To Perpetuate or Sell – It’s a Big Decision to Make

If you run your business as if you will choose to perpetuate you’re maximizing value,” says John Wepler, president of the consulting firm Marsh Berry & Co. Then, whether you decide to sell your agency to a broker or banker or to pass it on to the key people in your organization, you’ll be able to structure the best deal.

It takes a lot of work and commitment to make the changes necessary to perpetuate and about 77 percent of independent agencies do not do so, according to Wepler, a presenter at the Independent Insurance Agents of Texas’ Joe Vincent Management Seminar, held in Austin in late January.

Wepler said agency owners often get more money by selling to outside organizations rather than perpetuating internally. But it is possible to “eliminate that differential so your internal value is equivalent to your external value,” he said, by developing an organic growth plan, reinvesting in the balance sheet, relinquishing stock gradually and reducing seller risk.

“It’s tough … but it’s better for your employees and it’s better for your business if you run it the way it should be run,” Wepler said.

Big adjustments

One of the biggest adjustments owners will have to make is to eliminate excess owner payroll. “As an owner if you’re getting paid more than you would if you worked for a broker or an agency down the street … what you’re doing is you’re taking a dividend, which is really the profitability of the business,” Wepler said.

Holding producers accountable is another huge challenge for owners. But, “to grow organically you have to say to somebody: ‘Your job is to write new business. That’s your job. If you don’t do it you’re not going to have the job any more.'” Wepler said.

He noted that producers with the highest W-2s in the industry have lean compensation plans that leave the agency with cash flow to upgrade their support staff. “Producers don’t take the trash out, manage the agency, place their own business, process all the certificates,” Wepler said. “There are segmented job responsibilities and the business has a cash flow to support the producer so the producer has the time to focus on new business.”

And agencies that invest in their support staff have high customer retention ratios because their producers are “being followed around by a lot of very proficient folks that love to tear apart an account and handle the retentions.” Those agencies that foster a “total agency sales culture” also tend to have better contingencies, higher growth bonuses, and lower errors and omissions exposure.

He said high growth agencies pay lower renewal splits because they want their producers to focus on new business. “If there’s an agency that pays 40 percent renewal to producers, I can almost guarantee you’re not growing,” Wepler said. “How can you? The producers are their own account managers, they are their own account executives, they’re doing all their own service work, they don’t have any support.”

In agencies that pay 20 percent commission on renewals, on the other hand, “producers write a lot of new business. Why? Because they have account executives that are negotiating with carriers, putting together submissions, putting together proposals. … The business is growing, the producers make less on renewal but they’re just throwing everything down to a high level support staff.”

With a higher commission on new business producers make more money by building a much bigger book of business.

Compensation incentives

Getting producers to support a new compensation system can be a daunting task, Wepler acknowledged, but there are methods of incenting change.

One is to share within the agency producers’ year-to-date production levels. “Do you publicly disclose producer year-to date new production? In other words, in your office above the copy machine, on a screen saver, a report for the entire staff to see? … Everybody knows the weak one … and the strong one,” Wepler said.

“Who are the producers that don’t like their names displayed with their numbers and goal? The bottom tier — the ones that aren’t producers to begin with. Who loves it? The top producers.” He noted that 100 percent of the high growth agencies his firm has studied had public disclosure of new business relative to goal. Once a disclosure system is established, the owner’s job is to rally the agency support staff around the plan and tie producer performance to bonuses for the whole company.

For instance he said, if the producer doesn’t meet his goal for a quarter, then no one gets a bonus. “The only way the non-production staff gets a bonus is if the producer achieves the goals. Talk about grassroots pressure on a producer. Nobody gets a bonus unless the producer exceeds the new business production,” he said.

He suggested a bonus of 3 percent of payroll for the previous quarter for the entire staff if the producer meets 100 to 110 percent of the new business production goal. If it’s “115 percent or better you’re going to pay 15 percent of payroll … even down to the receptionist,” Wepler said. That’s a way to “get the entire company involved and have a total agency sales culture.”

Editor’s note: See the complete version of this story in the March 24, 2007, edition of Insurance Journal – South Central.

Topics Agencies