The Rough Notes Company Inc.

Like routine car maintenance, don’t put off making any plans, decisions or changes to your agency

Many people do not stay on top of their car maintenance schedule. They put off getting their oil changed regularly, do not pay attention to the level of transmission fluids, fix a dent, or are reluctant to take the time to change the headlight that burned out last month. The rationale is often: “If I take my car into the shop, they might find a bigger problem with it, and I don’t want to deal with that right now.” They prefer ignorant bliss under the assumption that their car will be able to get them from point A to point B, instead of facing the realities of what should be taken care of in the present.

A lot of business owners feel the same way about facing the realities of business. They know taxes aren’t going down and interest rates are going up. They know they are aging and need to plan for succession. They know that the market and carriers can change the agency game at any moment. Yet instead of facing these issues, they wait and see what happens, and put off making any plans, decisions or changes.

Running any business involves a series of constant challenges, frequent setbacks and frustrating surprises. The longer an owner operates a business with complacency, the harder it will be to change when he or she starts thinking about an exit strategy.

In today’s marketplace, independent agents can’t afford to take a “wait and see” approach to business. If you ignore market and economic changes, you may miss windows of opportunity. If you aren’t actively working at growing the business, it’s probably shrinking. If you aren’t focused on developing new talent, you may well find yourself with an agency that’s essentially worthless. And if you think you’ll “know” when it’s time to walk away, you’ll probably wind up with far less than you expect for your years of sacrifice.

 Failing to grow

Just as it’s easy to take your functioning car for granted, it’s easy to become contented and assume you can live off renewals after you’ve built a sizable book of business. Typically, though, failing to move forward doesn’t mean you stay in the same place—it means you actually lose ground. This is because even when your revenues remain generally flat, your costs of doing business continue to climb. In this era of low inflation, rising costs may not be particularly noticeable, but each year inflation carves away at your profitability.

In addition, revenue from a stable book of business Nreally doesn’t remain flat. There is always some degree of natural attrition as clients die, move to other places, or give in to your competitors’ more aggressive sales efforts. Client relationships are like their romantic counterparts: If you don’t make clients feel special and wanted, someone down the street will.

There’s another element many agents don’t realize. When you stop working at growing your business, both your clients and employees can sense it. If they feel you’re no longer enthusiastic, they’ll lose their enthusiasm for working with you. Carriers also know when you’re not growing. They may claim to be loyal to you, but their real loyalty is to your book of business and the premium income it produces. If carriers think their income is in danger because of your inaction, they may take away your appointment and hand that business over to an enthusiastic competitor.

Failing to develop talent

You probably take great pride in what you’ve been able to accomplish. But keep in mind that none of us lives forever. Although it’s human nature to cling somewhat selfishly to what we’ve built, sharing our successes with current or future employees can actually be far more rewarding, both financially and emotionally. By making it possible for trusted employees to create their own success and wealth, you can actually strengthen your business and enhance their loyalty to you.

There’s often a temptation to wait until we’re ready to retire before we start thinking about passing the business along, but that’s far too late. Providing opportunities and a sense of ownership early in employees’ careers is more beneficial. Their motivation to succeed will improve their quality of life, reduce turnover, and increase customer satisfaction, and the revenue will follow, increasing the value of your business.

Have you heard business owners complain that their employees just don’t understand what’s involved in owning a business? The most effective way to teach them is to help them become owners. Something funny happens when an employee begins to notice the relationship between the work he or she performs and the financial results it creates. They see that working just a little harder pays off, and working a lot harder and smarter pays off handsomely.

When you extend ownership opportunities to employees, you also give them motivation to remain loyal. As the business grows, your credit risk improves along with your ability to withstand economic downturns. As their shares of the business grow, they may eventually be able to obtain sufficient credit to buy you out and facilitate your comfortable retirement. Or, if you choose to sell the agency to someone else, their presence will enhance its value.

Waiting to sell

In the current marketplace, vibrant and growing agencies command the greatest interest and the highest prices. Most acquirers prefer to buy agencies where the owner’s age (or the weighted average of multiple owners) is closer to 50 than to 60 or 65.

There are two primary reasons. First, most acquirers want the present owner to stick around for several years, and someone in his or her early 50s is far more likely to do that than someone closer to the traditional retirement age. Even more important is the tendency of many agents to slow down and start “taking it easy” as their exit nears, no longer investing in the infrastructure.

That lack of energy and enthusiasm has a negative effect on the business and can depress its value. In addition, carriers expect to see consistent new business, or they may end their relationship with the agency. A third factor is the increased likelihood that the agency’s primary owner may encounter health problems that will distract from daily business operations. Unfortunately, many agency owners stubbornly wait until these factors erode value before putting their agencies up for sale.

What’s more, the sale of a business takes a significant amount of time. If the current owners fail to remain engaged in day-to-day activities such as building new business, the value of the agency can decline dramatically from the opening of negotiations to the actual close. Owners cannot allow a pending sale to distract them from what they should be doing for clients and carriers.

Proactive preparation

Agents who take the “wait and see” approach risk losing control of their future. Just as if they were to neglect maintaining their vehicle, one day they will be stuck, unable to drive or sell their less than perfect car. They’re likely to find themselves in a situation where they are forced to sell their business in unfavorable circumstances. Or they’ll have to settle for far less than they might have received had they taken a more proactive approach. Their golden years may not be as bright as they hoped.

Whether you’re 30 or 50, you should be planning for the day when you’re ready to turn ownership over to someone else, someone you should identify sooner than later. Develop a time horizon and a plan to ensure that your investment of hard work and other resources will provide the greatest return when the time comes. You may not be able to “take it easy” for quite some time, but you’ll face far less stress along the way.

 Loans and lines of credit subject to approval. Potential borrowers are responsible for their own due diligence on acquisitions. CA residents: Loans made pursuant to a Department of Corporations California Finance Lenders License (#6039829). 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.

 The author

Rick Dennen is president and CEO of Oak Street Funding, which redefined cash flow lending to insurance professionals that need capital to buy, build or sell their business. Reach him at
rick.dennen@oakstreetfunding.com.