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Volume 34 March 2019 Issue 3
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Literally thousands of agents every year value their agencies as a Going Concern. They do this when they select the level of life insurance they are purchasing to protect their families from the potential of their loss of income should something happen to them causing the business value of their agencies to erode. But most don't realize when they value their agencies for their continued participation that the value can be quite different if its purpose is the transition of ownership, either internally or externally. Link to this article to read how valuation differs based on whether it is for continued value for the current owner or for the transition of ownership, either internally or externally.
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Who "owns" the customer and why "Non-Acceptance" Agreements are more important for an agency than traditional non-compete agreements
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Your Staff? Your Clients?
Your System and Management?
Your Producers?
What makes you proud of your organization and what embarrasses you about it?
In the final analysis the answer for most agents will be that the owner(s) is/are both the primary strength of the business --- AND, SIMULTANEOUSLY, ITS MOST INVASIVE WEAKNESS.
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Several times each week we get calls from agency owners from all over the U.S. who have known us for years. While some of the calls ask viable questions about organizational development, incentive compensation for their employees, how to get, motivate, incent and manage producers, internal succession plans and perpetuation plans, a fair number each week begin or end with, "if you know any agencies in our area that are for sale, we are ready to acquire."
Some agents who call with this comment have acquired agencies before but most have not. But all of them realize that acquisitions can be paid for over some period of time and is a much faster way of growing than selling insurance one customer at a time.
I try to explain that, while we do a fair number of transactions every year, we only do them for Agency Consulting Group, Inc. clients. That means that we have consulted with these agencies and know their principals, their culture and what would "fit" their methods of operation. We try not to broker businesses that we don't know because our role is to make sure the deal is valid and valuable for both buyer and seller and that our client's long term strategies are being honored even in the transaction.
But, being in a consulting role for any agent that calls me, I always ask them two questions:
- WHY do they want to acquire? and
- What do they have that would make an agency want to sell to them?
The answer I'm seeking for the first question is that the agency has a long term plan for geographic or market growth that requires a larger base of business - or they are seeking skilled insurance talent to achieve their long term goals as an agency and acquiring that talent in one group is the best way to do it.
I usually stump the agents with the second question and they answer with the title of this article.
Then I ask them if an agency came to them directly and said, "I have enough money (or can get enough) to buy your agency" do they think YOU would react positively and want to sell to them? Of course not. There are many reasons someone wants or needs to sell an agency and, while the availability of funding for the purchase is critically important, it is not the decision-maker for the seller. He knows that there is plenty of funding and dozens of buyers for every seller. He's more concerned that he will be inundated with offers each one a little better than the last until he feels pressured into selling. Most seller's fear the pressure and emotions of the sale.
A man walked into a local convenience store at the same time that I did recently. He was in front of me as I stood in line to buy my coffee. He asked the clerk for a lottery ticket but he needed help understanding how to pre-select his numbers. The clerk asked him if he had ever bought a lottery ticket before. The man said, "No, I just decided that I could use the winning money yesterday." He decided that he could use the Million Dollar winnings yesterday and was buying the only lottery ticket he ever bought this afternoon. The clerk smiled and gave him the instructions and sold him a lottery ticket.
Do you think he won? Why not? He didn't need to buy a ticket as long as he didn't expect to win, right? Today - he expected to win so he bought a ticket.
Unfortunately, his chances of winning are about as long as an agent deciding that today he was going to let the agencies around him know that he would like to buy them out.
The lottery's long odds are created because there is virtually no way to prepare and make your chances of winning greater than any other schlub buying a single lottery ticket. You are trusting in luck and risking a buck.
On the other hand, if you wish to buy an agency there is only a small universe of agencies available to you and many other agents who would vie for the attention of the few each year who will be sold. You MUST have some point of differentiation that would separate you from the larger pack of agents all vying for the attention of the candidates, most of which are very reluctant because they face an unknown situation with any major change in their life and this one involves their major asset and their life's work, employee friends and client friends.
I recommend to any agent seeking growth by acquisition that they MUST create a vehicle that makes them more attractive to potential sellers than any other agent would be.
Using a consultant is one option that could pair your agency with others who would be cultural matches sufficient to attract them to you as their perpetuator. But the consultant should NOT be a broker trying to market your agency to potential buyers, neither of whom are well known to the consultant. The reason we only work with buyers who are our clients is that the on-going relationship permits us to market to, interview and select only the prospective agency acquisitions that are cultural fits with you as the owner and with your agency from the standpoint of clients, business methods, carriers, etc.
Whether you use a consultant or not, don't try to market yourself to the agents around you until you can answer the two questions above in such a way that the target agency will be able to judge whether they should be interested in you or not. And, the fact that you have or can get money for the acquisition is a very poor reason to acquire.
Please call us (856 779 2430) if you would like to establish a relationship that could include single or regular agency acquisitions. We do Strategic Planning for insurance agencies from which acquisitions can be a springboard.
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Literally thousands of agents every year value their agencies as a Going Concern. They do this when they select the level of life insurance they are purchasing to protect their families from the potential of their loss of income should something happen to them causing the business value of their agencies to erode. But most don't realize when they value their agencies for their continued participation that the value can be quite different if its purpose is the transition of ownership, either internally or externally.
Many agents have heard the horror stories and we, as consultants, have experienced it with many agents' families after a sudden death or disability takes the key personality out of an agency and no plans have been instituted to transition the agency after the incident. The value could plummet if nothing is done quickly and, surprisingly, the value could increase substantially depending on which direction the owner has established for the perpetuation of the agency.
The smartest of the agents who have provided for their families in case they are unable to continue their support have formulated both valuations of their businesses AND written either a Succession Plan (internal transition), a Perpetuation Plan (external transition), or a Contingency Buy/Sell Agreement (either internally or externally) that would act quickly in the event of a death or disability of the owner of the agency.
The reason life insurance is such a challenge is that EVERYONE (including insurance agents, themselves) is reluctant to plan for a tragedy (perhaps believing that planning will tempt the incident to occur). But, as our successful life insurance agents can attest, planning for that event is the most responsible way to assure that a business owner's family will be protected by the owner - even if something unfortunate befalls him/her.
An appropriate valuation will allow you to cast realistic values based on your continued operation of the agency (Going Concern) or will show you how the value of the agency will change depending on who takes it over and how.
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By now we should all be aware that, in the insurance agency industry, geographic non-competition agreements are being struck down in most courts. Courts are adamant that an employer can't stop someone from performing their career skill-set where they live and have their contacts. So if you have a Covenant Not to Compete in your agency for producers that include a prohibition for them leaving you and competing within a geographic range for some period of time, re-visit that section of the agreement with your attorney and replace it for all producers and employees that are affected by the agreement. This will likely require a "consideration" be paid to the employee for the imposition of any revised or new restrictions.
Non-piracy clauses and non-solicitation clauses accomplish the goal of prohibiting employees from
soliciting agency clients to leave the agency during a "reasonable" period of time during which the agency may replace the lost employee and re-establish a relationship with the clients that had previously been managed by the departed employee. Courts have found it reasonable for employees who have access to information about the agency's clients to be prohibited from soliciting agency clients for a long enough period to permit the agency to replace the relationship between the lost employee and the clients (s)he served with another relationship manager.
Relationship building and maintenance is the key to successful client retention anyway and, as long as the agency has at least one year (preferably two renewal periods) to replace the lost employee for each client, the eventual losses of clients to the former employee's new agency can be mitigated by the attention paid to the client by the employee's replacement.
If the lost employee becomes a principal of another agency or works on his/her own as a broker another important covenant to implement is
NON-ACCEPTANCE. This clause goes beyond non-solicitation and it forbids the former employee from ACCEPTING any of the accounts of his/her former agency employer for a period of time to allow the playing field to be leveled on behalf of the original agency. Even if the customer wants to follow the employee, this clause requires the former employee to wait until the Non-Acceptance period has passed before he is permitted to accept the client as a customer again.
The difference between Non-Solicitation and Non-Piracy and the new, Non-Acceptance terminology is that if a client moves to an agency in which the former employee is employed and the employee has not "solicited" the client, there may be no prohibition against the transfer of risk placement and administration by the former employee within the new agency. If the Non-Solicitation or Non-Piracy wording includes a prohibition for the former employee to "service" the client, it may even keep the employee from personally becoming the producer of record or the account manager for a client of his former employer -- but no such prohibition exists for the agency that has hired the former agency employee. While the employee may be restricted by the wording of his Covenant with his former employer that restriction does not extend to the client's desire to move his account to the agency for whom the former employee now works. As long as that former employee hasn't solicited the former employer's clients and doesn't even service or handle the client that moves to the employee's new agency, the Covenant simply doesn't transfer to restrict any other agency (including the employee's new employer) from accepting the former agency's clients. Any attempt at action would quickly yield a Restraint of Trade action.
The best solution to this problem is to impose Non-Solicitation, Non-Piracy
and Non-Acceptance wording in a Covenant that acts upon the individual and any Company in which the individual (the former employee) is an officer with respect to the ability of the individual or of the Company to accept clients of the former employer until the period of the Covenant is completed.
The other cause of action that we have noted revolves around the "ownership" of the insurance account.
Who Owns the Client?
In the eyes of the insurance companies the ownership of the customers always rests with the agency that holds the agreement with the carrier. The carriers acknowledge the renewals and commissions belong to the agency for which they have written the policies for the clients. That's the major reason that insurance agencies have value - because of the flow of income expected from their renewing clients. But we also acknowledge that every customer also "owns" his own insurance program. They have the absolute right to place their insurance with whichever broker or agent they desire within certain parameters. For instance, a customer cannot insist that his insurance be handled with a carrier for whom the broker or agent is not licensed. Nor can a producer be forced to accept a client if they know it will violate a legally binding covenant between the producer and his former employer.
On the other hand, producers without Agreements or Covenants that restrict their rights after they leave their agency employer also claim a right to the clients that they produce since there are no prohibitions against them competing with their former employer. SO WHO IS RIGHT? WHO "OWNS" THE CLIENTS? THE ANSWER IS THAT THEY ARE ALL RIGHT (and they are all wrong, as well).
- The agency owns the clients - whether or not producer agreements exist, the carriers assume the clients belong to the agency (according to most Carrier Agreements). That's why some companies won't move clients from one agent to another at all and the ones who will allow movement of clients from one agency to another require a Broker of Record Letter signed by the client acknowledging their desire to be moved to a different agency. We know of a few carriers that will accept a new application from an agency but will not accept a transfer through BOR/AOR (Broker of Record/Agent of Record) letters.
- The producers own their clients - from the standpoint of relationships. Clients wish to be serviced by the people they trust. The producer's job for most agencies is to develop and nurture the trust relationship between the clients and the agency. But, unless multiple employees or points of contact are developed for each client within the agency the point of contact is normally the producer - that's with whom the agency evolves the relationship with the customer. That is why it is always beneficial for an agency to have more than one point of contact for every client within the agency just in case their lead employee dies, retires or moves to a different agency, leaving the client with the loss of the only person they know and trust in the agency. Without an agreement including Covenants to prohibit solicitation of employees for some reasonable period of time, nothing stops a departed producer from soliciting the former agency's clients. It may require a BOR (Broker of Record) Letter to move the client within the same carrier and nothing is required to move a client to a different carrier. This is why Agency Consulting Group, Inc. and other agency appraisers will downgrade the value of agencies that don't have pre-existing non-piracy, non-solicitation and non-acceptance agreements in place that will be transferred to any buyer who wishes to purchase the agency assets or stock. Buyers will actively negotiate with the employees of an acquisition and will upgrade or downgrade their value based on the validity of an agency's covenants.
- The client "owns" his account - Of course a client always has the right to move his account from one agency to another. But, in most states, agencies are not forced to accept any applicant. The key to Non-Acceptance Agreements is that, under the right circumstances, you agreement may prohibit a former employee from accepting a client of his former employer for a reasonable period of time.
- The Client "owns" his account -- Non-Acceptance and the ability of a customer to move their accounts - The customer's right to move accounts is sacrosanct and primary. However a correctly crafted NON-ACCEPTANCE Agreement will prohibit a departed employee from accepting a client, even if the client wishes to move, for the period of the Agreement. While a client may "own" his insurance program, no one requires a producer or agency to insure all applicants if a legal agreement exists to prohibit such an action for some period of time.
However, Non-Acceptance Agreements only say that the former employee cannot accept the account not that the new agency for whom the employee works cannot accept the account. One agency cannot be forced to adhere to another agency's Agreements to which the second agency is not a party simply because they hired a former employee of the first agency.
While the imposition of Covenants and Agreements with producers and other key relationship management employees of an agency may not be the most pleasant part of a hire, they safeguard the agency's clients, books of business, AND VALUE as a Company. The written agreement clarifies the responsibilities of the employee, the responsibilities of the employer, and compensation issues. The Covenants amended to the Agreement should clearly state what the employee can and can't do if they leave the agency with respect to their acquisition of the agency's customers. Doing the Agreement at the time of hire doesn't require additional compensation or consideration since it is a condition of employment. Changing an existing agreement or adopting an agreement that limits the rights of an employee does require legitimate consideration to activate and no coercion to the achievement of the employee's signature on the agreement. Please note that antedating (dating a document prior to the signature date) may invalidate the agreement.
Please call us at 856 779 2430 to discuss how to create workable agreements that protect the agency from the vagaries of departed employees.
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All agency owners have an ego. You can't start, own, or operate a business without some degree of ego. The best agents have an ego that allows them to accept and laugh at their own inadequacies even while they are working to strengthen them. But most of us stumble (or charge) through life's (and business') challenges figuring that if it doesn't kill us, it makes us stronger. Of course, that's not true. You can damage yourself or others by not responding to an opportunity or challenge in the best way for that situation. But we assume that our concept and idea of business problem solutions is as likely to work as any. I sure hope that isn't the attitude of bomb squad members (or they will have a short, memorable career).
None of us who have not yet acknowledged the very separate roles of sales, service and management understand how differently we must respond to each of these disciplines. So whether you are a small agent and must handle all three disciplines because you are the Chief Cook, Bottle-washer, and Barista within your agency or, if you have dozens of staff members and management in place and have the right personalities handling each of these categories of agency performance, YOU are still the key to the success or limitations of your agency.
If you are the only performer or just have a few "helpers" you must do everything yourself even though you are likely unqualified to handle each discipline with maximum efficiency. Here's where ego gets in the way. Most of us will rationalize results of our actions as inevitable or as the fault of others if the results are less than stellar.
Eventually, luck, skill, or good support staff will allow you to grow into the position when you COULD place others in the roles for which your personality is not the best fit. Whether or not your ego lets you leverage your organization through the skills and talents of others is usually the first decision that either uses your strength or displays your limitations to long term business success.
The most successful agency owners I know have all faced this decision point in their careers and have stretched themselves to take on managers and/or other owners whose skill set is different from that of the owner and can manage the Sales Function, the Administrative Function or, in advanced agencies, the Financial and Strategic Functions of growing businesses. You can readily identify these successful agents. They tend to wonder how and why they have grown as successful as they have become and discount their sound decision-making as the primary reason for their success. You will find them crediting their managers and staff (who the owners originally chose and in whom they put their faith and trust) for their success. And it's true -- the owners chose well and the result was leveraged sales, service and management that worked to everyone's advantage.
As you know as consultants we are in different agencies weekly. As we analyze the agencies for ways they can develop better, faster and more productively and profitably, we can't help but note both the strengths and limitations of the agency are always driven from the owners' themselves.
An owner's reluctance to terminate staff members who are not able to be rehabilitated affects the entire agency for the long term. What the owner believes is being human and loyal is seen by the other employees as less than effective decision-making and management and that the poor employee is taking advantage of the owner and of the other employees in the agency because of his/her inadequacies.
The same owner may invest his time, money and reputation in new ventures, proving that he is a risk-taker to try to make the agency stronger. Most other employees may not have taken that risk but the entrepreneurial agency owner understands that "nothing ventured, nothing gained" is a way of life. The exception is that the risk-taking strength comes from fully informed education of the risks, the penalties for failure and the rewards for success. The foolish risk-taker hears a lecture, reads an article and charges forward without recognizing that the risk isn't worth the rewards in many cases.
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The Pipeline is intended to provide general information and background in regard to the subject matter covered. It is sold with the understanding that neither the writers nor Agency Consulting Group are engaged in rendering legal, accounting or tax advice.
The Pipeline is published monthly by the Agency Consulting Group, Inc., 507 N. Kings Hwy, Cherry Hill, NJ 08034, Copyright (c) by Agency Consulting Group, Inc. All rights reserved. Reproduction is permitted with the permission of Agency Consulting Group. For subscription information of reproduction orders ($10) - call 856-779-2430. Printed in USA.
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