Enhancing Agency Value: What The Marketing Manager Can Do

ENHANCING AGENCY VALUE:

WHAT THE MARKETING MANAGER CAN DO

In daily dealings with agency principals and managers, carrier marketing personnel will do well to remember why the agency exists in the first place: to generate a profit and build value for the owner(s). Marketing personnel can help agencies achieve these goals in two ways: (1) provide products for the agency to sell and impart the product knowledge needed to make sales successful, and (2) provide input on how the agency should be run as a business, utilizing standard business practices. Most agency principals are excellent insurance people, but aren't always well-equipped through training or experience to be high-quality business managers.

For some agencies, mainly those with a self-employed owner and one to three staff people, 'agency value' probably is defined as earning a high standard of living for as long as the principal remains active. At the time he or she seeks to retire, agency value will be a commission-retention payment for three to five years from another local agency.

For most agencies today, however, value is something more than a high standard of living through self-employment. Value in the modern agency era depends on three primary factors:

• establishing a business process by which sales are made (by owners and non-owners); carrier relations, placement, and product development are nurtured;
• customer service is provided by highly trained staff members (not by producers) following systems, procedures, and workflows which have been carefully defined and constantly upgraded; and
• administrative management covering automation, accounting, human resources, and office facilities truly supports sales and service, instead of being the focus of operations.

The remainder of this article deals with increasing the marketing manager's awareness of how the creation of a business entity, profits, and risk determine agency value, and some ways in which marketing personnel might influence value.

Marketing personnel frequently mention a common concern: Agencies with financial problems. This usually means the agency does not have sufficient funds to cover all of its payments to carriers when due; may not be able to cover debt service fully on a buyout; has overdue client receivables; may be operating on a month-to-month cash flow loss while waiting for a contingency check; or the owners may have foregone their paycheck once or twice in the last six months. These are not financial problems; they are all operating problems.

Financial statements are nothing more than a measurement of an agency's operations. If cash flow is low, an operating problem causing expenses to exceed revenue. Since financials are only a measurement of operations, poor financials are a mirror of poor operations. To improve value, profits must be improved, which means that operating problems must be identified and corrected.

To identify operating issues and implement action plans for correction, the agency should be broken down into more digestible and manageable bites. One common mistake made by marketing and agency managers alike is to view an agency as a whole. Marketing, sales planning, product development, placement/quoting, claims administration, client service, and automation needs are very different for Personal Lines Homeowner's accounts than for a Commercial Lines heavy manufacturer employing 125 people. Yet too often business development, carrier relations, customer service, and agency administration are all analyzed and planned for the agency as a whole, rather than for the component parts that make up the agency.

When planning for operations, identifying problem issues and establishing action plans, try to view the agency as having 29 separate operating areas. At the outset, this sounds very complex, but it all breaks down very easily.

Every modern agency should have at least eight basic business segments under its roof, or at least a strategy for each segment:

The agency must perform these eight business functions in three operating areas:

With eight basic business segments each having three key areas of operations, we should have identified 24 of the 29 agency operating areas. The other five areas fall under administration, and should all be considered as support functions that allow the other 24 areas to be performed as smoothly and efficiently as possible. The five administrative areas include:

Even though eight business segments have been identified, this doesn't mean that eight departments plus administration must exist at the agency. For example, in a small agency, a Commercial Lines CSR may handle all three types of Commercial Lines accounts at one desk. It merely means that the planning and action steps for each business development, placement/carrier relations, and customer service will be different for each of the three segments of accounts. The CSR should be following a different set of systems, procedures, and workflow for small Commercial Lines accounts than for large ones.

Overall, an agency should have a written game plan for each of the 29 areas of agency operations. Marketing personnel can potentially affect agency profit by influencing a high number of the 29 operating areas:

• Assist in sales and marketing activity planning for each of the eight business segments.
• Foster a stronger carrier/agency relationship, simplify the placement/ quoting function, and work to identify and develop products jointly.
• Remind agents of the need for written plans in the 29 operating areas.

Remember, the success of agency planning will be measured in profits, which directly enhances agency value.

Given that agency value is a function of profit, risk, and balance-sheet book value, the old rule-of-thumb myth of 1.5x commissions for agency value simply does not work. The formula recognizes neither profit, risk, nor balance-sheet value.

Agency values today range anywhere from .675x commission for an agency with a 15% pretax profit margin and relatively high risk, to 1.5x commission for a firm with a 25% pretax profit and very low risk of profits dropping. The new rule of thumb for agency value is a firm commitment to write four to six times the amount of profit it can generate to a buyer (either an outside buyer or an internal buyout).

Another way to help agencies with enhancing agency value is by encouraging the buildup of working capital. The retained cash will add to balance-sheet value and thus agency value, but is needed to finance the agency's growth. Without cash, growth becomes difficult, and without growth, value will erode.

A worksheet follows for calculating the amount of working capital available in an agency. At a minimum, the amount of working capital should equal 10% of gross agency commissions. This month's audiotape contains instructions for completing the worksheet. Samples of investments in agency growth requiring working capital include:

• New producers (two to three-year investment)
• Automation upgrades (12 to 18 months for results)
• Sales center
• Down payments on acquisitions
• Building secondary management

Marketing personnel are in an excellent position to assist agency owners in enhancing agency value. This is accomplished by acting as a coach in business planning for sales and operations. As a coach, marketing personnel don't actually have to become management consultants and financial accountants; they only have to motivate and monitor. By convincing agency principals to consider 29 areas of operations planning-to focus on growth in profits, not just revenues and on retaining cash for reinvestment in the agency, marketing personnel will have directly given 'value added' to their agency plant.AGENCY OPERATIONS VALUE

• Multiple is based on operating characteristics and risks of profits dropping in the future.

BALANCE SHEET BOOK VALUE/NET WORTH

MEASURING DEBT SERVICE CAPABILITY

WORKING CAPITAL: THE BACKBONE OF GROWTH

Calculating working capital available:

1. Total cash and cash equivalents = $_____
2. Add: Accounts receivable under 90 days = $_____
3. Add: Prepaid expenses = $_____
4. Add: Investments that can be converted to cash = $_____
5. Subtract: Premiums due carriers, including prebills = $_____
6. Subtract: Accrued operating payables = $_____
7. Total working capital available = $______