for each producer and the agency overall:

1) the number of accounts, 2) the total commission, 3) a breakdown of types of business in the book (SIC codes), 4) average size of account for each type of business, 5) a breakdown of the number of accounts by different size categories of accounts and 6) the hit ratio.

To complete the analysis, match up the size and types of accounts with the appetite of the firm's markets. Understanding where a firm is now is essential to guiding and directing the future of sales.

Buyers and markets are interested only in firms that show growth. The inability to grow is usually an indication of problems within the agency. Agency value increases with good steady growth and high retention of existing accounts.

Attrition from factors within the firm's control, such as dissatisfied customers, uncompetitive pricing, and lack of technical expertise in meeting the client's needs must be corrected.

Agency owners may also want to steer their agency's production toward solid medium to large commercial lines accounts, which is what buyers are interested in.

Personal lines and small commercial accounts, although profitable if serviced by staff, have fewer buyers. Thus, it is difficult to get the highest value for these accounts in a sale.

Producer Compensation
All producers should sign a producer agreement that establishes book ownership as well as compensation. The latter is important in determining the relative value of firms. (You may want to check with your attorney to create a noncompetitive agreement with your producer, should he or she ever leaves your firm.)

The compensation must be reasonably for the services performed and affordable, so a profit can be realized for the owners and managers.

Generally, a well-run firm cannot afford to pay an average renewal commercial commission of more than 30 percent if it hopes to generate a 15 to 20 percent profit margin. Firms can pay more than 30 percent for new business to motivate producers to bring in new accounts, but then they're cutting into their profits the first year to do so.

Culling small accounts out of the producer's books and establishing a Small Accounts Department is a prudent action.

Allowing in-house staff to handle the small accounts can increase the bottom line as well as frees up the producers to increase their "new" sales and focus on larger commercial accounts.

ELEMENT #3
GOOD MARKET RELATIONS
Most of those who wish to either merge with or acquire another agency list marketing issues as one of the top two reasons. Good carrier relations can make the difference in the firm's ability to survive market cycles, reach growth objectives and increase the firm's value.

Analyzing the agency's book of business will provide fodder for great communication with the companies. A quick review of the leading types of business in an agency's book will determine how to proceed with the relationships of the various companies. Nurture relationships with the companies that write the business the agency sells.

Talk to the underwriters. They should indicate what would enhance the firm's ability to write business with them. It may be a surprise to find that they are eager to help agents place business.

Also, strive to improve the firm's hit ratio. Here's what producers with the best-hit ratios have been able to do:

1) Screen prospects that call or walk in, 2) gather enough information to put together professional submissions, 3) market prospects to a few select carriers for quotation, 4) sometimes rate the risk and 5) often contact the underwriter about the risk before mailing it to them.

These firms have developed positive carrier relationships and they can place business competitively despite market cycles.

Having a central marketing department is also effective for many firms. Success depends upon choosing the right person to do the marketing.

The successful candidate must be able to deal effectively with producer egos, CSR's, and underwriters and should be the most technically qualified commercial CSR in the firm.

Both producers and underwriters should have a high regard for this individual to ensure a good working relationship. The focus of the department should be new accounts and renewals of significant size.

ELEMENT #4
HAVE A PERPETUATION PLAN
While owners are still young they should start thinking about the need to perpetuate the firm.

Who will the successors be?

Once identified, the candidates should give some sort of commitment, such as allowing producers to vest in their book of business.

A good perpetuation plan will ensure the continuation of the book of business. It will also improve market relations. Good candidates should be able to assume the retiring shareholders' relationships with the firm's top accounts and markets.

Establish a fair and equitable compensation plan for all owners and perpetuation candidates. The plan should include compensation components for production and management. A good plan will make the transition of ownership much easier.

High performance equates to high value. There is no magic to increasing the firm's value. If an agency follows these steps we believe its productivity and profitability will improve, While becoming more attractive to both outside buyers and insurance companies.

ABOUT THE AUTHORS
Bill Schoeffler and Catherine Oak, CIC, AAI; are partners in the international consulting firm, Oak & Associates, based in Northern California. The firm specializes in financial and management consulting for insurance agencies nationwide and abroad. Reach them at (707) 935-6565