Dressing Up the Agency for the Wedding – Part 2 – Book of Business

You can’t take it with you. Every business owner will eventually sell his or her business. It can either be on terms the owner defines, or it can be based on whatever happens at the end. So, if an owner desires to have an orderly sale at a fair price (and that can include options like gifting it to the next generation), then some preparation work needs to be done before the big event.

Last month we introduced the concept of “running your business like you are ready to sell your business.” That column covered tips on optimizing the agency’s operations for the eventual sale of the business in order to attract qualified buyers and a high value. This month’s column will focus on the agency’s book of business and related topics.

Focus on Two Things

The two things most buyers focus on are the agency profits and the book of business. Typically, the latter drives the former. A bunch of small accounts, or labor-intensive large accounts usually does not help make the firm profitable. That is why it makes sense to deliberately choose the types of accounts that the agency will focus on for new growth, that are also profitable.

When deciding which direction to grow the business, one approach is to model the business after future potential buyers. Typically, those buyers have a successful business model, so that alone is a good reason to mimic their approach. Another reason to model after potential buyers is that it will make the business more valuable, since the buyer will have an easier transition due to the similarity.

In general, buyers are looking for products, services, processes and people that generate profits in the most efficient manner. Each buyer will have their own unique approach, however, there are only a few main components of the book of business on which they focus. Here are five of the most common.

A ‘Good’ Book of Business

There are no absolutes on how to define a “good” book of business. It is a relative term depending on the buyer. Some buyers focus on profitability, some focus on the composition and some, maybe something else entirely.

Generally, larger commercial accounts tend to be more profitable, especially when they are rounded out with multiple polices and lines of business. These types of accounts also attract the large, well-funded buyers. But, they are hard to obtain and maintain for smaller agencies. They are also mostly tied to the key owner or owners.

Middle market size accounts may be safer and are often desired by many buyers today both large and small.

An efficiently run personal lines book or small commercial accounts can be very profitable and easier to write for smaller agencies. Buyers for these types of agencies tend to be local peers, or at most, regional agencies. The downside is that they usually cannot pay top dollar and have less favorable terms, compared to large regional or national brokers.

A Strong Platform for Growth

One of the most important attributes of a good agency is a stable of properly managed non-owner producers. This is an indication of a sales-oriented business.

Also, if the owners are retiring, then it is important that there are producers in place to perpetuate the owners’ accounts. If not, then producers of the buyer need to be able to handle them. Buyers want to make sure that the owners’ and producers’ books are retained. The more producers, the better the chances of this occurring.

Keep in mind that often an earn-out is put in place anyway, especially if the buyer is worried that the accounts have not been properly transitioned.

Sales Management in Place

Many agencies have some problems with sales management. The agency owners are usually the drivers for new sales and the other producers are not properly managed. These firms are not sales organizations and must tout themselves as good retainers of business and service oriented. They should also get rid of poor-performing producers and not make this the buyer’s problem.

If there are even some basic sales management tools in place, that will set the firm apart from those that don’t have any at all. As a minimum, biweekly or monthly sales meetings should be established. Goals should be set annually and monitored with individual sales coaching.

Buyers look for firms with a good sales culture in place. It is also important for account managers to participate in sales and be rewarded for account rounding in all departments and across departments.

Pay Only Those Who Are Doing the Work

The largest expense category for agencies is compensation. So, the key to increasing profits is to pay people for the work they do. This philosophy comes into play with personal lines and small commercial accounts especially. The agency will often not make any money on these accounts if they are paying both a producer and CSR. Often, on the personal lines and smaller commercial accounts, the CSR is doing all the work, so the producer is getting paid for doing nothing. Resentment often occurs.

It is okay to have small accounts, however, they should be handled much differently than the medium to large accounts. A producer can generate the business, but the service staff should handle all the work from there on. This means producers can get paid commission on the new accounts, but they should not get renewal commissions on these small commercial lines accounts. This approach also applies to personal lines accounts.

How is a “small account” defined? It usually depends on where the agency is located. In a rural area, a small account might be anything under $250 to $500 in commission. For a medium size agency in an urban area that limit might be $2,500 in commission or more.

Some producers will be upset if they are told they will lose the commissions on these accounts. It is best for management have a report done by the producer based on size of account, so they can see at varying levels the amount of commission they might lose if changes are made, and if it really is significant or not. If significant, management can also wean producers off these commissions, over a two-year period, say, with the new plan applying to only new accounts until then. This gives producers time to grow their book.

If the producer is upset and can’t get over the changes made, that is a clear indication they are not sales oriented and might not be a good fit for the future direction of the agency. Producers need to focus on new sales and maintaining medium to large accounts. The agency cannot pay a producer and a CSR to handle a commercial account that brings in only $500 or less in commission!

Book of Biz with Niches or Specialties

Agencies with niches or specialties tend to be more profitable and are in a position to have faster growth. This is because program business allows the agency to be more efficient as they can often deal with only one product and one carrier. Producers and service staff get very familiar with the issues and don’t have to reinvent the wheel each time. Buyers could be attracted to either the specific type of program business the seller has or the profits they generate, or both.

Agencies often don’t realize they have specialties, so it is a good idea to generate a report of the book of business by SIC code. It is also a good idea when hiring new producers to find out what niches they may already have. Once the niches are established, the agency resources can be spent on the producers’ niches to get them leads, marketing, conventions and establishing networking groups. Producers can better succeed in agencies that provide them with these resources. Marketing assistance is also a plus for producers. It is amazing how many agencies hire and then just show new producers the desk, and they are expected to be on their own to prospect, produce and market their new accounts. Some are even expected to complete the entire ACORD forms, which is not a good idea for busy producers.

The best way to plan an exit strategy is to create an agency that others will want to buy. This means that the agency operations and book of business need to be attractive, efficient and well managed. This is not only the best way to attract buyers, but it is the best way to run the business.