Search CompleteMarkets

Agency Team Building
AGENCY TEAM BUILDING by Eric Moberg   The internal workings of every agency depend on the employees interacting effectively on a daily basis. Cooperation and communication among employees is necessary for them to do their jobs and for the agency to prosper. None of them can work in a vacuum. The exchange of information regarding changes in the marketplace, new policy provisions, and new underwriting guidelines-not to mention the communication of agency procedures, successes, and failures-is essential for people to perform their jobs. As we gain information, it's very important to communicate it to our co-workers. INTERNAL COMMUNICATION The exchange of information within the agency occurs in numerous ways. One of the most common is through employees' informal conversation; one employee may become aware of some important information and relays it to another employee in normal conversation. Although this can be an effective method of communication between two people, it doesn't pass the information on to all who may need to know it. To make sure that information is properly communicated to everyone who needs to know it, a more formal method should be used. Communication between departments is essential to serving the insured effectively. In many cases, an agency's departments don't effectively communicate with one another. They need to, because Commercial accounts can become Personal accounts, and vice versa. Almost all accounts have the potential to become Life, Health, or Group accounts. Opportunities exist to benefit the agency as well as the insured, but only if departments cooperate. If an opportunity exists with another department, take the initiative and tell the people in it. There should be cross-selling between all departments. If you think improvements can be made in this area, bring it up at your next departmental staff meeting. AGENCY MEETINGS Regularly scheduled meetings-for departments and for the entire agency-provide the most effective way to communicate important information to all those who need to know it. This method not only passes new information to those who will use it the most, but provides an opportunity to discuss all of its applications. How will the new information affect the way your agency does business? What will be the effect on customers? Will the information require a change in the way you do business? All these questions and more should be addressed during the agency meetings. If new procedures are required by the change or new information, discuss them during the meeting. All those in attendance should have the opportunity to ask questions and clarify issues. This forum also gives the attendees a chance to discuss how the department or agency can function better, given the information being presented. Discussion may lead to a decision to try something unique and better suited to specific agency operations. Here are guidelines for meetings, both departmental and agency-wide: Departmental Meeting Agenda (scheduled weekly or monthly) Review of discussions from prior meeting Questions/discussion about prior meeting's topics Discussion of any problems resulting from actions taken after prior meetings Update on current status of agency/department goals and objectives Future goals and objectives New items for discussion: Market conditions Changes in agency marketing direction (such as new programs) Changes in carriers, programs, underwriting, rules New markets or opportunities New business issues (new sales in process) Upcoming new accounts (type, size, work required) Marketing issues affecting new business activity Renewals to be handled (90 to 120 days in the future) Potential account problems (market, competition pricing) Strategy by account (who will handle and how to be handled) Personnel issues Scheduling (vacations, education, leaves, and so on) Personnel awards/recognition General Agency Meeting Agenda-All Employees (scheduled quarterly or semiannually)   Current status of agency's performance vs. objectives New business sales Renewals, premium, and retention Business and market conditions affecting the agency General insurance and economic conditions New opportunities or changes in programs and markets New or changed agency marketing strategies Agency procedures Changes or additions to current procedures Discussion of current procedures Personnel issues Additions, departures, changes Personnel awards/recognition How does communication impact teamwork? Webster's defines teamwork as "Work done by several associates with each doing a part but all subordinating personal prominence to the efficiency of the whole." In other words, several people working together to accomplish a task, with no one person necessarily being more important to the task than the others. Communication is the cornerstone of teamwork. For people to work together, they must let each other know what they're doing and how they're doing it, and pass this information on to the entire team. Meetings and formal communications provide the means for this information to pass from one manager, supervisor, or employee to a group of employees. Participation with the team is the responsibility of all those involved. Anyone who decides not to hold up their part of the work will have a negative impact on the rest. Everyone is a necessary link in the chain. In an agency, customer service may involve a number of people: The Agency Principal/Manager who oversees all operations The Producer who originally writes the account The Department Manager/Supervisor who manages the overall process The Marketing Representative who markets the account The Customer Service Representative (CSR) who services the account The Processor who sets up the account on the computer The Accounting Representative who manages the ongoing billing The Claims Representative who handles losses Think about how your agency is structured. Who's responsible for the tasks just listed? Do you have regular communication with them? Can you work together more effectively to meet the needs of the insured and the agency? Your agency may have separate people handling each of these functions or, as is commonly the case, the CSR handling several functions. Regardless of how your agency is staffed, cooperative interaction between staff members is essential for the business to be handled properly. Each person has a role, and all must perform their part of the process. Remember, documentation and communication go hand in hand. Effective workflow involves equal parts of communication and documentation! Don't allow verbal communication to be your only means of ensuring effective workflow; make sure you take the time to write down the information that needs conveying. Document your conversations, follow up conversations with memos or notes, and take minutes from your meetings for distribution afterwards.

Seven Steps to Qualify Your Prospect
Few steps of forming a business relationship have more importance than qualifying the prospect's interest and commitment. It's a high-payoff and high-value use of your time, and leads to a constructive outcome for both parties in the relationship. The underlying goal is to "match" your product, service, business opportunity, or offer with the values, goals, and commitment of the prospect. You're not there to impose, coerce, or persuade someone to buy what you're offering. It's perfectly OK to offer what you have and for the other person to say graciously, "No, and thanks for offering!" With this paradigm, you free yourself from the pressure of having to sell, convince, or push in any way. It becomes much easier for you to talk with someone and explore the important things. What are the important things? The most important is to identify the prospect's state of readiness. This clarifies their timetable to act. THE BUYING CYCLE Every person goes through an identifiable, predictable cycle that I call "the buying cycle." Embrace it and implement it if you want to make a major impact on your success rate. Every person's buying cycle has three distinct phases: Phase 1: Satisfied Phase 2: Dissatisfied Phase 3: Ready The best use of your time is to identify which phase of the buying cycle your prospect is in.Nothing can produce a higher win for both parties than to help the buyer determine his or her state of readiness to take action. What's the real timetable for doing something, anything? While other people are pitching and extolling the virtues of their product, service, company, plant, marketing plan, or compensation structure, you should talk (and actually listen) to your buyers about the only thing that matters: them! Identifying their state of readiness will guide you to the next step in the relationship. If a person is truly satisfied, you don't want to persuade them to do something new and different. Even if you could, "Anyone convinced against his will is of the same opinion still." Until they become dissatisfied, there's no reason for them to change what they're doing. Taking the time to tell your story to these people is not a high-payoff use of your most precious resource, time. There's good news, however: Satisfied people eventually become dissatisfied. The best you'll do with a satisfied person is inform them or make them aware of something they don't know. This information might get them to realize they're in phase 2: dissatisfied. Even so, they're still far from being ready to do something about their dissatisfaction. We all have problems, challenges, and difficulties, but we don't solve them all. We live with many of them. If you offer a solution to a problem that I'm content to live with and I'm not ready to change, I'll retreat. I'll object to the change you propose-and the game is over (for now). If you're not careful and choose to persist, you might extinguish any chance of future business. Remember, prospects act when they're ready, not when you want them to. Fish eat when they're hungry! Your goal is to find as many hungry fish as you can-phase-3 people who are ready to make a change and committed to seeing it through. The question then becomes, is what you offer the solution they want? They want an adequate solution, not the best. (There is no best.) They want not only an adequate solution, but added value from a trusted advisor. They want to be cared for and cared about. They want to be led to water, and then allowed to decide what and when to drink. The key is communication. Regardless of what phase they're in today, they may be a prime prospect sometime in the future, when their situation changes. People can turn into a phase-3 buyer at any moment. This underlines the importance of staying in touch with people. The whole purpose of marketing is communication and adding value. Phase-2 dissatisfied people are one step away from taking action. Any event-tommorow or next week-can trigger the change that makes them ready to buy. If you're positioned in prospects' minds and hearts as the trusted advisor, they'll seek you out for your counsel. Even if the best decision for them is not to work with you or buy what you offer, you've made a friend and performed a service that will reward you many times. Sometimes, in our fast-paced rush to win people over, we may lose sight of the real reasons we do our work. In some measure, you work to serve others. To achieve this, it may be the right thing for you to recommend an alternative that you can't supply. Would it surprise you that in some industries, 11% to 21% of all new business is referred by the "competition"? Sounds more like cooperation to me. And that's the essential ingredient in every mutually beneficial, win-win business and personal relationship. Trust and respect must be earned by each side. If buyer and seller believe in one another enough to be associates (not adversaries) and cooperative (not confrontational), then each will obtain the highest and best result. This leads to a true partnership. On the other hand, when one party attempts to take advantage of the other (to get the most for themselves), neither party reaches the best payoff. The best is immediately compromised. Making a fair profit is best for business, and seeking the highest ideal for both parties is good karma. To help you identify a person's state of readiness, I developed a simple seven-step process, "Seven Steps to Qualifying Your Prospect." It can be used literally and sequentially, or it can supplement or wrap around a process you already use. Utilize the steps that make sense to you and for the situation. Be flexible. Step 1. Buying Strategy: Why Do You Buy What You Buy? The first thing I want to know about prospects is their buying strategy. What did they buy in the past and why? What criteria do they use to make a buying or business decision? Be careful not to impose your views or beliefs on what, why, how, and when other people buy. It's easy to blow right past this step. You must understand as much as you can about what makes this person tick if you want to position your offer in the proper light. Ask, "What caused you to buy or decide in the past? How did you select your service providers?" The answers to these questions will give you an enormous amount of information and-most important-will get them talking. If you understand more about what they want than anyone else, you're best positioned as the trusted advisor to help them get it. Step 2. Support the Past Decision: What Did You Do Right? This is a crucial step. Making a decision is one of the scariest things we do. Sometimes we get paralyzed, fearing the bad things that may result if we make the wrong decision. Support is something few of us get much of, and if you can support a person's decision, regardless of outcome, you become one of the important people in that person's life. There are so few people who support us. When we meet them, we're instantly attracted to them. Realize that if you criticize their choice, decision, outcome, or action in any way, you immediately chill that relationship. It might take a long time for them to thaw and warm up to you again. Making a decision, any decision, is such an accomplishment that it should be commended and supported, regardless of the outcome and consequences. Ask questions such as, "How did that work out for you? What are you satisfied with, or happy about? What good came out of that decision?" After all, something good comes out of every decision. Praise their action and support the past decision. Step 3. Measure Dissatisfaction: What Would You Change or Do Differently? "If you knew then what you know now, what would you have done differently? If you could go back and do it again, what would you change? What challenges do you face now that you'd like to overcome? How will you do it the next time?" These questions all point to the crucial state of readiness. How dissatisfied is the prospect? Dissatisfied but not quite ready-or sizzling hot, ready to launch into action the moment he or she finds the right solution? In this step, you identify whether the prospect is on or off course-that is, getting closer or further away from what he or she wants. Here's where you'd explore the consequences and implications of the problem or challenge if it persists, and the depth of prospects' emotional dissatisfaction. If they don't feel the emotional, psychological, and financial cost is great enough, they're simply not ready to consider a solution. Today. But they will be. Step 4. Future State: What Are Your Decision Criteria? Find out how the prospect wants a product, service, or opportunity delivered to them. Ask, "What do you want it to do for you? How would you want it to feel? What are the key decision criteria you'll use to buy this product or service in the future? What are your most important priorities?" This helps prospects see a vision of what they want. The clearer the picture, the easier it will be to help them find it, even if you don't offer it. Remember, trusted advisors are always looking out for the best interest of the client, and must be detached enough to recommend solutions even when they don't have them. The universal law of cause and effect will always bring something good back to you if you do good by others. Step 5. Time Frame for Action: When Do You Want It? This is arguably the most important piece of information you'll get from a person. "When do you want that result, solution, benefit, feeling, or outcome? How soon do you want to make a change?" The answer helps you determine your next step. Many people never ask the all important "when" question. They often assume that because a person is interested, they'll actually do something about it right now. Nothing could be further from the truth. People take action when they're ready to buy, not when the seller is ready to sell. Fish eat when they're hungry, not when you drop the line. Just because someone is interested today doesn't mean they'll act today. A trusted advisor helps a person make a decision in his or her right time frame. That means finding out when they want to take the next step or start the process. There's a serious danger in trying to persuade people to do something before they're ready. Research clearly shows a very low success rate when a person is asked to buy before they're ready. Phase-2 buyers are dissatisfied, challenged, or have a problem, but haven't said explicitly that they're ready to go. Knowing a person's time frame for action points you to the next step and defines how you should advance the relationship. It clarifies expectations, clears up misconceptions, and gives you and the buyer a clear target time in which to complete the deal. After lowering their resistance and answering most objections (which are resistance to solutions they're not ready to act upon), you and the prospects are now on the same page. You can now proceed smoothly to the next milestone. Step 6. Qualifying Action: Will You Take Action? I'm an advocate of direct questioning. Direct questions get direct answers. Beating around the bush creates uncertainty and tension. What you do next will be determined by the person's level of interest, state of readiness, and willingness to commit to action. If you don't get this on the table, you can waste a lot of your life presenting opportunities and solutions to people who will never do a darn thing about it. They might listen to you, hear you out, give you the courtesy of looking at what you've got, even humor you-and still never buy from you. Determine how much time you want to spend with each person. Spending time with ready buyers and people who are soon to buy is a high-payoff activity. If you know their time frame and willingness to take action, your chances of gaining their commitment increase dramatically. Ask questions such as, "Would you make a change if it were in your best interest to do so? Would you revise, adjust, or modify what you're doing now to help you get what you want? Would you act if the right opportunity came along? If it would be beneficial to you to [reach your goals, increase your income, buy the second car, finance your children's education], would you make a change right now? Are you committed enough to take action or do something about it?" If you feel these are too direct for your taste, tone them down as you see fit. Direct questioning should not be intrusive or sound like an interrogation-but if you don't get these questions answered, it will be like shooting at a moving target miles away with a blindfold on. That's why so many sellers live in hope. They hope a person is going to buy. They don't know, because they haven't asked the important (and in some cases, hard) questions. Step 7. Commitment: Is This Problem Worth Solving? This is the commitment question. "Is the problem worth solving? Is this challenge or dissatisfaction worth doing something about? Is the opportunity worth pursuing?" If they say, "Yes!" they've stated explicitly that they want to do something about it. Explicit statements lead to high levels of sales conversion, fewer objections, less resistance, and an openness to solutions you may offer. If the person says, "No," they're not ready, or don't see the problem as big enough to need solving. Don't attempt to show them why they should buy anyway. Trying to sell or persuade people who aren't ready is a futile act. It comes off as pushy, leads to disharmony, and creates a feeling that you're trying to convince them to do something against their best interest. It undermines trust, and can all but eliminate any chance you might have for a future relationship. If they're simply not ready now, you can do very little to influence their decision today. But there's a lot you can do about positioning your offer so that when they become ready, they'll commit to action more quickly and easily. It's OK for someone not to buy in to your opportunity. If you present yourself elegantly and know what the other person truly wants, you begin a relationship that could last for years. Fill your pipeline with lots of people, and contact them frequently with valuable information, ideas, and education. Call, write, and fax phase-1 people. Speak at length on the phone with phase-2 buyers, and meet with those who seem the most dissatisfied today. This will help to ensure that when they reach phase-3 status, you're positioned as the trusted advisor and have the best shot to get their business. Understand the buying cycle, use these seven steps-and watch your success rate skyrocket.

Marketing With Newsletters
Newsletters. We see them every day. We subscribe to them, get them for free, market with them. We learn from them. But how much do we really know about newsletters? The First Benefit-Retention Rare is the agency that wouldn't like to see higher retention rates, which results from relationship-building and account-rounding. Good relationships stay with you. Plus, the more policies you deliver to an individual client, the greater the retention rate. Newsletters tell your clients that, as their expert, you keep on top of things and you care enough to communicate the information to them. Newsletters, along with telephone and personal visits, provide a communications continuity that keeps clients happy with you and your services. A great example comes from SAFECO agents Russ and Alice Neville. When a string of arson fires broke out in Lynnwood, WA, they published a special Arson Alert newsletter for 5,000 of their clients and prospects. The same goes for account-rounding: Newsletters are the perfect medium to let clients know about the services you provide. Moreover, your services can be described in newsy, informational articles that provide them with solid reasons for considering your agency for their other needs. The Second Benefit-Prospecting How much follow-up is right for a prospect? Do you call once a week, a month, a quarter, or just when the x-date is due? Developing the parameters of effective follow-up is an individual matter to both the agent and the prospect. Everyone works it a bit differently. Newsletters are ideal for follow-up. They keep your name in front of the client, do not cost the client productive time, and establish your expertise and value as an agent. Just as they build relationships with your existing book of business, so too do they build relationships with prospects. Another area of newsletter effectiveness lies in target or niche marketing. Let's say you want to go after widget manufacturers. Consider a newsletter that deals with the specific needs of those who manufacture widgets. Immediately, they will perceive you as an agency with expertise in their field. You talk their language. The Third Benefit-Meeting The Competition A consumer's memory is relatively short. When faced with a renewal decision or the need to change coverage, the most recently seen name generally leaps to mind. Industry figures show that the average agency is in touch with its customers only once or twice a year. On the other hand, the alphabet houses and large direct writers continually bombard consumers with advertising that builds credibility and name recognition. And the competition is going after every segment of the marketplace, large and small. Newsletters counteract the competition with a cost-effective method of keeping your name and your services at the forefront of the consumer's mind. Compared with the cost of other advertising methods, newsletters are ideal for battling the competition. The Fourth Benefit-E&O Risk Management We've all heard the E&O horror story of the P/C agent who was sued by a widow for failing to advise her then-living husband that the agency also offered Life insurance. To defend against an E&O claim or any type of litigation, the rule is document, document, document. Regularly sent newsletters that advise clients of all your services and provide risk management information provide valid documents of defense against such claims. 'Mr. Jones, you admit receiving the various newsletters we've sent to you during the year. . . .' Newsletters are an ongoing, non-threatening method of informing clients about changes in state and federal regulations, policies and coverages, and areas of exposure. Clients eventually come to expect such information. Although some might argue that a business letter can accomplish the same, business letters don't carry the visual impact of a newsletter. Providers of E&O coverage are currently looking at assisting agencies with newsletter expense, either through cooperative funding or rate reduction. Already many carriers will share the costs of a newsletter program if it features their product lines. This approach is more targeted and less costly than regular print advertising and direct response. Business reply cards can be included. The Fifth Benefit-Dividends When you give clients and prospects information that protects their lives and property, they will remember you. Alerting them to the danger of arson or explaining how to protect their property from a natural disaster helps foster trust, and is sure to pay dividends. Cutting Through The Clutter We're all deluged with mail, much of it junk, to the point of information overload. Once you agree on the benefits of a newsletter, you need to overcome this clutter. Your newsletter must reach out and beckon to them! Above all, do not waste clients' time with a less-than-desirable message. A good newsletter conveys timely and pertinent information to the reader. Appealing art and catchy headlines are critical to draw them into reading. Most of all, a good newsletter has a cohesive look and presents a variety of material in a balanced fashion. Hodgepodge won't cut it! The first step to any direct-mail program is to analyze and determine the needs of your reader. An ongoing research effort must then be continually pursued to gather the facts, figures, quotes, statistics, and stories essential to good editorial content. The writing must be clear and simple to interest the reader. Other considerations require that the copy be reviewed for legality and accuracy. Insurance is complex, and there must be E&O protection. After layout and typesetting: proof, proof, and proof again before printing and distribution. The Sixth Benefit: The 'Do It Yourself' Syndrome Everyone is watching pennies these days. As a result, your first reaction upon hearing of a good idea like a newsletter may be to save money by doing it yourself. Before undertaking such a project, however, some comments- IMMS account executive William Wood's and mine-might prove to be of value. From personal experience, as a writer and as president of both Sound Marketing and Compliance Publishing, I fell into the do-it-yourself trap a few years ago. What began as a shining star of an idea quickly turned into a burden, and the publishing dates soon stretched further and further apart to the point of nonexistence. Something else always took precedence. According to Wood, 'Agencies that attempt their own newsletters often don't realize how much is involved. From the research and writing through the review and proofing, a lot of time and expense is involved.' In addition, an agency could end up spending more for the printing alone than an entire full-service program would cost. Depending on the frequency, such full-service programs usually cost only $1 to $5 per client every year. Additional Benefits Ever the marketer, IMMS' Michy Greenberg points out, 'Even the stuffing, addressing, and mailing can be beneficial to an agency's community relations. We've found that virtually every city or county in the United States has a nonprofit group, shelter society, fundraising effort, or senior center that can provide the logistical support for newsletter mailings. In some cases, this is the only source of support for their organization. When using such services, an agency is truly helping the community and has a tremendous opportunity for positive public relations.' Author's note: Attesting to Greenberg's comment, our company has very successfully used the members of the local high school band to perform mailing services. The students donate their time, and we donate their 'earnings' to the Band Booster Fund. Summing It All Up A newsletter is not a great treatise or novel, but it serves an extremely useful purpose for insurance agents. Customers are demanding more and more education about their insurance purchases because insurance has a tremendous impact on the quality of their lives-health care, automobiles, homes, and their ability to cope with disasters and deaths. Insurance consumers, commercial and personal alike, rely on their agent for guidance and security. They need and benefit from your product. A newsletter program establishes a one-to-one connection between customers and you, which results in more calls, more interest, more business, and greater profits. Can an agency afford not to have a newsletter program? For information on the various newsletter programs offered by IMMS, call William Wood at (800) 753-4467.

How To Buy, Sell, Merge Or Perpetuate An Agency: Introduction – Part Iv
HOW TO BUY, SELL, MERGE OR PERPETUATE AN AGENCY: INTRODUCTION – PART IV by Larry Morrison and Gary Jacobson A Comprehensive Look at the Best Ways to Handle One of the Most Significant Financial Events in the Life of Your Agency Editor’s note: This article is one of a series that covers buy/sell arrangements for agency valuation and tax issues, shareholder internal buy/sell agreements, related estate planning, employment contracts and non-competes. It’s part of a unique pre-publication book by the authors that gives you practical street-level understanding of one of the most significant financial events in the life of your agency. CHAPTER 2 - NEGOTIATIONS In Chapter 1 we dealt extensively with issues to be addressed prior to initiating negotiations to buy or sell an agency. In Chapter 2 we discuss the negotiations from both the buyer’s and the seller’s side. THE FIRST MEETING You’ve done your homework. Now it’s time for the first meeting (or two).   Both buyer and seller should have thought through, in advance, what they are willing to disclose in order to help establish mutual interest. For instance, the seller might be willing to disclose overall revenue numbers, but not profitability or who the agency’s best accounts are. Until mutual interest is established, a Confidentiality Agreement is generally not signed and confidential information is not exchanged. Hence the first meeting often doesn’t include an exchange of confidential information.   Although confidential information might not be exchanged at the first meeting, this meeting is very important. At that meeting, a seller should be able to clearly explain to a potential buyer: • Why the seller’s agency is for sale? • Why now? • What’s most important to the seller in the overall sale? • What the seller will do to help the buyer post-sale? Likewise, the buyer should be able to clearly explain to the seller: • Generally speaking, what’s most important to the buyer in this potential deal? • What makes the buyer a strong potential candidate to buy this particular agency?   The first meeting is usually not the time to talk price. Instead, we recommend starting with a general discussion of the items above. SET THE BASIC RULES FOR THE NEGOTIATION If the initial discussion goes well and a possible sale seems likely to be worth further discussion, then it will help; to set some basic “rules” the parties intend to follow in the negotiations. Nothing can guarantee success, of course, but following these basic rules will greatly improve the odds: Rule #1: Win/Win negotiating. Both sides must believe the sale will be a “win” for them. Never let negotiations become  a contest to see who “wins” individually. It’s rare for a buyer to feel that they simply must buy the seller’s specific agency. Most of  the time, a buyer can just walk away if the proposed sale becomes a “lose” for the  buyer. Likewise, few sellers feel they have only one potential buyer. Even if only one potential buyer is currently at the table, the seller often has the option of not selling. Even in these situations when it seems the seller must sell to one specific buyer, your authors have encountered many prospective sellers who would literally rather wind the agency down over time than feel like a “loser” in the negotiations.  In almost every case, both sides will lose as soon as either side believes they have “lost”. Even if circumstances are such that the “loser” decides not to withdraw from the negotiations altogether, there will almost certainly be multiple ways the “loser” can try to even the score. Once this kind of thing starts, everyone loses, including the side that thought they “won”. Rule #2: The sale must “work” for both sides.  The buyer and seller should cooperate to improve the overall tax effects of the transaction for both sides. Tax savings can sometimes be dramatic, and this can help bring a buyer and seller who are unable to agree on “price” back together. After all, the only part that counts is what you get to keep after giving the IRS its share. The seller should cooperate to structure the sale in ways that will “pencil-out” for the buyer. This often means part of the sale will be seller financed, and it might include an “earn-out” provision that adjusts the price based on future results. If the sale must be an “all-cash deal”, the seller should recognize that the buyer must still justify the money spent based on the cash flow the buyer thinks is likely to be available following closing. Rule #3: Both sides must control their respective advisors. The technicalities of the sale of any closely-held agency can be highly complex. Both sides will probably need their own attorney and CPA involved in the process. Preferably, use advisors who are explicitly familiar with insurance agency sales. Insurance agencies have many differences from the typical closely held business; which means you’ll be better off if you don’t have to educate your advisors on the unique aspects of agency transitions. The principals on both sides need to insist that their advisors respect rules #1 and #2 above. Your advisors know more about the financial and legal technicalities than you do, or you wouldn’t need them. However, they do not know as much about agencies as you do, and they won’t be the ones living with the results. They’ll want you to get the “best” deal you can, and sometimes work a little too hard to “improve” on the results the buyer and seller have already negotiated informally. Although your advisors are virtually certain to find a few things to argue about, don’t let their discussions about the fine points of a deal turn a win/win into a win/lose. The cliché about “deal killer” attorneys or CPAs can easily turn into reality. In our opinion, trying to get the last 2% out of a deal isn’t worth the damage that pushing for that last concession might cause. In particular, letting an advisor talk you into changing something that the principals have already agreed on can be highly damaging to the overall negotiations. When to Talk Price: Don’t get specific about “price” too soon (generalities are OK). Talking about a specific “Price” is premature until: (i) You have a meeting of the minds about how negotiations will be handled; (ii) You have exchanged a substantial amount of confidential information; (iii)  The buyer has had a chance to assess the overall situation. Talking “price” too early in the negotiations can lead to expectations that are too high, or money left on the table if things end up looking better than expected. Either one can kill what would otherwise have been a successful sale. Confidentiality Agreements   Once the buyer and seller have agreed that proceeding to the next step is justified, and have set basic “rules” for the negotiations, the next step is for the buyer to sign a Confidentiality Agreement.   The buyer will need to see a great deal of sensitive and confidential information before the buyer can decide if even making an offer is really justified, much less what this offer should look like. The seller should not provide this information unless the buyer is willing to keep it strictly confidential.   This is a normal and reasonable part of all agency sales. It’s so basic that a buyer who won’t sign a reasonable Confidentiality Agreement should not be considered serious. Although these agreements are generally simple and straightforward, this isn’t always the case. A well-prepared buyer or seller might even bring a Confidentiality Agreement that they consider acceptable to the first meeting. Because these are such a standard part of any closely held business sale, it’s common for a prospective buyer to sign this type of agreement on the spot. However, this isn’t always wise; it’s perfectly reasonable for a buyer or seller to have their attorney review the agreement first. A typical Confidentiality Agreement will bind the buyer and the advisors with whom the buyer chooses to share the information. If the buyer is an individual, this is often all that is needed. If the buyer is a separate entity such as a corporation or an LLC, then such a format is not always broad enough. The key employees of the buying entity who are involved in the negotiations should also execute the Confidentiality Agreement if they present potential competitive threats to the seller, and the buyer entity should take some responsibility if such an employee violates the agreement. When a closely-held agency is sold, it’s common for the buyer to be another closely-held agency. If this is the case, it might make sense for the Confidentiality Agreement to bind the owners of the buying agency individually, as well as corporately. Bear in mind that providing confidential information without insisting on an agreement to protect this confidentiality can jeopardize the legal status of the information. In a worst-case scenario, the seller can accidentally turn confidential information into publicly available information that can no longer be protected legally. Reciprocal Confidentiality Agreement: The seller will probably be asked to offer seller financing for part of the purchase price. If so, the seller is perfectly justified in asking for enough information to justify extending credit. Depending on the information requested, it might be appropriate for the buyer to insist on a Confidentiality Agreement before providing this information. INFORMATION NEEDED, AND WHEN   Once a Confidentiality Agreement has been signed, the seller can begin collecting the information needed to assess the opportunity before making an offer. The information needed at this stage is not as extensive as will be needed to complete the buyer’s due diligence.   Because no two sales are the same, it’s not possible to create a practical checklist of what information to collect. The typical minimum requirement at this stage includes five years of financial data, including both internal agency statements and agency tax returns, plus whatever extra information might be needed based on specific agency details. The representations and warranties (“rep’s & warranties”) in almost all Purchase and Sale Agreements require the seller to disclose all material items proactively. This must be done at some point during the process – we recommend sellers proactively disclose every item the seller thinks might be material early in the process. The buyer can then decide what additional information will be needed before making an offer, and can incorporate the results into the offer. Buyers will often walk away if they conclude that a seller has been trying to hide something material, and failure to disclose a material item not discovered until after a sale is closed can be cited as grounds to rescind the entire transaction.   This is also the time to bring up all items the seller considers essential to an offer. Leaving sensitive items until late in the process hoping that momentum will carry the day is a high-risk strategy and often a waste of everyone’s time.   Much more information will be needed to complete the buyer’s due diligence if an acceptable offer is ultimately made. We’ll discuss this in a later article. THE PRICE IS NOT THE PRICE Although isn’t yet on the table, but both buyer and seller might wish to consult their professional advisors. The structure of a sale can have an enormous impact on the final result, and it is easier to avoid pitfalls if you consult your advisors are early in the process. Taxes. In the wrong circumstances with a poorly-designed sale, the combined taxes on the buyer and seller can easily exceed 50% of the overall available cash flow. It’s common for experienced advisors to be able to restructure the sale in ways that greatly reduce this confiscatory tax burden. The buyer is almost certain to insist that the seller not compete with the buyer after the sale. Some of the consideration for the sale might be allocated to an agreement by the selling shareholders not to do compete. Selling “personal goodwill” and post-sale employment can also be major tools to help improve the overall sale. These tools have tax, as well as legal effects, and can often be designed to lower overall taxation on the sale.   In some cases it’s even possible to lower the price and simultaneously improve the after-tax cash flow for both sides. A lower price and better after-tax cash flow can be a win/win/lose (the loser is the IRS). Risk. Risk can be even more important than price. Most sellers could reduce taxes by not being cashed out, but are afraid they might not get paid if they don’t get all their cash at the front end. Likewise, most buyers would be willing to pay more if they were confident they would succeed. Terms. The terms are the key to reducing taxes and risk. Creative terms can easily end up being more important than the “price”. It’s common to see a retention based element in the sale, and there are a variety of formulas that pay the seller more if future results are good (sometimes referred to as “earn-outs”). LETTER OF INTENT If your discussions succeed, the culmination of this phase of the negotiations is normally memorialized in a Letter of Intent. We will discuss these in our next article. Larry Morrison, CLU, ChFC, is president of the Business Transition Network (Arlington, WA), a firm specializing in agency evaluation, purchase, mergers, and business succession planning. You can reach him at (866) 475-9992 (toll free); or e-mail: [email protected]. Gary E. Jacobson, JD, a partner at Vander Wel, Jacobson, Bishop & Kim, PLLC (Bellevue, WA), offers expertise in the legal aspects of agency evaluation, purchase, mergers, and business succession planning. You can reach him at (866) 498-0008, toll-free; e-mail: [email protected]; or visit www.vjbm.com.

Niche Marketing: Attracting Associations Going Captive
NICHE MARKETING: ATTRACTING ASSOCIATIONS GOING CAPTIVE   by Raymond T. King, Jr.   The letter below recently was received from the executive director of a trade association who had endorsed a Marketpac Safety Group insurance program.   Gentlemen:   This is a tough letter to write. You will recall that during the convention in Montreal , we were doing a survey for a possible creation of a captive insurance program for our association.   This idea has bloomed rapidly and now is a fact. We have established a captive insurance company headquartered in Bermuda ; named a board of directors; and have premium pledges totaling better than $3 million.   For this reason we will be severing our relationship with Marketpac and this letter is to officially advise you of this fact.   I'll be looking forward to visiting with you from time to time at ASAE and other industry functions. As I said, this is a tough letter to write but now we seem to be headed in the right direction so far as our insurance program is concerned.   The point made in the last sentence of the letter is the springboard for this article: 'We now seem to be headed in the right direction as far as our insurance program is concerned.' But what is the right direction for an association insurance program to take?   Before addressing this question, let me point out that association insurance programs are our niche-our specialty-in the insurance industry. The association market is comprised of nearly 40,000 professional and trade associations including national, regional, state and local groups. It is laced heavily with the medium-sized commercial accounts so sought after in today's insurance world. It is a dynamic market, with many brokers and carriers aggressively pursuing it with new and creative techniques.   Why Go Captive?   What happened to make this association change directions? Conventional wisdom would suggest no need for creating a captive (an association-owned insurance company). First, the market is soft. Second the competition is keen. The normal circumstance is that association members would already be getting the best coverages available at the least cost. There should be no need for a member to turn to his association to solve his insurance problems; and if there are problems, is an association captive the answer?   Why did this particular association decide to go captive? There are many possible explanations: The insurance consultant is earning his fee, an aggressive broker is selling an unbundled package of services, an association executive is trying to make his mark, or an unusually imaginative insurance committee has done its work.   In this instance, none of these explanations apply. This association has had a sponsored insurance program for several years. It has changed insurance companies several times. And it has changed its insurance group manager several times. While the process has been frustrating and difficult, the association learned some lessons about the realities of the insurance market.   Member Needs   Most importantly, the association has learned what its members really want in an insurance program. It learned from its own experience, from shared experience with other associations, and from a parade of prospective insurance suppliers presenting proposals to the association. This association also learned from one-on-one discussions and from conducting insurance surveys of its members.   What are members interested in when buying insurance?   (1) Sixty percent of the members are concerned with cost. This comes as no surprise and is one of the constants of business life.   (2) Forty-nine percent of the members want coverages designed for their special needs. They are tired of being asked to learn the insurance business. When prospective insurance suppliers talk about a package designed for their industry, the immediate and enthusiastic response is, 'Thank heaven, someone in the insurance industry has taken the time to learn about us, and we are not being asked to learn the insurance business.' The Scott Seed people put it another way: 'Don't talk to me about your grass seed, talk to me about my lawn.'   (3) Forty-seven percent of the members want a single source for their business insurance. The implications here are enormous for the independent agent in terms of a mental set, suggesting that he or she is in an excellent position to write both the property and casualty as well as the life, group, and employee benefits coverages.   (4) Fifty-six percent of the members do not want coverage limitations in their policy. If the insurance company cannot handle, or does not want to handle what the insured perceives to be an exposure of concern, then the inclusion of sublimits, special conditions, or outright exclusions are of grave concern to association members. An example within the convenience store industry: The underwriter is concerned about holdups. The operator is concerned about loss of food in the freezers. By talking to both parties, it becomes evident very quickly that the underwriter is perfectly willing to expand a coverage extension in the policy for food spoilage, and can exclude holdups (as this coverage is self-insured by most operators anyway).   Cost Not Only Concern   It is interesting to note that cost alone is not the answer. It is the blending of customer concerns into an attractive package that is the key. It is also interesting to note that over the years, the association under discussion was able to package its member concerns into its sponsored insurance program.   When it comes to discussing the cost issue, the safety group dividend program must be mentioned. It is the most common type of program sponsored by associations-members can save money on their insurance through competitively priced premiums and the potential to earn dividends.   A safety group program works like this: All members are written into the same insurance company by their own agent or broker. This grouping of insureds helps spread the risk over a larger premium base. All safety group policies have a common anniversary date. Approximately nine months after the anniversary date, the numbers are analyzed and a retention applied. The money left over, if any, is returned to the participants in the form of a dividend.   It is at dividend time that the association receives a continuing education about how insurance companies account for their money. What was once a well-kept secret on retention build-up is now familiar to many association insurance committees, either through a self-learning process or because they have hired consultant actuaries of their own to review retention in detail. They have become quite expert in such things as 'tax and board,' 'direct commissions,' 'other acquisition costs,' 'loss reserves,' 'IBNR,' 'bulk reserves,' and the always mysterious 'insurance charge,' not to mention the 8% loading in the rate filing for loss control.   Record of Dividends   Many associations, like the one under discussion, have been fortunate enough to have established a rather fine and consistent record of dividends, and have asked themselves one question. Could we have done better by our members if we managed this money ourselves? Could we buy the different skills required to make the program even more member responsive, and less reactive to the heavier overhead of a multi-line insurer?   In many cases, the answer is yes. And so we are witnessing a trend within the association market to sponsor insurance programs for their members. Associations may start with a simple safety group dividend plan and then, charting membership participation and dividend track record, progress to a rent-a-captive, and then on to a full captive of their own.   Participation of the membership is central in whatever program the association sponsors, be it safety group or captive. Without participation, all the numbers are interesting, but academic. If the sponsored program does not generate interest and participation by the membership, even the most basic plan will fail.   Much has been written about trade association insurance programs. And the woods are full of people who can massage the numbers on a theoretical basis. Very little has been written about the amount of sales/marketing effort it takes to get members on board. It is hard and difficult work that requires persistence, staying power, and the critical resources of time and money.   Successful programs are backed by intense direct-response mailings, advertising in association journals, attendance at conventions, and personal contact with members. There is a need for a whole range of promotional services to ensure membership awareness and participation.   Finally, to close the marketing loop, a personal call is needed. Marketpac has an organized network of independent agents throughout the country who have agreed to call on local members of sponsoring associations. These agents present the program to members and report to us on the results of the call so that we, in turn, can report to the association on membership interest and participation.   This new breed of companies, such as Marketpac, also includes Market-Dyne, Famex, MMI, and a few regional concerns, whose entire purpose is based in the successful marketing of association insurance programs. In addition, many of the national brokers have in place or have announced full time divisions or development departments to cater to this growing market.   Loss Control   No discussion of the association market is complete without reviewing the important and member-responsive subject of loss control. Loss control can and does work for an association. Experts generally agree that to implement a loss control program for owner-operated businesses on an individual basis is very expensive and time consuming. Instead, the reality is that for small- to medium-sized businesses there is no consistent education or application of any loss control techniques, particularly in today's market.   However, loss control can be handled through the association, with demonstrated results, provided the following two conditions are met:   (1) The loss control program must be simple in its application and reflect the kinds and types of losses that are common to the association's industry. For example, if lifting has traditionally been responsible for both the frequency and severity of losses, promoting proper lifting techniques to member firms of the association can reduce losses.   (2) The loss control program must be funneled through the normal communication methods used by the association to communicate to its members. By using the association as the focal point, effective loss control programs can be implemented on a cost-effective basis. Consistent messages in association publications, communications from the insurance committee, inclusions in operational or procedural manuals and bulletins, and workshops at state, regional or national meetings all work to reinforce the importance of the loss control program.   Association leadership today recognizes what impact losses, even insured losses, have on their members' bottom line. They're willing to cooperate (some even insist) on the implementation of loss control programs customized to the known experience of their industry. For marketing to be successful it is important to remember that:   Associations are becoming sophisticated and member-responsive in undertaking insurance programs on behalf of their member firms.   Successful insurance programs must be designed to be responsive to the specific needs of the industry involved.   The program should combine the elements of cost, customized coverage, a minimum of coverage limitations as they impact on the targeted industry, and a simple, yet customized, loss control program.   Membership participation is critical, involving an increased amount of marketing specialization. There are a growing number of marketing companies like Marketpac whose full-time job is dedicated to solving the problems of membership participation.   The association market is enormous, and the potential for profit is staggering. There is a great deal of experimentation and research now being done in many quarters as more and more people look to this market as the way to attack the small- to medium-sized commercial account. It is, indeed, an attractive niche.