Search CompleteMarkets

...r compensation, because production fuels revenue. All else is expense. So it's...ons about profits solely on minimizing taxes, though, might not have the retai...

... insurance carriers have served to fuel the flames. Insureds are demanding tha...rence has to made up on other kinds of taxes. Because all agents are in thi...

... often going against the very business judgments that made the acquiring firm's CEOs successful. Why does this happen? Different reasons crop up, but more often than not it's some combination of: (1 ) The ego and emotions of the acquirer; (2 ) assumptions of false synergies; and (3 ) too much focus on revenue growth. Ego and Emotion: Some growth-by-acquisition entrepreneurs feel compelled to fuel expansion by consummating the latest deal. Without a deal, the owner can't justify their existence (ego) . How about the firm that lost out in past negotiations and is determined not to lose again (emotion)? Or the situation in which the buyer and seller are friends? These and other examples can easily cause the acquirer to pay for value that doesn't exist. Buyer beware! ... Value (NPV) of future cash flows (discounted at the acquiring firm's cost of capital) compared with the purchase price. When the NPV of the cash flows exceeds the purchase price, value is added. If it's that simple, what are the hang-ups? Future cash flows are only estimates, based on assumptions of incremental commission revenue, account attrition rates, agency operating expense costs, effective tax rates, and other factors. When conducting an acquisition, do your homework. Know exactly what you're buying. Know who'll own the entire book of business. Know the retention rates. Know the producer capabilities and all the severance packages and employment agreements. Analyze the combined carrier offering to determine where you can enhance company agreements. Understand areas in which you can exploit cross-selling opportunities. Plan the ...

...on entrepreneurs feel compelled to fuel expansion by consummating the latest ...cy operating expense costs, effective tax rates, and other factors. When cond...

... begin to formulate a fair owner compensation plan, set a value for each area of performance: management, production, and ownership Whether an agency has two or 10 owners, each individual's compensation must be measured against the value of these contributions. VALUING MANAGEMENT Let's face it, the management function shouldn't be compensated at the same level as production. Production is the primary basis for compensation, because production fuels revenue. All else is expense. So it's not unusual - and shouldn't be viewed as such- for agency owners to make different amounts of money. Most agencies value the management function at around 5% of total revenue, though it ranges from 4% to 7%, depending on an agency's size and its stage of growth. Sometimes management is worth more to an agency than at ... management. The potential for controversy lies in how much profit is taken out in bonus pay and how much is retained. We encourage agencies that have retained earnings to fund growth enhancers, such as new producers, books of business, and technology. But it's the owners who'll determine how much profit to take in compensation and how much to invest back into the agency. Of course, there are tax implications to consider, so agents should consult with a qualified tax advisor. But in general, agents who want to take profit out should do it as either a bonus or a dividend, depending on the organizational structure and tax situation. Owners who base their decisions about profits solely on minimizing taxes, though, might not have the retained earnings necessary to keep the agency vibrant in later years ...