Making a Producer an Owner

There comes a time for many agencies when the owner is faced with the decision on whether or not to make a producer an owner of the firm. Like most important management decisions, there is no correct single answer.

Why producers want ownership
Typically, the job of a producer is to bring to the agency opportunities and to sell them insurance. Often a producer is also required to develop the opportunities—to “shake the trees” in order to pick up new prospects—as well as market the account to the various carriers. Therefore, it is not surprising many producers feel that the accounts belong to them, rather than to the agency.

When we ask a producer what they mean by ownership, stock ownership is often what comes to mind first. Stock ownership usually conjures up visions of importance and respect. Producers feel that having the word “Owner” on their business card will improve sales. Often the producer only understands the benefits of stock ownership, and the drawbacks are ignored or not understood.

Agency owners are often unclear themselves whether or not they should offer stock to a producer. Owners might often feel that they are forced to offer stock in order to entice a new producer to join the firm or to retain a currently employed producer and the book of business.

Everything needs to be put in the proper context when considering a producer as an owner. Is it an expected and welcomed decision? Or, did the producer blindside management and hold the fate of a book of business in the balance? The manner in which this decision is presented should only impact the palatability of the decision, but it should not change the thought process required to arrive at a conclusion.

Ownership material
The first step is to determine if the producer is qualified to be an owner of the business. The general rule of thumb at Oak & Associates is that in order to be an owner of a business, that person must possess some skills that would augment or enhance the management of the firm.

This rule of thumb should be adhered to if the agency is small and has one or two owners. Business perpetuation should be a primary goal under this circumstance, and a non-managing owner could prove to be very unwise, especially if the current owners are close to retirement.

The management role of an agency owner should be primarily the strategic management of the firm. Strategic management means the big picture issues, such as major decisions making corporate vision/leadership and agency planning. Of course, the smaller the agency, the more hands on the owner will need to be.

It is usually not an issue to have an owner that focuses on production only for large firms with a strong and diverse management team. However, it would make sense to limit the ownership percentage to a minimal amount. This is to limit the majority voting block to those that actually make regular management decisions.

Key requirements
The goal of all insurance agencies is to create new sales, service the clients and make a profit. With these common objectives, there are some fundamental characteristics that all owners should have. A sales oriented personality should be near the top of the list. Without an understanding of the importance of production, that person would have priorities that would send the agency down a path of no return. Fortunately, most producers come pre-equipped with this trait—but not all.

A similar appreciation by the owner is needed for client service. Problems usually develop from benign neglect; the owner focuses on new production, and ignores the existing clients and the agency service staff. Non-managing producers tend to be guilty of ignoring service more than their managing counterparts.

The last common trait all owners need to have is, to put it succinctly, the ability to act like “an owner.” The person needs to feel responsible that things are running smoothly, new sales are increasing, retention is high, costs are controlled and the agency is moving in the right direction.

For those that start their own agency, this trait is usually fairly strong. This trait may, however, be weak in those who move up the ranks in an agency and become an owner because of the size of their book or duration of employment. Those owners that lack this trait become only stockholders in the firm, not active owners in the broad sense of the meaning. This is because they always retain an “employee” mentality.

A “great owner” is a person who is well rounded. Knowledge of a variety of aspects of the industry will enhance one’s management skills. Communication skills must be excellent, and leadership traits must be present.

Making it happen
The actual mechanics of making a producer an owner will vary based on the situation, and the details are beyond the scope of this article. The key issues are where the money is coming from, to whom the money is going, the tax impact of the transaction and the terms of the deal.

A producer, using his/her own funds, can purchase newly issued stock from the business or some existing shares from another owner. If the producer does not have the cash, the business can loan the producer the money or bonus it out to them. Producers who have a vesting plan or account ownership can exchange the vesting (or account ownership) for stock in the agency. Keep in mind that a CPA should be consulted to determine the most tax efficient process to follow.

Some other pointers
When deciding whether or not to make a producer an owner, the impact on stock distribution needs to be evaluated. Will a new owner cause significant realignment, so that there are no majority owners? If so, is this an acceptable situation? Control is important.

On the other hand, does the prospective new owner understand the significance of their stock ownership? Minority ownership has its pluses and minuses. A minority owner has no control over how the business is run. A minority owner might not qualify for a profit distribution. The value received by a minority owner when they sell their shares may be discounted.

However, the future producer/owner might just be looking for the respect that comes with being an owner of the business. When trying to impress a prospect or a client, having just 1 percent ownership could have the same relevance as 100 percent. Also, a producer yearning to be an owner is often looking for long-term security and building something for retirement.

If building equity is the primary goal of the producer, then a vesting program might be the best solution. Deferred compensation is a method for producers to build long-term value for their efforts directly related to their book of business. The plan is often phased in over time until the producer is fully vested in the plan.

It is often better to offer the new or existing producer a deferred compensation plan rather than company stock. The producer has direct control over the growth of the equity, based on their production efforts, thus providing them with a sense of financial security.

The agency benefits by having a system that encourages the producers to build their books as well as remain with the firm. It must be noted that a deferred compensation plan creates a contingent liability for the firm, which does negatively affect agency value. However, deferred comp is also “consideration,” which helps uphold the covenant not-to-compete in a producer contract. This is another good reason to have it for producers.

Summary
The decision whether or not to make a producer an owner needs to be based on a review of many factors. The right decision will propel the agency for many years to come. The wrong decision will mire the firm in unimportant muck.

Despite the weight of this decision, avoid getting too emotionally involved or taking it too personally. Outside advisors can provide objective thought and specialized expertise. Reviewing the issues outlined in this article will provide insight into the “big picture” of this matter. The key is to understand all the options, think long-term and keep a clear head.

Bill Schoeffler and Catherine Oak are partners in the international consulting firm Oak & Associates based in Northern California. The firm specializes in financial and management consulting for national and international agencies, including valuations, mergers, acquisitions, clusters, sales and marketing planning, as well as perpetuation planning. For more information, call (707) 935-6565, e-mail catoak@sonic.net, or visit www.oakandassociates.com/catoak/.

Topics Human Resources