You could be better off by acquiring a sales superstar than buying another agency.
Every year the numbers seem to get more outrageous. Pay levels for “impact player” athletes such as LeBron James and Tiger Woods continue to climb into the stratosphere. And it isn’t just athletes. You name the endeavor, whether it’s in the business, entertainment, or even the academic world, and there’s a near-universal phenomenon occurring: Impact player inflation. Despite the fact that it drives a lot of people crazy to hear that some people are making so much money, there’s a simple reason for the inflation: The impact players are worth it.
Like so many other businesses, we have been witnessing impact player inflation in the insurance brokerage community in recent times, especially for sales talent. In this mature (and soft) market, agencies are desperately battling for market share. Agency owners are realizing that if they fail to find a way to grow their agencies they are going to be in the unenviable position of owning a large asset with a declining value.
The value of an impact player producer is higher today than it has ever been. When a mature industry is in a market share battle, the talent of those who can grab market share is extremely valuable. A superstar producer brings this market share-grabbing ability, but that’s just the beginning. Yes, the agency gets a large and often very profitable book. But the agency also benefits in many indirect ways. The morale impact of sales success and growth are significant. Perhaps most significant is the motivational effect a superstar can have on the rest of the producers, who find it increasingly difficult to blame “the soft market” for their difficulties.
Impact player inflation is evident in the marketplace today, as top producers are commanding ever-higher sums when they are enticed to switch teams. Partly the inevitable result of fallout from the mega-mergers between Marsh & McLennan, Johnson & Higgins, and Aon and Alexander & Alexander, it seems there has been an abnormally high amount of “free agency” in the market recently.
In addition to more aggressive commission schedules, owners are enticing potential free agents with an assortment of goodies including signing bonuses paid in either cash or stock, stock appreciation rights, book equity agreements, etc. When restrictive covenants are in place, restricting the free agents from moving, suitors are looking to negotiate terms with the “losing team.” All in all, the high-quality talent market has become more fluid, as agents and brokers have come to recognize the very attractive economics of attracting impact players.
And make no mistake, the economics of acquiring an impact player can be outstanding and might best be evaluated by comparing the acquisition of the impact player to the acquisition of an entire agency (by far, the most common means of acquisition-driven growth). A traditional agency acquisition confronts the buyer with a number of challenges, including:
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The agency to be acquired might really be a wasting asset (something that’s going to shrink after you buy it). An agency for sale is often, though certainly not always, at the tail end of its glory years. Discerning the growth potential of the agency you’re buying is critical in determining what it is worth.
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Agencies to be acquired are usually like a sausage link; they contain some things you want, but also some things that you would just as soon do without. Unfortunately, like a sausage, an agency purchase is normally an all-or-nothing proposition.
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Price expectations of agency sellers are often beyond what their agency can justify economically. As a result, the return on investment offered is often meager, and can in fact be negative. Often, after some time, the buyer is left wondering in his quieter moments whether it was all worth it.
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Buying an agency involves a great deal of work. When you consider all the details of integrating an acquired agency into your own, from merging employee pay and benefit plans, renegotiating or terminating office leases, converting computer data and systems, protecting employee morale — plus a laundry list of others, you realize that the task is not for the light-hearted.
Contrast this bleak set of circumstances with the “acquisition” of an impact player producer. First, real sales talent is no wasted asset! A talented salesperson, if properly supported, can grow at several times the rate of an agency. Second, when you acquire an individual, you’re not stuck paying for what you’d rather do without as well as what you want. Finally, because the up-front investment in an acquired individual is often a commission on business produced plus a payment for business that they bring with them, the acquisition cost can be a fraction of what you’d pay for an entire agency.
With this lower acquisition cost comes a far higher potential return on your investment. Paying even an inflated multiple for a $300,000 commission book of business and having it double or triple in size over three to five years offers an investment return that exceeds even the most attractive agency purchase. Combine this higher growth potential with the better profit margin usually generated on a large book of business and the result is a return on investment that might even satisfy a venture capitalist. This can be exciting considering the perception that ours is a “sleepy” business.
Clearly there are some real risks involved in acquiring impact players. There’s a higher “concentration” risk (e.g. all your eggs are in one basket). Also, good people can be extremely difficult to locate and attract. And even when you think you’ve found a superstar, you can’t always be sure that they’re as talented as they appear. But done properly, impact player acquisitions, even at today’s prices, can offer a much better return on investment than a traditional agency acquisition.