*This article is part of a continuing series about how to maintain and grow the value of your insurance agency so it will hopefully be worth more tomorrow than it was yesterday. In this entry we cover the importance of having multiple and varied Sources of Income to create more value in your agency.
Everyone knows the old saying, “Don’t put all your eggs in one basket.” And there couldn’t be a more appropriate proverb to discuss why having a variety of income sources is important to improving the value of your insurance agency.
If you were given $100,000 to invest in the stock market, it’s not likely you would spend all of it on just two stocks. A wiser move would be to spread out the investment over several different stocks, buy some mutual funds, maybe some bonds. Because if you just bought two stocks, then you would be totally relying on just two companies to maintain or grow your investment. If something were to go south on either one of those companies, that would have a huge impact on the value of your investment. But if you had spread your $100,000 around in multiple different places, then if any single one of them didn’t do well, you would still have all of the others to sustain you.
In general terms, the same idea holds true for the sources of income at your insurance agency. As an independent broker, you have the obligation to “shop” for the best rate and coverage that is in the best interest of your client. But if you or your people are really only comfortable writing business with one or two carriers, you will tend to steer business that direction, and that leaves you putting all of your eggs in one basket. If one of those carriers changes their appetite, or decides to lower commissions, or has a significant rate increase, then you could be stuck.
This is a bit of a double-edge sword, because of course you are visited multiple times each month by carrier marketing reps who are trying to generate as much business and loyalty as possible. So they would be thrilled if you placed all or most of your agency’s business with just their company! But even if that loyalty creates good income for you short term, it is probably not helping your long term asset value.
At the beginning of this series we discussed the difference between Income Value (the amount of money you can make today) and Asset Value (the amount of money somebody else would be willing to pay you for your business). So while placing as much business as possible with one or two carriers might get you higher commission rates and contingent bonuses from that carrier today, it could have the effect of reducing the future value of your business for a new owner. When buyers of insurance agencies see 40-50% or more of your revenue coming from a single carrier, they view that as being somewhat risky. They may not have the same relationship with that carrier as you do, or they may be concerned that if something changes with the carrier they will be stuck with a majority of business placed there.
Diversifying your sources of income isn’t limited to just how many carriers you write with. It also extends to how many different lines of business your agency is writing, what type of clientele you are attracting, and how much of your income is coming from renewable commissions versus one-time fees. The issue of fees comes up over and over again when agency owners are considering how much their agency is worth. In general, fee income is not considered part of the asset value of your agency. It is the classic difference between Income Value (the fees are making you money now) and Asset Value (but someone else is not likely to pay you for fee income later). However, there are two key words that determine the value of fee income as it relates to the value of your agency: consistency and balance.
If your agency is generating fee income at a consistent level and on a consistent basis that can be demonstrated over a 3-year period of time, chances are good that fee income will be considered part of the total value of the agency. However, if the balance between fees and commissions shows “too much” fee income, it presents too much risk for a buyer to consider it as part of your agency’s value. What is too much fee income? If your fee income represents more than 20% of your agency’s total income, it will be viewed as volatile and suspect. Even though you were able to generate that kind of fee income, a new owner will not perceive it as sustainable or reliable.
Agency owners should also take advantage of every line of business available to them through their carrier relationships. Why write only auto insurance with your Mercury appointment when they also have excellent homeowners, umbrella, commercial auto, and commercial property products? Why write only health insurance when all of those health clients also have property and casualty needs? While it’s true that certain “niche” lines of business for certain specific risks or industries can create very solid value for an agency, the general rule is that a good mix of income from various sources provides a solid sense of security about your income and that improves your agency’s value.
If you have all your eggs in one basket today with a limited number of carriers, few lines of business, or heavy reliance on broker fees, just focus on one new effort to start modifying the sources of your income. Pick a new product line or carrier and get training on how to sell it. Once you start seeing some regular monthly income from those efforts, then do it again, and again, until you have truly started to diversify your stream of income, adding considerable value to your agency at the same time. But don’t wait too long to get started, as another famous saying reminds us, “Never put off till tomorrow what you can do today”.
About the Author:
Jerry Pickett is VP of Mergers & Acquisitions/Client Consulting with Agency Acquisitions – an Astonish Results Company (www.AgencyAcquisitions.com). Agency Acquisitions works with agency owners to help maximize the value of their agency, perform agency valuation analysis, and handle all aspects of acquisition transactions for sellers and buyers of insurance agencies. Contact Jerry @ 614.859.9606 or email: jpickett@astonishresults.com
