Agency owners who are faced with the decision of keeping or selling their agencies can't really explore one of these routes without investigating the other. But since you know the advantages and problems of running your agency, most of the emphasis in this article focuses on the decision to sell.
I have concluded recently that many agency owners should sell their agencies. Don't ask me to quantify 'many.' I'll only say it's a lot more than people who know me would expect to hear from me. I have been optimistic about the future of independent agencies and bullish on their value-so what's causing me to recommend selling?
I'm bullish on selling because I'm more optimistic than ever about the economic viability of the independent insurance agency and the equity value it will bring to its owners. What appears to be changing is the quality of ownership. It's being elevated, subtly in some cases and obviously in others. The viability and opportunities presented by independent agencies are so good that people are bringing them a new level of investment in systems, people, marketing, and management-raising the bar of performance and expanding the notion of what an agency can deliver.
Up until fairly recently, the vast majority of 'sell' decisions resulted from retirement or failure. And the failure stories were few and mostly self-imposed through gross neglect or serious financial mismanagement. In the recent history of agency ownership, if you generally liked what you were doing and didn't mess it up too badly, there was no compelling reason to sell your agency. That tide has turned.
I recently read Undaunted Courage, Stephen Ambrose's fascinating account of the Lewis and Clark expedition. When Captain Lewis came to the end of the Ohio River and turned his humble craft north on the Mississippi and then the Missouri, he and his team began a journey analogous to the efforts of many agency owners: pulling and pushing and rowing and slogging upriver all the way to the Continental Divide. But the analogy ends there. The agencies that are now on their way, and the many that will follow, are sprightly craft with pretty good horsepower astern. My point is that coasting is no longer sufficient. Coasting separates you farther from your upriver target.
Many agency owners should put together a plan for selling their agencies, not because the future of the agency business has dimmed, but because for various reasons they aren't likely to make the new and continuous investments needed to make headway upstream.
SELLING POSITIVELY
Good business decisions create or preserve business value. Good strategic business decisions create or preserve critical value-value that lasts for a long time and that makes a meaningful difference in one's financial security. Selling your business properly and with good timing is one of those strategic decisions.
It's a good move. Of course, if you're in a financial pickle and the only way out is to sell when you'd really rather keep, it's not so positive. But for most of you who should sell, this is not the case. And selling properly-or putting in place today the mechanism by which to sell the agency properly tomorrow-is an important task that needs your best effort, not something to feel sorry for yourself about.
I've put together a list of questions to help you decide whether you're among those who should sell their agencies. These questions are for agencies in which Personal Lines and small Commercial Lines are crucial to the future:
- Do you have a specific, detailed plan to grow your unit count (customers and/or policies)? And if you expect average commissions to decline, do you have a plan for unit growth that is sufficient to overcome that? If the answer is 'no,' then a follow-up question is in order: Are you prepared to invest the time and money needed to create such a plan? If the answer is 'no,' 'maybe,' or 'it depends,' check your instrument panel. The 'sell' light is beginning to flicker.
- Do you know the age distribution of your Personal Lines insureds in good and specific detail? If 'no,' are you prepared to devote the resources necessary to find out? Anything but 'yes' illuminates the 'sell' light.
- Do you have a list showing which of your Personal Lines and small Commercial insureds have financial-services products with your agency? Do you have a systematic plan in place to solicit, or arrange for the solicitation of, these products from every customer who doesn't? Think 'sell.'
- Try this one: Have you sat down with all your key carriers and candidly discussed their visions of policy processing and workflows of the future-say, three to five years from now? What tasks are being performed at the agency site? For what compensation? What tasks are done at the carrier's backroom site? For what compensation? If applicable, what tasks are done at the reinsurance site, and at what compensation? If they can't be bothered with your questions or if they have no clue, and if you have no clue either, selling's a definite recommendation.
Here are a few questions for Commercial Lines agencies:
- Do you have a revenue plan and a producer-compensation plan-and thus a profit plan-for each major segment of your business? I'm not talking necessarily about a formal or fancy plan. The question is, do you know what you're doing in each major line to stay or become profitable in this competitive environment? If 'no,' are you prepared to build such a plan?
- Do you have a game plan for two things: First, on which parts of your small-account book, if any, will you go to a company service center and for what deal? Second, on which parts of your accounts, if any, will you consider alternative risk-financing strategies? We're not talking about a chat over cocktails, but a sensible approach in which you know what's hot air and what really works.
- Are you well informed about what your Commercial Lines clients are doing regarding employee benefits plans, executive-security plans, and Human Resources administration? Do you know which ones are considering a PEO? Regardless of whether you want to be in the benefits business, are you well informed about what your customers are doing?
These questions are for any agency, whatever the business mix:
- Do you have a specific plan in place to develop or hire at least one new young person (future partner or perpetuator) for every $700,000 of current operating revenue? If the answer is 'no' and you're within 15 years of what you reasonably consider your retirement date, then the 'sell' light should be on.
- Are you prepared to commit a significant part of your agency's revenue every year for the next 10 years to new information systems and communication technology-and, if your agency is large enough, to the personnel to manage it? This money should be over and above what you're spending now to finance and maintain your current agency-management system.
Unless you can answer 'yes' to questions like these, get serious about a plan to sell-because the 'keep' decision is likely to be a challenging journey. Maybe not as arduous as Lewis and Clark's, but longer.