Change Agent

July Cover Story

Change Agent
It’s never too early — or too late — to increase your agency’s value.

Jason Angus breaks the mold. A 33-year-oldwho incorporated Venture Specialty Insurance in Richmond, Va. in 2005 and opened in January 2006, Angus has already grown from three employees and 50 accounts to 11 people and more than 650accounts. Annual revenues hover between $700,000and $1.2 million, and Angus’ goal is to add one niche market per year. So far, the agency specializes in taxicabs, limousines and pest control companies, as well as tow trucks and group transit programs.

How has this young upstart set up accounting and agency management systems, built and trained a staff and grown revenues by more than 300% in17 months? For one thing, Angus has an MBA and is comfortable with strategic planning. It’s a given for him that to grow profitably and increase agency value, he must have an annual plan and take consistent steps to achieve it.

“When you find out where you want to be and set it as your goal, you tend to grow into it,” he says.
But there’s more to it than that. To advance his scratch agency as effectively as possible, Angus has applied admirable discipline from day one. When taxicab customers ask if he’ll also insure a side business or write their personal lines, for example, Angus declines. “I tell them the taxi business requires a certain expertise, and that’s what we do,” he says. He then offers to refer them to a generalist or to call their local agent. “It’s so easy to want to help your customers with other things,” he says, “but we don’t.”

Bye, Bye Valuation Formula
Where is your agency in its lifecycle? Is it new and growing, middle-aged and comfortable or old and showing signs of decline? Whether your firm is young, old or in-between, efforts at increasing its value will be less effective if smart and regular growth isn’t an ongoing occurrence. Without continuing profitability and expansion, an agency begins to stagnate and atrophy sets in—and it rears its ugly head in agency valuation.

Agency values are no longer calculated as a multiple of revenues. Instead, the professionals who assess these values use a host of criteria that range from EBIDTA minus various adjustments, such as earnings from the two largest accounts, to omission of entire insurance markets, depending on the needs of the next owner. “Agents think there’s still a rule of thumb for determining agency value,” says Chris Amrhein, president of Amrhein & Associates of Lorton, Va., “but no one who does [agency valuation] for a living uses one.”

As agencies have become more complex, due to broad differences in products, markets, carriers and automation, to name a few, it’s rarely appropriate to try to paint any two agencies with the same brush. Add to this evolution the wide-ranging needs of perpetuators, and it’s not surprising that individuals and firms specializing in agency valuation use a much larger palette of tools today than just 10 years ago. “Just because you add a swimming pool to your home doesn’t guarantee that your property will rise in value,” Amrhein says. “The people who buy it may decide to fill your pool in.”

The biggest problem is that many agency principals haven’t learned how to keep their foot on the gas. “Too many agency principals who’ve gotten older are still doing the things they were doing when they hit their stride,” says Amrhein, who works with groups of agents at conferences and seminars to try to instill ongoing innovation. The tendency is to “figure out the business, get it running successfully, and then turn on the cruise control,” Amrhein adds.

The reason these agencies remain moderately successful, he believes, is that most of their clients are roughly the same age as the principals, and are engaging in the same kind of behavior. “They’ve taken their foot off the accelerator and don’t realize the world has moved on and left them behind,” Amrhein says. Then, when a new generation reaches adulthood and buys its insurance differently, coasting agency owners will be blown off the highway. “There are still agencies out there using Quicken from 12 years ago,” he says. “And if they’ve counted on a certain agency value as their [ticket to retirement], they’re going to be rudely awakened.”

One reason baby boomers aren’t particularly good at planning may be because so many of their parents devoted their careers to a single organization. “I don’t accuse anyone of being lazy or stupid,” Amrhein stresses. “Many people just get in a pattern of knowing what works and then never reach out for anything new.”

If your agency fits this pattern, Amrhein has a suggestion: Hire young employees and let them bring with them the latest technology, thinking and generation of customers. “They’ll automatically break the cycle,” he says, “and together you can build a great team whose synergy is greater than the sum of its parts.”

Hello, High Performance
Take Joe Weinman for example. Five years ago, this owner of a 116-year old agency in Indianola, Iowa, experienced a turning point. It didn’t happen instantly, but occurred gradually during a series of seminars and conversations with other agents. What happened? The president of Weinman Insurance Services realized he had become set in his ways. “We were doing the same thing year after year,” he says. “We had reached a plateau, and come to see ourselves more as a service organization than a sales company.” To stop backsliding and start growing in value, he knew his business had to refocus on sales.

But Weinman was 52 in 2003, and he might have greeted his new knowledge with a shrug. Instead, he paused, took afresh look at his agency and found almost every area in need of improvement. “First we looked hard at automation, procedures and workflow,” he says. By going paperless and adjusting procedures to the new work flow, he knew from talking with other agents that his service employees’ chronic backlog would vanish. Once this stress was lifted, he also knew his CSRs would have more time to render better and more efficient service, creating happier customers who would in turn generate more referrals.

These steps were just the beginning. Since 2003, Weinman has made so many improvements that he was able to purchase another local agency in January, boosting business volume by a whopping 70% while adding only 1.5 employees. “It was a real blessing we were at the stage where we could take advantage of this opportunity,” Weinman says. “Without the steady growth of the last five years, we couldn’t have afforded the purchase.”

Driving Profitable Growth
Eldon Hunsicker is another “old guy,” as he labels himself, who has followed a well laid-out plan to maintain and increase his agency’s value. Noel Insurance in Ottumwa, Iowa, where Hunsicker is a partner, sprang from the marriage of three agencies in1960. By the time Hunsicker arrived in1985, the agency’s partners had developed niche markets, a regional business mode land a striking perpetuation plan that brought in new partners as the original owners aged and retired. “These owners had a lot of vision,” Hunsicker says. “They created strategic planning documents that we’ve continued to use over the years to bring in eight new partners, retire out seven and pay two spouses at the time of [their husbands’] death.”

Hunsicker, who is 58, has been fortunate to have such a well-thought out foundation from which to build. But he has also made important innovations on his own:

• He has hired young CSRs and producers, one of whom speaks Spanish.

• He has acquired another agency in Osceola, Iowa, 72 miles away, to grow geographically.

• He is a technology devotee, serving on IIABA’s Agents Council for Technology (ACT).

• He recently hired a new partner who is13 years his junior.

“You have to keep moving forward,” Hunsicker says. “How many things can you continue to do in the same way and not lose ground?”

Elliott, Powell, Baden & Baker, Inc., of Portland, Ore., epitomizes that philosophy. Co-owner Marc Baker joined this 58-yearoldagency in 1993, and after building up a personal lines book, began pursuing serious growth. Today the agency works 11specialty markets and does business across the Pacific Northwest. It has also acquired other agencies, is presently rolling out a risk management plan that Baker believes will strengthen the agency’s differentiation and is always on the lookout for talented service employees and producers. “We try to think in creative ways,” Baker says. It’s all about asking why or why not, he adds, “because we can always be better at what we do. We can all be better.”

If you’re still asking yourself how much difference any new steps to improve your agency will make, regardless of its place in the agency life cycle, Baker suggests this: Figure in a 90% retention rate and the premium plunges the soft market wreaked on your agency in the past 12 months. Then see how far you’ve regressed.

The 48-year-old former entertainment executive has another idea, too: “If you don’t have a plan to keep selling and growing, give me a call,” he says. Just don’t expect him to meet your asking price.

Hodges (hodgeswrites@aol.com) is an IA senior writer.

Upstart, Established or Mature?

To help you gauge your agency’s progress, the Best Practices tool divides an agency’s life cycle into three stages: upstart, established and mature. Each of these stages, however, is subdivided into two categories: one that describes agencies facing abundant obstacles along the way, and the other referring to agencies that are successfully positioning themselves for the future—and added value. Where is your agency in its lifecycle?

1. Upstart A (1–5 years)
Agencies in this phase have a loose management structure with limited experience or time for management activities. Typically, their business planning, focus and vision can be described as inadequate. Upstart A agencies also usually have low equity and a minimal number of employees. Cash flow is unsteady, since sales activity is inhibited by lack of time, insufficient resources, limited access to markets, a fluctuating client base and general uncertainty.

2. Upstart B (1–5 years)
Managers at these agencies are using their growing experience to sharpen their focus on the business and the strategic direction they want it to follow. Business planning is not yet viewed as critical and cash flow is still an issue. But equity is growing, as are revenues and the client base. Market access is still constricted by carriers’ premium-volume requirements and a minimum number of employees.

3. Established A (6–15 years)
Agencies at this stage are unable to move beyond the activities that should be accomplished in the first stage, mainly because their principals are too busy working in the business to be working effectively on it. Lack of delegation keeps owners too busy to find the time for developing a formal strategic planning process. These agencies can usually maintain revenues and a client base, but are unable to advance to the next level.

4. Established B (6–15 years)
Because these agencies have defined a business focus and strategic direction, the yare now building alliances and centers of influence. They’ve found good markets for main lines of business and developed a stable cash flow. As a result, they are building equity and adding employees to support staff and to production. Technology is being leveraged to manage workflow and is keeping backlog at a minimum.

5. Mature A (15 years and older)
With experienced management in place, the Mature A agency has solid access to good markets and a stable client base. Workflows and procedures are defined and standardized, and cash flow is consistent. Profitability has reached an acceptable level, and the business plan is updated annually. But focus is fixed on maintaining current business levels, relationships and operations. Perpetuation planning is still fuzzy or not being aggressively executed. The prevailing attitude: “If it ain’t broke, don’t fix it.”

6. Mature B (15 years and older)
For these agencies, all the hard work is paying off. An effective leadership team is focusing on successful growth and expansion. Market access aligns with the agency’s defined business focus, and cash flow continues to be stable, allowing the business to execute an equity management plan. Employee and producer productivity have reached high levels and continue to increase as new technology is deployed. Strategic alliances and centers of influence are being fully used to offer more services and attract more business. Perpetuation strategies are being continuously updated and executed, while employee morale thrives amid an environment willing to embrace change.

To access specific criteria for each maturity level and rate your agency against these standards, go to www.independentagent.com, click on Uncover Best Industry Practices and then on Products.

—S.H.