We find that more and more agency principals are dissatisfied with the current state of the insurance industry. Competition and downward pressure on rates and the commoditization of insurance products have in many cases drastically lowered the sense of excitement for agency principals. In many cases they are running to stay even. Commissions from new production barely exceed business lost to attrition. It is also becoming more and more difficult to attract qualified and experienced individuals to the agency to fill various roles. In the case of CSRs, companies have done away with their training programs as cost-cutting moves in recent years.
With consolidation at the carrier level, determining whether or not an agency has sufficient markets has become more and more problematical. With the consolidation, agency principals may suddenly find they have too much concentration with one carrier.
When the discussion turns to the possibility of selling, however, potential negatives surface immediately. Examples include giving up autonomy, reporting to others, paying taxes, the future of children in the agency and word getting out that the agency is for sale.
Keeping the status quo or selling are not the only two options, however. Selling up is realistic third option, but it means different things in different situations. Some real life examples based upon Harbor Capital Advisors' client assignments will help clarify the concept of selling up.
The first situation involves a client of ours who ran a small but profitable employee benefits practice. The difficulty this client faced was the ability to make the business grow. The agency was located in a sophisticated suburban marketplace with numerous corporate headquarters, and the principal had the appropriate credentials including a high level of expertise in the field of benefit consulting. There was, however, a credibility barrier in selling to larger corporate organizations which expressed concern about the size of the benefits operation and effectively viewed the principal as a one-man show with little technical support.
The solution was to sell up into a larger agency operation that had both property/casualty and benefits expertise. This had the potential to solve two problems. First, the benefits expert would have the opportunity to cross-sell to an existing client base. Second, the credibility issue could be overcome by being part of a larger, more visible agency with name recognition.
It was not difficult in this case to make a determination that the solution was selling up not selling out. The principal's income earning ability rose quickly as a result of the sale, and the principal is now one of the key employees at the larger agency.
A second example of selling up occurred recently when Harbor Capital was retained by a large foreign-based life insurance company to assist its U.S.-based subsidiary in finding a property/casualty agency in which the parent could invest. The U.S. subsidiary operated as a life and benefits agency in the U.S. and had decided to take a majority interest in a property/casualty agency in order to cross-sell property/casualty products to its benefits clients.
This acquisition represented a win-win situation for all involved. The seller retained a substantial continuing equity position, which would become more and more valuable as the agency cross-sold property/casualty coverage to the benefits agency's clients. In addition, the agency principals were able to capitalize a portion of their value and retain a sense of autonomy.
We have seen many other examples where agencies with specialties acquire equity in or merge with a smaller organization that has the ability to distribute product.
A third example involves a retail property/casualty agency where the principal owned a 100% interest in the firm. However, there was a significant producer who owned his own book of business. The principal decided that he wanted to sell but needed the cooperation of the producer. While the producer could have sold his book to the same buyer, he decided to partner up with the buyer and take an equity stake in the acquiring organization. By so doing, he was effectively freed of the administrative burden and was able to concentrate on his strength, producing new business.
Another Harbor Capital client experience of selling up included a property/casualty agency with a substantially negative balance sheet. While the agency was struggling to make up the negative balance sheet, it was approached by another agency which derived the majority of its revenues from a special liability program. The acquiring agency also had a deficiency, which was the fact that its retail property/casualty book was relatively small when compared to its specialty revenues. Feeling that a well-balanced stool requires at least three legs, the buyer made an offer to acquire the property/casualty agency in a tax-free exchange of equity. The acquired agency became the hub for property/casualty sales while the larger agency was able to continue its focus on distributing its specialty product. The principals of the acquired agency have the continuing stature of being equity holders in the acquiring agency and a renewed motivation to continue in the insurance business.
The final example of a property/casualty selling up involves an agency with a specialty in fiduciary liability. This entity was selling to large international unions. While there was great potential to increase market share by focusing on local unions, under the umbrella of international unions, the cost and logistical difficulties of traveling all over the country to make the sales became impractical. Instead the decision was made by our client to open discussion with larger public brokers who had the infrastructure through their branch office system to effectively service the potential client base. What our client brought to the table was the relationship established with the unions. This relationship was the most valuable asset for consummating the sale.
Examples of agencies selling up are becoming more and more frequent. Agency principals are beginning to look beyond the decision of whether or not to sell--to the implications of a strategic sale where the added value to both organizations is significantly enhanced.
When we work with agencies, we look beyond the traditional cookie cutter solutions. We try to find creative ways of meeting our clients' goals--to provide them with the optimal financial and psychological rewards they are seeking. Selling up is one way agencies are meeting their perpetuation needs. While the above examples may not exactly fit the business model available to your agency, you would be well served to explore the concept of selling up. *
The authors
Paul J. Di Stefano, CPA, CPCU, is the managing director and G. Edward Kalbaugh, BSE, MBA, is director of management advisory services for Harbor Capital Advisors, Inc. Harbor Capital Advisors is a national financial and management consulting firm which offers services to the insurance industry. Services include agency appraisals, merger and acquisition representation, strategic and management consulting. They can be reached at (800) 858-2732.
©COPYRIGHT: The Rough Notes Magazine, 1999