INSURANCE INDUSTRY KNOWLEDGE FROM OAK STREET FUNDING
S P R I N G
2 0 1 6
Time to retire to your dreams?
Slow Growth vs. Fast Growth Page 14
What you can learn from large and small agencies Page 16
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Spring 2016 Publisher Oak Street Funding Editorial Director Michelle Wilson
Contributing Editors Michelle Wilson Stefanie Neer
Graphic Designer Aidreen S. Hart The Bridge is a newsletter produced by:
do you 7 How sleep at night?
Finding peace as an agency owner
10 Drowning in drudgery Know when to seek help vs. DIY
18 Specialty distributors Retail agents want more than just specialty products
Oak Street Funding 11350 N. Meridian Street Suite 600 Carmel, Indiana 46032 866-625-3863
Potential borrowers are responsible for their own due diligence on acquisitions. Loans and lines of credit subject to approval. California residents: Loans made pursuant to a Department of Corporations California Finance Lenders License. The materials in this paper are for informational purposes only. They are not offered as and do not constitute an offer for a loan, professional or legal advice or legal opinion and should not be used as a substitute for obtaining professional or legal advice. The use of this paper, including sending an email, voice mail or any other communication to Oak Street, does not create a relationship of any kind between you and Oak Street.
© 2016 by Oak Street Funding LLC. All rights reserved. Any duplication without prior written permission is strictly prohibited.
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LETTER FROM THE FOUNDER/CEO
Pursue your dreams KNOW YOUR OPTIONS
We all have to take time to evaluate where we are in the business life cycle and determine where we want to be in the near and distant future. Whether we conclude we are moving up the ladder of success or ready to start winding down,
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both require planning and wisdom. Growth involves getting better, expanding, increasing, improving and emerging stronger. Exiting for retirement or other reasons also demands diligence and thoughtfulness. Because of current M&A opportunities, increases in multiples and the usual amount of uncertainty, agencies should be informed about selling and succession regardless of when they may be placed on the market. They should also know their exit options and understand how timing of a transaction can affect the enterprise
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value. Knowing your options doesnâ€™t mean you have to actually start down the path of acquisition talks and assemble a team of advisors, but it can help you prepare for the future, ensure your agency has maximum value for potential buyers, or is ready
to transition to a successor. Oak Street Funding strives to make resources and financing available for every stage in a business life cycle. In this issue of The Bridge, we offer insights to help you grow in pursuit of your goals or plan for an exit. We hope you find its contents helpful in reaching your goals.
Oak Street Funding Vision Statement Oak Street Funding utilizes industry knowledge, well-developed technology and passion to deliver best-in-class service and capital products to insurance and finance professionals nationwide. Our customer-focused mind-set and access to capital will allow us to continue to fulfill customer needs, identify growth opportunities and provide an empowering work environment for employees. 8 6 6 - 6 2 5 - 3 8 6 3 â€˘ w w w. o a ks tr e e tf u n d i n g . c o m / subsc r ibe | 3
Agency Growth Trends Survey
Business planning has significant impact on agency growth and success. 4 | w w w.oakstre etfundin g . co m / s u b s cr ib e â€˘ 8 6 6 - 6 2 5 - 3 8 6 3
Insurance agency owners continually strive to grow their businesses and are challenged with developing the most effective growth strategies possible. Oak Street Funding first conducted a survey1 in 2014 to learn about these challenges. We conducted a second survey in the fourth quarter of 2015, only this time we asked new questions to help pinpoint, identify needs and potential opportunities, and share information that can help agency owners understand the current landscape of agency growth. The following pages highlight the results from 250 agents who responded to the survey.
Who Responded •
Fairly consistent with 2014 results, 66 percent of all respondents were veteran agents who have been in business for nine or more years. 15 percent have been operating for three or fewer years. 62 percent of respondents were independent agents, while 38 percent were captive agents. In 2014, independent agents accounted for 70 percent of all respondents.
57% 57% of agencies with long-term plans have seen growth of 10% or more over the last two years. (vs. 42% average)
Most agencies know what their competitors are doing.
Agency Growth •
Growth results remained very similar to 2014 results. Roughly half of all respondents grew by 10 percent or more over the last two years, while nearly 28 percent grew by 9 percent or less.
Sales processes make a difference. 37 percent of agencies that follow a sales process grew more than 25 percent whereas only 21 percent of agencies with no sales process grew by that same amount.
Independent agents have experienced more growth. »» 5 8 percent of Independents versus 39 percent of Captives have seen growth of 10 percent or more over the last two years. »» 2 5 percent of Independents versus 14 percent of Captives have grown more than 25 percent over the last two years.
What Contributes to Growth •
Business planning has a significant impact on growth. »» 5 7 percent (vs. average of 42 percent) of agencies with business plans have seen growth of 10 percent or more over last two years.
Certain marketing activities may contribute to higher growth. Higher growth agencies (25 percent or more growth) were more likely to engage in website marketing, referral programs and special events.
Higher growth agencies report spending less time than average pursuing existing clients.
1 Survey Methodology – In October of 2015, Oak Street Funding sent an online survey via email to over 20,000 insurance agency owners throughout the United States. The names were randomly selected from Oak Street’s database and the results presented are from 250 professionals who responded to the survey.
Agencies with business plans initiate contact with existing clients more frequently.
63% 63% of Captives have used personal credit or assets to finance agency initiatives vs. 50% of Independents.
Should you borrow to reach your goals?
or businesses that consider or choose to take on debt to implement growth initiatives, achieving the right balance between that debt and equity is important. Maximizing a company’s return on equity requires a certain amount of debt. Oak Street appreciates the need for clients’ capital management strategies to align with their long term growth plans while minimizing potential cash flow vulnerabilities and works cooperatively with its clients to achieve these goals. In a survey conducted in 2015, Oak Street discovered its clients were able to realize an average of 24 percent growth by the investment of monies borrowed into their agencies.1
Equity or debt financing?
When you decide to secure financing for your insurance business, you have to determine whether equity or debt financing is the best fit. Equity is the value of a piece of property after any debts that remain to be paid for it have been subtracted. Equity Financing is the business exchange of leveraging a portion of existing equity (ownership/shares) for capital. Debt Financing is defined as an amount of money owed to a person, bank, company; the state of owing money to someone or something (Merriam Webster Dictionary). The biggest differences between equity and debt financing are ownership and control. With equity financing, you typically give another entity or person an ownership stake in your business. What’s more, this may allow an outsider to significantly influence the daily operations of your business. On the other hand, debt financing allows you retain your current ownership structure and control of your operations, but will reduce your income as a result of debt cuts. The main change resulting from debt financing is the need to budget and ensure adequate cash flow to cover the repayment of a loan.
Can my business qualify for financing?
There are financing options for insurance businesses. While banks are often the first lender owners consider, banks are often hesitant to lend capital to insurance agencies and insurance agency buyers. An insurance agency’s primary asset is its future commissions and banks normally base lending on balance sheet financials and hard collateral such as real estate and inventory. As a result, insurance businesses frequently find it difficult to obtain bank financing, especially without providing personal assets as collateral. An insurance lender, however, will allow future commissions to serve as collateral for financing and take into account carrier ratings, contract rights, retention rates, loss ratios and other factors. In determining if a business is credit worthy, an insurance 6 | w w w.oakstre etfundin g . co m / s u b s cr ib e • 8 6 6 - 6 2 5 - 3 8 6 3
lender typically considers agency value, eligible commissions, historical and projected cash flow from commissions and the agency’s ability to repay the debt while reasonably continuing operations with its amount of available working capital. Cash flow. EBITDA stands for Earnings Before Interest Taxes Depreciation & Amortization. Most traditional banks/ lenders are comfortable lending one to three times a company’s EBITDA. This is an easy way to determine the core cash flow a business is generating. If comfortable with the type of risk, some banks/lenders may get more aggressive and lend a multiple of up to three to five times EBITDA. Higher multiples typically result in greater loan and loan payment amounts, which make for a tighter cash flow. Consequently, higher interest rates may be charged with higher leverage. Agency value. This represents the value of the agency or property, similar to an appraisal of a residential property or home. Lenders will use a third-party valuation to ensure they don’t lend an amount of money that may exceed the value of the agency in the event it is sold. An agency that needs a valuation should consider utilizing an insurance industry expert that understands the value and nuances that occur in this space (carrier contracts, contingency bonuses, standard vs. non- standard business, etc.). Commissions. With commission-based financing, the historic retention/persistency ratios of agencies has a significant impact on the amount of money available to borrow. The higher the retention ratios, the larger the loan amounts and longer the repayment terms tend to be. Agencies writing tougher classes of business with lower retention ratios may qualify for a lower leverage due greater uncertainty of policies renewing.
Is 2016 a good time to borrow?
Many business owners are curious about whether 2016 is a good time to borrow. The Federal Reserve increased interest rates by 25 basis points at the end of 2015. These small increases, however, should still keep capital affordable and not dissuade business owners for taking on debt. What’s more, a stable economy, loosening credit standards and insurance market conditions should make credit available from various funding sources. 1 Data as of January 31, 2015, for entire portfolio of loans. Average timeframe of 30.1 months. Individual loan results may vary and revenue growth is not guaranteed.
What keeps you up at night? Does running your agency ever keep you up at night? If you always sleep soundly, congratulations. Even those who don’t suffer chronic business-driven insomnia often find themselves wide awake in the wee hours, wondering whether they’ll be able to respond to perceived or real threats. That isn’t paranoia. While insurance agents have always faced situations that threatened their businesses, the pace of the industry and intensity of competition have both accelerated in recent years. Last year, in an Aite Group survey1, agents and brokers had no difficulty identifying the threats that were keeping them up at night. Many of those threats focus directly on how technology is changing the ways in which our industry does business. For example, nearly three of five agents worry that sophisticated data analysis and similar technology will make it easier for carriers to identify and sell directly to prime prospects. Nearly half worry about the tendency of younger customers to “bypass the middleman” and deal directly with national businesses like insurance carriers. And half of the agents worry about whether their own investments in technology will allow them to keep up. As much as all owners would like to believe that none of those issues are valid, the reality is they are. So is it time to give up hope? Not at all! Instead, take action to help ensure your future.
Have a clear vision
The more clearly you can define what makes your agency different and the goals you have, the less you’ll be affected by threats. You’ll be far more focused than most agency owners, so you’ll be less likely to be distracted or frightened by external events or developments. A clear image and well-defined goals give you a framework within which you can consider every decision.
If something is consistent with your image and goals, it’s probably a good idea. If not, it may be something to avoid or ignore.
Protect your book of business
Your agency’s single-biggest asset is the list of clients you’ve developed. As long as they remain your customers, they’ll provide a predictable stream of revenue that will let you keep the doors open and the lights on. Knowing they’ll be around for the long term can give you the confidence to take other risks, such as exploring new lines of business. The best defense is an aggressive offense. Start by never taking your current customers for granted. In addition, look for opportunities to increase the value of their relationship with you and become a trusted resource.
Don’t create openings
If there’s a threat outside your home, the first thing you’re going to do is lock the doors and windows. In the same way, you want to make sure you don’t give competitors easy ways to steal your customers. The key here is to think of what strategies your competitors might use and address those issues before they have the chance. You can’t stop the forces that are reshaping the industry. New competitors and amazing new technologies are inevitable. So the key becomes knowing what you offer that makes you different, and capitalizing upon those differences. Is it easy? Not at all, but it’s critical if you want to stay in business for the foreseeable future. 1 How Independent P&C Insurance Agencies Thrive in 2015’s Competitive Marketplace. 2015. Aite Group LLC.
Wearable Technology Poses Cyber Security Threats According to a survey by Travelers Business Risk Index in 2015, wearable technology is causing increasing concern across industries. Many watches, fitness trackers, and even medical devices now have smart sensors, microprocessors and transmitters that could allow data breaches and cyber risks. It is presumed that wearable manufacturers take every precaution to avoid security ricks, but we must realize that details can be overlooked and breaches can happen.
Seeking Input from Millennials to Shape the Future of the Industry How will the gap between retiring baby boomers and the millennial generation be filled? ANZIIF is calling on under-35 year olds to take part in a survey that addresses potential shortages in the future of the insurance industry. ANZIFF CEO recognizes how vital it is to understand the experiences, aspirations and motivations of the under-35 crowd, so that the insurance industry can “attract, retain and develop them.”
Online Platform Economy is Changing the Workforce More than 10.3 million Americans, roughly 6.5% of the United States' workforce, earn their income from “gig” jobs using modern web based platforms, such as Uber or Airbnb. These unique marketplaces have mastered directly connecting individual sellers with consumers, are highly flexible, and give individuals the ability to better buffer income and expense shocks. On the contrary, these jobs typically offer fewer worker protections than traditional work arrangements and create more income volatility.
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Personalization Needed to Succeed in the Digital Insurance Arena As the insurance industry embraces the digital age, customers still want a personal experience. How can they have the convenience of the digital world while not completely sacrificing the personal attention and individuality from their carriers? The answer is personalization. Embracing digital technology and analytics can give carriers the ability to better know exactly what their customer wants, and help them to tailor custom insurance solutions. Providing this level of detail and attention goes a long way with the modern consumer.
Decline in Organic Revenue Growth for Agent Brokers Raegan Consulting Group has released its latest “Organic Growth and Profitability Survey”, noting that organic revenue growth for agent-brokers slowed down in 2015. Growth slowed to 4.6 percent, compared to 6.2 percent in 2014. From a historical perspective, however, 4.6 percent ranks fourth best in the past eight years of the survey. The consulting group also noted that mergers and acquisitions activity hit an all-time high in 2015. Over 400 deals were done in North America for the first time in history.
Technological Advances Bring More Regulations Technological advances are bringing the vertical cloud into highly regulated industries, such as healthcare, government and financial services. With this comes an increasing number of regulators, who are overwhelmed by the rapid changes in technology across these industries. In 2016, they are expected to aggressively apply new levels of pressure on companies. The shifting regulatory landscape will bring about overhead costs due to managing the new regulatory policies and guidelines. Be prepared to navigate these changes. http://smallbiztrends.com/2016/02/wearable-technology-security-issues.html http://www.insuranceandrisk.com.au/industry-seeks-input-from-younger-cohort/?platform=hootsuite http://www.propertycasualty360.com/2016/02/19/more-americans-now-work-in-gig-economy-than-live-i?ref=hp-news http://insuranceblog.accenture.com/insurers-must-heed-customer-demands-for-personalized-service/?c=fs_dibfy16twt_10000596&n=smc_0216 http://agencychecklists.com/2016/02/17/agent-broker-growth-profitability-down-in-2015-13615/ https://www.linkedin.com/pulse/trends-have-profound-impact-business-2016-clara-shih 8 6 6 - 6 2 5 - 3 8 6 3 • w w w. o a ks tr e e tf u n d i n g . c o m / subsc r ibe | 9
Is NOW the time to pursue your next phase?
very agency owner has likely heard about the big multiples being paid for agencies over the last few years. Maybe you’ve read one of the many industry articles on the topic, a competitor recently sold their agency and there were rumors on the price, or perhaps a close industry colleague made an exit and you heard it directly from the source. You may have even fielded calls from potential buyers inquiring on whether or not you are for sale. There’s no questioning the current M&A environment is as aggressive as most agents have seen in their careers. The rumors are true; purchase price multiples have been on the rise, with our firm witnessing increases between 15–20 percent over the last two years. Multiples are being pushed up by an increase in the number of buyers and, hence, competition over a limited supply of agencies. Activity by private equity-backed buyers alone, which represented a small fraction of transactions pre-recession, has surged. The demand is being fueled by a rebounding economy coupled with persistently low interest rates and low-yielding
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alternative investment options. As these firms acquire at a torrid pace, many of the usual buyer suspects have been forced to look further down the totem pole (in regards to revenue size) to fill their appetites. How long will the bubble last? No one can say for certain, but interest rates have already started to make the move upwards with the Feds’ announcement to raise rates this year. As rates go up, it will be harder for buyers to realize their desired returns on deals and valuations will start to decline. It’s simple math. Increasing the cost of capital reduces the rate of return and what buyers can afford to pay. There are indications of a softening commercial lines market according to Willis’ Marketplace Realities 2016 report. When you add a decline in revenue to a decline in value multiple, you get a negatively multiplying effect that can quickly evaporate substantial equity. The same trend was observed shortly into the recession of 2008. So, how do you know if now is the right time to sell? Let's assume that you've spent the past few years (both personally & professionally) putting yourself in a good position and are planning on stepping aside sometime within the next few years. Should you do it now, next year or the year after? If you are mentally ready to make that transition you should strongly consider your options sooner rather than later. We've had clients sell within the last year who fully intended on being out years ago. Right before the recession they received several offers for prices they would have gladly accepted, but it was a year or two too soon. We all know what happened next. The bottom fell out of the economy, buyers disappeared, multiples fell and they were left scrambling to keep the business growing. Their exit got put on hold for eight years until the owner could realize an amount necessary to reach their financial goal.
The chart below shows some hypothetical scenarios for selling your agency sometime in the next three years, assuming your revenues stay flat, your EBITDA margin (Earnings Before Interest Taxes Depreciation & Amortization) is 30 percent and that you were to pay a Capital Gains tax rate of 23.5 percent. 2016 Revenue
This last chart depicts a scenario in which revenues decrease by 5 percent, which was a common occurrence during the Great Recession as agency owners were fighting just to stay level. 2016
Cap Gains Tax (23.5%) Net Proceeds
Cap Gains Tax (23.5%) Net Proceeds
Difference ($) Difference (%)
Notice that if multiples decrease on a similar pace as theyâ€™ve grown over the last few years, you may have a hard time keeping your agency value as high as it is right now. You may need to grow the overall agency revenues by 10 percent year over year just to keep a similar valuation. For an agency with $1M in revenue with an 85 percent retention ratio, that means youâ€™ll need to write $250K in new business while keeping your bottom line profit margins the same. That task could be even more daunting with the potential for rate softening. 2016
A two-year decline in revenues, compounded by a decrease in purchase price multiples lower the net proceeds for the owner by over $350K, or 23 percent. Buyers are still making big plans to acquire in 2016. That trend may continue beyond the next 12 months. However, if the market turns it could change quickly, just like what happened in 2008. If you are in a good position and are debating how soon to make an exit, you could reduce the possibility that your primary asset, the agency, decreases in value by exploring a sale sooner rather than later. After all, you are in the business of trying to reduce and eliminate risk.
Cap Gains Tax (23.5%) Net Proceeds
Difference ($) Difference (%)
Difference ($) Difference (%)
About the Author Chris McAtee is an M&A advisor and consultant specializing in insurance industry. Over the past 10 years he has been a part of over 100 insurance transactions representing over $250M in transaction values. He can be reached at email@example.com or (765) 894-5282.
g n i n Drow y r e g d u r D in u need to raise yo d an y fl 't sn e o d IY Sometimes D al help your hand and seek re
Agency owners are courageous, industrious people. Otherwise, they would never -have started businesses that are focused on sales. It takes a great deal of self-confidence to spend every day trying to convince people to buy the coverage you offer or to expand your existing client relationships. When it comes to running an agency, there’s a downside to self-confidence. Owners may be convinced they can (and should) do everything themselves. In addition, the pride that comes with self-confidence may keep them from asking for help when they need it. Those traits are common among agency owners, but they tend to have negative effects on business. When agents spend their time working on the wrong things, they aren’t focused on growing their books of business. And when they are trying to handle tasks for which they’re really not suited or knowledgeable, they can actually hurt their operations.
Getting help is okay
The same drive that powers successful agents can get in the way of asking for help. It’s not unusual for self-driven people to consider having to obtain outside help as a weakness. Nothing is further from the truth. The most successful business owners have a solid grasp of both their strengths and their weaknesses, and they’re willing to ask for help when needed. Simply put, you don’t need to do everything yourself. Nor should you. That’s inefficient, frustrating, and it can actually hurt your agency. Instead, concentrate on the areas that make
the best use of your skills, and look for ways to turn the other aspects of business over to others.
Your time is valuable
Most agency owners have a pretty good idea of the cost of doing business, but there is one number that far too few owners take the time to compute. That’s the value of your time. You only get so many working hours each week, and how you choose to spend that time has a profound impact on your success, your profitability, and your satisfaction. There are roughly 2,000 work hours in a year. If you personally generate $100,000 of business, that means each of those hours is worth at least $50. If you’re handling tasks that others could perform for $20 an hour, you’re missing out on $30 in potential revenue for each hour. It’s like driving 20 miles out of your way to save two cents per gallon on gasoline. The key is to spend your time in the most profitable activities, and have lower-cost sources handle the rest.
The benefits of outside help
Assigning tasks to employees or outside sources will help you make more productive use of your time, but that’s only one benefit. Another is that it allows you to concentrate your energy and attention where it’s most needed, whether that’s being able to make more sales calls or devote time to planning.
Eliminating distractions allows you the opportunity to manage more strategically and focus on your core business. You can step back and pay attention to the bigger picture, and will be better able to notice and address areas that may have been neglected. You’ll have time to try new ideas that you’ve considered. Your agency will operate more efficiently and more profitably. When you spread the workload, whether to employees or outside sources, you also reduce your business risk. If you become seriously ill or temporarily incapacitated, your agency doesn’t grind to a halt. The people or providers you trust will be able to pick up the slack and protect your book of business and your professional reputation.
calls, data entry, and basic customer service. It’s easy to find someone who can handle the most basic and repetitive tasks that swallow up your day. On the other end, you may benefit from specialized expertise that you don’t possess. That could include everything from bookkeeping, to payroll, to overseeing technology, to help with marketing. You probably already have relationships with providers you trust who can assume part of your workload. For example, you may think of your accountant only in terms of tax preparation, but most CPAs have strong analytical skills and an outsider’s perspective. Your accountant may be able to identify potential efficiencies or opportunities you’ve never considered.
What can you assign?
If you find yourself exhausted at the end of every week, it’s a good bet that you’re handling work you probably shouldn’t be doing. The same is true if you become frustrated with tasks that you don’t enjoy or that overwhelm you. Take a break from the day-to-day workload and consider all the tasks you currently handle. Be honest about your strengths and weaknesses, as well as what constitutes the most efficient use of your time. Keep in mind that there are some tasks that are important for you to handle as an agency owner, even if you don’t particularly enjoy them. Next, consider the best way to reduce the amount of time you spend performing those tasks. Perhaps it’s a matter of improving your technology, so you can automate some tasks. Maybe you need to add a part- or full-time employee. Or you may want to consider outsourcing portions of the work to an outside service provider. The right choice depends upon your needs, your resources, and your comfort level. Develop a plan of how you think you should proceed, and then share that plan with a trusted advisor such as your CPA or your attorney. It can be difficult to move beyond that do-it-yourself mentality, but the benefits can be significant. Plus, a funny thing often happens when an agency owner begins to reach out for help. As the owner discovers that the hours spent at work are becoming more satisfying and profitable, it’s easier to shed even more tasks – and create even more satisfaction and profitability!
Generally, the easiest tasks to hand off are those that are simple – and those that are complicated. On the one end, you may be devoting time to clerical tasks such as answering phone
When should you reach out?
Is it better to grow fast or slow?
ne of the most familiar fables is that of the tortoise and the hare. In that story, the tortoise eventually outpaced his foe by taking his route slowly and steadily. Does that mean that an agency owner who has his or her eyes set on growth should take the slow route? As with nearly any debate about agency management, there’s no simple answer. The approach that’s best for your agency depends on a lot of factors, including the way you manage your day-to-day business, your capacity to handle growth, your goals and the overall nature of the markets you serve. That said, there are some advantages — and drawbacks — with either approach.
One of the biggest dangers of growing slowly is that the decision to do so is often built upon the assumption that both you and your business will be around for a long time. We all hope we’re blessed with many years, but that isn’t always the case. Even if we remain healthy, the business climate may not. It typically takes many years before agency owners see substantial profits, and if you’re counting on those profits to put your kids through college or pay off your home, the timing must be right.
Putting your agency on the fast track may be exhilarating, but rapid growth creates an entirely different set of challenges. Growth generally requires some degree of investment. That’s not a problem, as long as the increased revenue keeps pace and your cash flow remains positive. Should your expenses start to outpace your reserves, a slow month or two could be enough to significantly strain your cash flows. If your goal is to grow quickly, make sure you have a good grasp of how to monitor your cash flow. If you’re not completely sure, get some guidance from your CPA.
Grow faster by slowing down
If you’re eager to grow your business, the last thing you probably want to do is slow down the pace. Dialing back the speed can be very sensible. Take some time to perform thoughtful planning. In fact, assessing your strengths and weaknesses and writing a formal business plan can be an excellent way to think through all of the aspects. Your plan should spell out clear goals for growth, along with a timetable and practical milestones that will allow you to gauge your performance. It should provide tasks and needs for each of your goals, and prioritize them so that you can make the best use of your resources. No matter what your objectives may be, your plan should address certain important questions. One of the most important questions is whether you’re properly staffed to achieve your targets, and whether you and your current employees have the right skills. If additional training or hiring is needed, the plan should spell out exactly how and when that will happen. Another key issue is your current space. If your business is going to grow, do you have adequate space for your operations? Is your current facility
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appropriate for the type of business you plan to target? Equally important is how you’re going to fund growth. Do you already have sufficient capital to make the moves you’re planning? Will you need to borrow money, and will your financials be attractive enough to convince the right funders to lend? No matter what you plan to do, or how you plan to do it — and no matter when you choose to grow rapidly or through a more measured pace, there is one thing you should do as quickly as possible: learn as much as you can. The more you know about your business, your market, and your industry, the more effectively you’ll be able to plan, and the more likely you’ll be to achieve your goals. About the Author Rick Dennen is president and CEO of Oak Street Funding, which provides commission-based lending for insurance agents that need capital to buy, build or sell their agency. Dennen is a licensed agent in the state of Indiana for Life, Accident & Health products and a licensed Certified Public Accountant in the state of Indiana. In addition, he holds an MBA in finance and is an instructor of venture capital and entrepreneurial finance at the Indiana University Kelley School of Business. He can be reached at firstname.lastname@example.org.
Ranked #1 M&A Advisor* by SNL Financial. AGAIN.
DATA. EXPERIENCE. RELATIONSHIPS. Contact us today if you’re serious about tomorrow. 800.426.2774 • www.MarshBerry.com Securities offered through MarshBerry Capital, Inc., Member FINRA and SIPC, and an affiliate of Marsh, Berry & Company, Inc. 28601 Chagrin Blvd., Suite 400, Woodmere, Ohio 44122 (440.354.3230). *Merger & Acquisition (M&A) Announced Transactions in Insurance Brokerage (1999-2015); Ranked by Total Number of Deals
Learning from large agencies
It’s possible that a small agency’s entire book of business could be dwarfed by a single account at a big agency. The differences in the sizes of the agencies can be so big, the people managing either extreme may think they have nothing in common with the other. After working with agency businesses of all sizes, I’ve learned this simply isn’t true. Agencies at both ends of the spectrum (and everywhere in between) do different things very well. A smallagency owner may not have dreams of growing into a behemoth, and a large-agency manager might think of a neighborhood agency as quaint, but both can improve by paying attention to what their counterparts do to succeed.
Learning from large agencies
Many of the strategies big agencies use are equally effective at a smaller, community level. Larger agencies never
lose sight of the importance of growth. Even when the economy is weak, acquiring new business and expanding existing relationships remains a primary focus. They recognize the importance of making investments that will facilitate growth, whether that’s increasing the size of the staff or moving to a new technology platform. They don’t agonize about making those investments. Neither should a small agency’s owner. Because managing and coordinating a large agency is inherently more complex, having written business plans is critical. That way, everyone within the agency focuses on the same objectives and operates with the same playbook. After all, managers can’t assume that informal objectives will find their way to every employee, or that each person will automatically know the most effective way to target this year’s objectives. Plans should include benchmarks and metrics for measuring performance and guiding decisions. Large agencies understand that one of their most important assets is their staff. They hire carefully, looking for people who will fit their cultures and eagerly pursue their objectives. Employees are confident that their compensation (including their benefits)
will reflect the marketplace. Larger agencies are also more likely to have formal performance review processes and well-written personnel policies to ensure that everyone is treated fairly and understands exactly what is expected of them. Finally, larger agencies recognize that even with a big staff, they haven’t cornered the market on knowledge. That’s why they eagerly turn to outside professionals who can bring muchneeded specialized expertise in areas such as legal matters, accounting, and marketing. Having access to that expertise allows managers to make important decisions with a much higher degree of confidence. Those outside professionals share the best practices in their industries, helping the agencies sharpen their policies and procedures.
Learning from small agencies
Yes, growth is important, but an insurance agency is fundamentally built upon personal relationships, whether the clients are buying a $1,000 auto policy or $100 million in property and casualty coverage. Whether there are 1,000 employees in the office or a single agent working in his home-based office, clients want to deal with someone who knows them and their needs. The most successful small agents provide a highly personalized level of service that can be tough for big agencies to match, but the most basic people skills — being polite, returning calls quickly, doing what you say you will — are effective at every level. Smaller agencies can’t afford to be wasteful with money, time, and other resources, because there is simply less of all those things to go around. That means those agencies have to be careful when making decisions about spending. They also tend to keep their operations simple, concentrating on only a few lines of business or certain types of clients. The advantage of that approach is that they become very knowledgeable in those areas and skilled at serving them. It can be more efficient and satisfying to do two or three things well, instead of trying to do 20 different things. Larger agencies often try to grow by expanding their scope beyond areas they know well. Because smaller agencies have significantly smaller staffs, each hire is critical. A small-agency owner really has
to know his or her employees, their strengths, their weaknesses, and how they balance work with their personal lives. That may require more flexibility, such as allowing employees to adjust their hours to the needs of their school-age children. That kind of flexibility and understanding often means more to employees than a high salary. In addition, collaboration is important in smaller agencies, because employees depend upon one another. That means each employee is usually better able to step in and help when needed. Finally, smaller agencies typically have to become more creative in how they address client and business needs. They usually can’t spend or hire their way out of a challenge, so they have to think of better ways to solve it. It can be difficult to foster that kind of creativity in a larger organization that stresses conforming to the culture over encouraging individuals. If larger agencies can adopt an entrepreneurial mindset, they’ll give employees the opportunity to find new and better ways to do things, which can lead to greater client satisfaction and higher profitability. About the Author Kirsten Petras, Director of Strategic Markets for Oak Street Funding, has a strong understanding of commercial financing for insurance professionals, helping to ensure the funding of many complex, larger loans. Her diverse background with roles in sales management, loan advising and compliance have provided her with great insight into sales, underwriting and account servicing for larger loans. Kirsten can be reached at email@example.com or 317-428-5156.
Because managing and coordinating a large agency is inherently more complex, having written business plans is critical. That way, everyone within the agency focuses on the same objectives and operates with the same playbook.
What do Retail Agents Want from their Specialty Distributor? We frequently ask this question and frequently receive a generic response such as, “We want excellent service and technical expertise.” We contend these are good things to have. But what do they actually mean?
Excellent service means different things to different folks.
For example, one agent we queried in preparing for this article answered, “Excellent service is being responsive [to phone calls and emails].” True, we would agree that the tenets of basic service include responsiveness to phone calls and emails. However, responsiveness in and of itself is not quantifiable and thus, not really worthy of the good-answer category. On the other hand, Specific, Measurable, Accountable, Realistic, and Trackable (S.M.A.R.T.) servicelevel agreements can help take the guesswork out of good service. There is no right or wrong answer to the excellent service question. Each agent’s experience is unique; but, there is one common denominator — each agent wants excellent service. We believe true service excellence should be assessed using the S.M.A.R.T. framework with the results proactively tracked.
Technical expertise is another loosely used term that, in a vacuum, means very little.
However, in terms of specificity, one broker we asked about technical expertise said that he looks to his preferred wholesale markets for “unique skills in regards to markets, policy formation and claims processes.” For example, the life science-heavy broker describes his need for specialty distributors with, “a unique appetite for life science liability and clinical trials liability, and access to a decision maker with market clout and leverage [to reduce pricing or gain difficult coverage enhancements].” Another agent we spoke with looks for “a specialty distributor that is strategic, knows how a retailer operates, and isn’t afraid to push back [on a submission from the retailer].” These attributes are particularly important when the retailer is a product expert (e.g., a professional liability expert). “It is 18 | w ww.oakstre etfund in g . co m / s u b s cr ib e • 8 6 6 - 6 2 5 - 3 86 3
important that the specialty distributor be an extension of my team — they do their homework [on the account / risk] beforehand, set goals and objectives ahead of time, and know which carrier markets are likely to write the risk.” In summary, all agents want excellent service and technical expertise from their specialty distributors. What they need is an objective process to identify excellent service (S.M.A.R.T). Securities offered through MarshBerry Capital, Inc., Member FINRA Member SIPC and an affiliate of Marsh, Berry & Company, Inc., 28601 Chagrin Blvd., Suite 400, Woodmere, Ohio 44122 440.354.3230. About the Author Chad Morgan is Vice President, Insurance Carrier Services, with MarshBerry. His responsibilities include merger & acquisition (M&A) advisory, financial management consulting, and valuation services. Chad currently maintains the Series 62, 79 and 63 FINRA Registrations. He can be reached at 949-234-9653 or firstname.lastname@example.org.
The best relationships are based on the principle of a partnership; the specialty distributor acts as an extension of the retail agent’s team and adds value to the process — they are not just pushing paper.
F ina nc ing fo r th e in su ran ce in du stry
Insurance lending requires insurance expertise. See why thousands of insurance businesses have turned to Oak Street Funding for hundreds of millions in capital since 2003. oakstreetfunding.com/expertise
Up to $20 million* • Loans • Lines of Credit • Customized Options
Uses of Capital • Acquisitions • Recapitalizations • Successions • Debt Restructuring • Business Growth
* Loans and lines of credit subject to approval. CA residents: Loans made pursuant to a Department of Corporations California Finance Lenders License. Potential borrowers are responsible for their own due diligence on acquisitions.
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