Building Value in Your Insurance Agency. Michael Mensch, CBI

Transcription

1 Building Value in Your Insurance Agency Michael Mensch, CBI Certified Business Intermediary Consultants

2 Agenda 1. Introduction 2. Creating a Growth Culture 3. Building Your Marketing Model 4. Managing Finances 5. Case Studies 6. Final Thoughts Your moderator Michael Mensch 2

3 Agency Value Factors that influence the market value of an insurance agency/brokerage: Revenue and earnings Risk associated with both Transaction terms Market conditions Acquirers are looking for: A return on their investment Assurances that the business will remain stable after the sale 3

4 Agency Value What can owners do to build value in their agency? 1. Create a culture of growth 2. Hone an effective marketing model 3. Monitor and manage finances Lay the foundation for sustainable growth and profitability. Next up: Creating a Growth Culture 4

5 Creating a Growth Culture The direction of a business is defined by its leadership. Examples: Jack Welch and General Electric Steve Jobs and Apple Warren Buffett and Berkshire Hathaway Ken Lay and Enron Each relayed upon their respective companies their own vision, core values and sense of accountability (or lack thereof). 5

6 Creating a Growth Culture Leadership is the ability to influence others. One is not a leader simply by: Being a manager, entrepreneur or pioneer Having authority or high intelligence Leadership is founded on character. Leaders: Create vision & purpose Inspire & empower people 6

7 Creating a Growth Culture In an organization, the leadership message starts with three tenets: Mission statement (the purpose) - defines why the organization exists. Vision statement (the goal) - defines how you want the company to be seen and the value that you hope to bring to customers, employees and other partners. Core values (the standards) - defines your priorities and key principles as an organization. 7

8 Creating a Growth Culture Mission Vision Values Leadership Culture The mission/vision/values should be: In writing and displayed prominently. Relayed and repeated to your employees, customers and partners passionately. Adhered to at all times. Leaders add conviction to these tenets! 8

9 Creating a Growth Culture Mission Statement Marsh & McLennan Companies Marsh & McLennan Companies is a professional services firm, committed to assist our clients in the protection and enhancement of value through advice and solutions in risk, strategy and human capital. Vision Statement We will be widely recognized as one of the world s elite business enterprises the preeminent provider of professional services. We will provide our clients with the most valuable ideas, services and solutions. We will provide our colleagues with opportunities to grow, contribute and thrive. We will achieve sustained growth in earnings. We will achieve significant and sustained growth in shareholder value. Source: 9

10 Creating a Growth Culture Culture-defining strategies (employees): 1. Hire people that share your values Do they have the right attitude? Are they a person of good character? What are their personal goals? 2. Cultivate a friendly, competitive environment Use production-based compensation Keep a score board or score card Have regular meetings and share successes with the group Have social gatherings and give awards 10

11 Creating a Growth Culture Culture-defining strategies (employees): 3. Invest time developing people Discuss goals, expectations and responsibilities Solicit input and feedback Multiply your influence seek the top 20% Respect Admiration Loyalty 4. Incentivize growth Use a compensation structure that forces producers to sell Set goals on individuals & teams Add incentives for higher production Add incentives for longevity 5. Create accountability 11

12 Creating a Growth Culture Culture-defining strategies (customers): 1. Create a great customer experience Have consistent processes Engage customers enthusiastically Listen and empathize 2. Show appreciation Thank them Send birthday or holiday cards Provide value-added follow up information On the benefits of additional coverages On disaster preparedness On ways they can reduce their rates On market updates 12

13 Creating a Growth Culture Culture-defining strategies (customers): 3. Solicit feedback How would they rate: Their experience (1-10)? How well their needs were met? The likelihood they would refer you (your score needs to be > 8)? Do they have other insurance needs? Do they know someone that might be interested in your services? For more information on surveying customers see: 13

14 Creating a Growth Culture Impact of Service on Organic Growth 14

15 Creating a Growth Culture Leadership Mission, Vision, Values Strategy Goals & Objectives Processes People & Infrastructure Growth Next Up: Building Your Marketing Model 15

16 Building Your Marketing Model Marketing - The business development and sales processes in an organization. Two marketing models for brokerages: Sales-driven (producer model) Producers solicit business and manage client relationships Often larger, more complex accounts or accounts with higher initial commission Marketing-driven (CSR model) Agency markets for business and CSRs manage client relationships Smaller, cookie cutter accounts and more stable recurring revenue 16

17 Building Your Marketing Model Which model is right for your agency? Most profitable agencies operate on a marketing-driven (CSR) model. Largest agencies operate predominantly on a sales-driven (producer) model. Most agencies with > $500k in revenue operate on a hybrid. Doesn t matter as long as you understand how you will drive growth. 17

18 Building Your Marketing Model A successful marketing plan requires six things: 1. Goals - the big picture 2. Strategy the game plan 3. Objectives the interim goals 4. Tactics the internal processes 5. Budgeting the allocation of resources 6. Resources the means to get things done 18

19 Building Your Marketing Model The goals for your business should be based upon: What is important to you. What you want to do with your time. How much you would like/need to earn. The amount of capital you have available. Where you would like the business to go. How you intend on exiting the business. 19

20 Building Your Marketing Model A marketing strategy should start with market research: Who is your prospect? General public Independent contractor Business or professional practice Municipality What are their needs/wants/fears? How competitive is the marketplace? Are there opportunities in the market? How large of a geographic region do you need to target to hit your growth goals? 20

21 Building Your Marketing Model The next step is identifying how you will differentiate from the competition: What is your promise or value proposition? Common differentiators: Product, Price and Service Not good enough! Your promise needs to align with the customers needs/wants/fears. It should be concise, unique and capture attention. It should focus on benefits, not features. It should be upheld at all costs. 21

22 Building Your Marketing Model The third step is to identify how best to market and promote the business? Will it be 22

23 Building Your Marketing Model Once the market analysis is done, realistic objectives should be set: Marketing New business Old business Personnel Financial Make weekly, monthly and annual objectives and monitor the progress regularly. 23

24 Building Your Marketing Model The tactics should be drawn up to detail how the strategy will be implemented to: Execute marketing Process new sales leads Retain clients Train new personnel Monitor results and finances Results Behavior The real test of management is maintaining quality control through consistent and defined processes. Objective Tactics Strategy 24

25 Building Your Marketing Model The budget should outline the allocation of resources in terms of: Monetary outlays for expenditures, specifically for fixed and variable Assignment of duties of personnel Your time in conducting management duties Everyone should be accountable for their duties, even your money! 25

26 Building Your Marketing Model And for all of this to work requires having the necessary resources: People (both sales and support) Money (operating capital) Market contracts with carriers/brokers Facilities and equipment Tools Engagement marketing materials & sales scripts Operating management system, accounting software, quoting software, etc 26

27 Building Your Marketing Model RECAP - A successful marketing plan requires six things: 1. Goals - the big picture 2. Strategy the game plan 3. Objectives the interim goals 4. Tactics the internal processes 5. Budgeting the allocation of resources 6. Resources the means to get things done Next up: Managing Agency Finances 27

28 Managing Finances What is a financial model? The allocation of money to cover specific expenditures What is a financial benchmark? A comparison of your operating performance against industry averages. Why should you know these things? Maximize profitability and value. Maximize productivity. Budgeting for the future. 28

29 Managing Finances Agency Expenses as a Percentage of Revenue Sales Driven Marketing Driven Blended SALES EXPENSES Commissions 20-25% 0% 10-15% Meals, travel and entertainment 1-2% 0% 1% Marketing, advertising and promotion 1-2% 3-6% 2-3% OPERATING EXPENSES Salaries & wages 20-25% 20-30% 25% Benefits (PR taxes, insurance, 401k) 5-7% 6-8% 5-8% Occupancy (rent, utilities, R&M) 5-8% 5-8% 5-8% Phones & technology 2-3% 2-3% 2-3% Printing, postage & supplies 1-2% 2-3% 2% Business insurance % % % Other 3-5% 3-5% 3-5% TOTAL EXPENSES (rounded) 60-80% 45-65% 55-70% NET PROFITABILITY 20-40% 35-55% 30-45% *Exclusive of owner's salary and benefits, depreciation/amortization and interest on debt. Most applicable for agencies with revenues > $300k. This summary is based upon my own analysis of agency financials and reported statistics from The National Alliance Research Academy. 29

30 Managing Finances Optimum profitability found when revenue is stable: Growing businesses reinvest capital (new employees, technology, etc) Shrinking businesses struggle to manage costs while revenues are declining An agency operating: On the low end of profitability might have structural problems (often in compensation) On the high end of profitability the business might be run very efficiently or could be a sign that not reinvesting in growth enough. 30

31 Managing Finances Performance benchmarks: CSR productivity benchmarks PL CSR CL CSR Commissions per $120k - $160k $200k - $350k Accounts per Compensation per $35k - $45k $45-60k Compensation to CSRs often includes: Salary or hourly base wages Incentive bonuses for: new sales achieving group goals proper completion of paperwork Benefits sick/vacation time and health insurance (less common) 31

32 Managing Finances Performance benchmarks: Why no benchmarks for producers? Their production is based on tenure Can range from $50k to $5M Additional thoughts on producers: Should be held to preset goals (novices) Commission split should not exceed 40% and should have a new/renewal margin of 10-15% Should not be given control over the business they produce. Alternatives include: Deferred compensation Minor equity in agency Buyout on book of business over time upon departure (contingent on non-compete) 32

33 Managing Finances The financial health of an agency has two critical components: 1. Keep > 3 months of working capital Helps you survive unforeseen events, seasonality or market cycles Allows you to invest in growth or acquisitions 2. Don t spend what is not yours! Always remain in-trust with carriers This includes accounts where you are paid infull on semi-annual or annual commissions Failure to follow these two rules could lead your business into a fast decline. 33

34 Managing Finances Budgeting Create a base line budget for each year based on prior year income and expenses January February March April May June Revenue Commissions $ 36,000 $ 39,000 $ 45,000 $ 42,000 $ 38,000 $ 44,000 Other $ 720 $ 780 $ 8,000 $ 840 $ 760 $ 880 Total Revenue $ 36,720 $ 39,780 $ 53,000 $ 42,840 $ 38,760 $ 44,880 Fixed Expenses Wages $ 17, % $ 17, % $ 25, % $ 17, % $ 17, % $ 17, % Rent $ 1, % $ 1, % $ 1, % $ 1, % $ 1, % $ 1, % Utilities $ % $ % $ % $ % $ % $ % Phones $ % $ % $ % $ % $ % $ % Supplies $ % $ % $ % $ % $ % $ % Software $ % $ % $ % $ % $ % $ % Insurance $ 2, % $ 4, % $ 2, % $ 2, % $ 2, % $ 2, % Advertising $ - 0.0% $ 1, % $ - 0.0% $ - 0.0% $ 2, % $ - 0.0% Marketing $ % $ % $ 8, % $ % $ % $ % R&M $ % $ % $ % $ % $ % $ % Other $ % $ % $ % $ % $ % $ % Total Expenses $ 25, % $ 28, % $ 41, % $ 25, % $ 28, % $ 25, % Net Income $ 11, % $ 10, % $ 11, % $ 17, % $ 10, % $ 19, % *Include owner's salary and benefits 34

35 Managing Finances Track productivity Of marketing dollars Cost per lead & sale Closing ratios Of CSRs and producers Number of sales & volume written Revenue per Of accounts and lines of business Retention % of multi-lining Changes in premium Next up: Case Study 35

36 Case Study Case Study: Two similar agencies Both >95% personal lines agencies with 9,000 customers. Both writing standard markets with middle and upper middle class customers. Both had near $1.5M in revenue. Both had highly respected and hard working owners. On the surface, very similar but differences existed that played a major role during the sale. 36

37 Case Study Profit & Loss % Adjustment Economic % Notes Gross Revenue $ 1,536,336 $ - $ 1,536,336 Agency #1: Profit & Loss Recast Statement: Operating Expenses % % Advertising $ 33, $ 33, Applied Systems $ 12, $ 12, Automobile Expense $ 18, (18,986) $ Personal discretionary Contributions $ 1, $ 1, Dues and Subscriptions $ 7, (4,789) $ 3, Personal discretionary Insurance - Health $ 40, (12,637) $ 27, Owner's insurance Insurance - P&C $ 25, (8,602) $ 16, Owner's insurance Licenses & Permits $ $ Miscellaneous $ 16, $ 16, Postage and Delivery $ 6, $ 6, Photos $ 2, $ 2, Professional fees $ 3, $ 3, Rent $ 41, $ 41, Repairs & Maintenance $ 17, $ 17, EZLynx $ 4, $ 4, Telephones $ 18, (5,228) $ 13, Owner's cell phones Travel & Ent $ 11, (11,430) $ Personal discretionary Utilities $ 4, $ 4, Office Supplies $ 15, $ 15, Payroll Expenses $ 605, (194,479) $ 411, Owner's family salaries Prof. Development $ $ Website Expenses $ $ Elevation Certificates $ $ Marketing Leads $ 25, $ 25, Total Operating Expense $ 917, $ (256,151) $ 661, Operating Income $ 618, $ 874, Discretionary Earnings $ (100,000) Manager's Salary (Est.) $ 774,520 50% Adjusted EBITDA 37

38 Case Study Tax Return % Adjustment Economic % Notes Gross Revenue $ 1,454,896 $ 1,454,896 Agency #2: Tax Return Recast Statement: Operating Expenses % % Compensation of officers $ 120, (120,000) $ Owner's salary Salaries and Wages $ 420, $ 420, Repairs & Maintenance $ 32, $ 32, Rents $ 95, $ 95, Taxes & Licenses $ 19, $ 19, Interest Expense $ 38, (38,238) $ Notes paid at closing Depreciation $ 3, (3,605) $ Non-cash expense Advertising $ 419, (290,000) $ 129, One time expense Employee Benefits $ 1, $ 1, Accounting $ 3, $ 3, Bank Charges $ $ Computer Maintenance $ 2, $ 2, Dues & Subscriptions $ $ Equipment Rent $ 14, (14,557) $ Leases paid at closing Insurance $ 82, (7,250) $ 75, Owner's insurance Legal & Professional $ 1, $ 1, Meals & Entertainment $ 3, (3,439) $ Personal discretionary Office Expense $ 49, $ 49, Postage $ 1, $ 1, Telephone $ 43, (5,000) $ 38, Owner's cell phone Travel $ 1, (1,091) $ Personal discretionary Utilities $ 9, $ 9, Professional Fees $ 4, (4,400) $ One time consulting fee Total Operating Expense $ 1,368, $ (487,580) $ 881, Operating Income $ 85, $ 573, Discretionary Earnings $ (100,000) Manager's Salary (Est.) $ 473,525 33% Adjusted EBITDA 38

39 Case Study The end result: Agency #1 sold for 6 x buyer s EBITDA (17% ROI) which equated to over 2.6 x revenue. Agency #2 sold for 5 x buyer s EBITDA (20% ROI) which equated to about 1.65 x revenue. A price difference of roughly 50% for generally very similar agencies! So what made the difference? Owner #1 had been involved in numerous sales and acquisitions, built value into his agency and groomed it for sale. Owner #2 owned the agency most of his life, had no plan and sold when he was ready to retire. 39

40 Case Study An inner look at what owner #1 was doing: On human resources & leadership: Prescreened hires through employment agency Compensated with base pay plus sales & service incentives Held regular meetings where office policies were emphasized Replaced least productive employee every 1-2 years Managed agency out of one main office On marketing & finance management: Utilized multiple cost-effective marketing outlets Developed targeted marketing campaigns Tracked the leads, closing rates, cross sales and cost Tracked every dollar and kept a monthly budget Maintained a productivity of $160k in revenue/csr Enjoyed a strong cash flow which helped in sustaining revenue 40

41 Final Thoughts To build value, you have to both lead and manage your agency. Create a strong sales culture based on shared values. Develop an effective and consistent marketing model. Track and manage your finances and efficiencies. If you do these effectively, you will grow your business and its value! 41

42 References & Acknowledgements Scott Addis, President & CEO of The Addis Group and Addis Intellectual Capital, for ideas via his Beyond Insurance newsletters. The National Alliance Research Academy for data provided in Growth & Performance Standards. 42

43 Suggestion Contact: Ashley Correll 43

44 Questions or Comments Thank you for your time and I hope that you found this information useful. Please direct any questions or comments to: Michael Mensch, CBI Agency Brokerage Consultants [email protected] Office: (321)