Different situations require different answers. Different agencies, although they might have the same problem, require different solutions. Simple, boilerplate answers rarely exist. Chris Burand explains why in this document.
When I was five, my dad taught me to ride a horse (or at least he tried). The first day he put me on a nice old nag. I learned that putting my heels to the horse’s flanks, using the reins, and maybe adding a verbal command for good measure was required to get the horse to go. This worked well on the old nag. The next day, my dad put me on a thoroughbred racehorse (still actively racing). Just like the cowboy on the old Marlboro TV commercials, I leaned forward in the saddle. The horse, Tez, made like a bullet for the mare about a mile down the road. The result? A broken leg, concussion, and facial stitches. What a way to learn that different horses had different 'Go' commands!
To defend against a black bear attack, a person should fight back. But when a brown (a.k.a grizzly) bear attacks, a person should play dead. Last fall, a person from Colorado, well-versed on black bears, was trekking in Alaska. He crossed paths with a grizzly amid a September feeding frenzy. The bear attacked. The hiker fought back rather than playing dead — and nearly died as a result. Different bears require different survival strategies.
The demand for simple solutions and boilerplate answers remains high. I’m asked to provide simple answers virtually every day. The questioners honestly, and sometimes desperately, want a simple answer. Simple answers are easy and desirable. Unfortunately, they’re probably wrong. For example, I’m regularly asked, 'What’s my agency worth?' The desired response is 'X times commissions.' However, to give such an answer without a thorough analysis would be akin to lying because the answer would have no basis in fact.
On average, maybe all agencies are worth 1.3 times revenues, but that does not mean any specific agency is worth 1.3 times. Agency values can range from -2.0 to perhaps, in extremely good situations, 2.0 times commissions (there are rare exceptions above and below this range).
Agencies face common issues to which owners often desire simple, boilerplate solutions. Here are several of these issues, together with a few reasons why boilerplate answers won’t work. If your agency faces one or more of these issues, consider your unique needs as you evaluate your options.
Producer Compensation. Producer compensation depends on producer responsibilities, the local market price, the type of business being written, the extent to which owners are willing to subsidize producers, the agency’s competitive advantages, and many other factors.
Non-Piracy/Trade Secret Agreements. Although these agreements are fairly standard, every agency has different requirements, each state has slightly different regulations, and having an attorney review the agreement is an absolute must.
Agency Valuations. Agency valuations absolutely cannot be 'boilerplated,' averaged, or in any way simplified into a one-sentence statement. Agency valuations are inherently complex and must consider volume, business mix, growth, companies, personnel, producer competency/compensation, the quality of employment contracts, E&O exposure, the balance sheet, and dozens of other factors.
Buy/Sell Agreements. Buy/sell agreements must consider valuation issues, the parties involved (shareholders/non-shareholders), the buy/sell triggers, and many other factors.
Acquisition/Merger Agreements. Acquisition/merger agreements must consider the type of merger/acquisition, state regulations, the unique terms of the merger/acquisition, tax issues, liability questions, employment issues, conditions to be upheld, and dozens of other considerations.
Cluster Agreements. Most cluster agreements I’ve read have significant flaws, so to copy one to use as a boilerplate is like building a foundation of cardboard. The structure will surely crumble in a matter of time. Also, because clusters are as unique as agencies themselves, each agreement must address the special needs of the cluster’s members.
Agency owners and managers often face seemingly simple questions (for example, 'How much should I pay my producers?'). Identifying the solution is complex and unique. There aren’t any simple, boilerplate solutions. Successful agencies will invest the money, time, and effort to find the solution for their agency — not some other agency’s solution!