David Tralka 

President and CEO of InsurBanc

John D. Rockefeller once observed that “a pessimist is one who sees a disaster in every opportunity. An optimist sees opportunity in every disaster.” Rockefeller reportedly spoke these words while playing a round of golf. He may have been commenting on the infernal difficulty of the game, but his words certainly ring true in today’s business environment.

Optimism is the predominant mood among agency owners I talk to about selling or perpetuating their business, even during the pandemic. Despite the slowdown in merger and acquisition (M&A) activity, there is every reason to feel good about the fundamentals of agency ownership, especially those agencies that are well run and have solid financials.

Sure, revenue and earnings are big question marks right now, but agencies remain sound investments. They are still attractive to both internal and external buyers. In uncertain times, it helps to remember what drives agency values. Think of independent agencies as cash-flow engines, powered by recurring revenue from steady, renewable premiums. Buyers are betting on the continued perpetuation of those cash flows well into the future. Good agencies are able to generate solid returns for their owners year after year — and that’s what makes them so appealing to acquirers.

The pandemic has raised concerns that buyers may think twice about acquisitions or perhaps offer less for agencies. This is understandable, and some deals have been put on hold for now. At the same time, some sellers have decided to postpone their exit from the business. And that makes sense, too.

But retirements and exits can’t be postponed forever. The same caveats that applied prior to the pandemic will apply in the coming months — better agencies will fetch better prices. Agencies that haven’t kept up with technology, modernized their operations, hired top producers or perfected their marketing will not fare as well.

It’s like selling your house. If you’ve kept up your property, made improvements over the years and your home has good curb appeal, you can sell it for top dollar. But if you’ve neglected your house, and it needs a lot of work, you may have a hard time finding a buyer.

The means of evaluating an agency’s potential earning power haven’t changed. It’s still a matter of analyzing the inputs that affect value. What are the risks to your cash flow going forward? Understand that a buyer is basically purchasing the future predictability of those cash flows.

If there are greater risks now because of COVID-19, they will be reflected in the outputs in the valuation model. Do you expect changes in retention levels? Will growth be lower? Will your loss experience increase? What about carrier relationships? All these factors can introduce a degree of uncertainty, which means more risk to your cash flow. And that, in turn, can affect what a buyer is willing to pay.

A buyer will look beyond your earnings to understand the source of your cash flow and its volatility or risk. What’s the risk of those earnings diminishing? The indicators here might be trends in retention and loss ratios, the geographic location of your agency (is the population declining or aging?), the market you are in, the companies you represent and the types of customers you serve.

Disruption in the market due to the pandemic may well impact the quality of your cash flow and your future earning power. Expect to see more due diligence as acquirers grapple with these unknowns. If customers aren’t able to afford homes or buy cars, personal lines revenue will decrease. Commercial insurance customers may also cut back on coverage. Benefits and workers compensation could be affected as well. A lot will depend on the markets you serve and the demographics of those markets. If your business is heavily dependent on travel, hospitality, entertainment, construction or energy, for example, your risks are obviously higher.

Follow Agency Best Practices

Regardless of what happens in the coming months, following agency best practices is critical to maintaining value. More than ever, you’ll want to make sure your financial house is in order. Here’s some advice to ensure your dreams of perpetuation can still come true:

Increase the value of your agency through steady growth. Growth comes from a combination of investing in new sources of income and greater efficiency. When income can be earned with fewer expenses, it increases your cash flow and your agency’s value. Increase your productivity and earnings potential by reducing the cost of servicing your accounts, utilizing CRM systems, digitizing records, taking advantage of social media and using your cash more efficiently.

Invest in your people. Having a stable, reliable team makes all the difference in the world. This includes your top managers, producers and customer relationship staff. During the pandemic, it’s especially important to take care of your employees. Make their safety and mental health your top priority. Check up on your team if they are working remotely. Make sure they have the computer, telephone and agency management resources they need to effectively service your customers.

Manage your expenses. There may be additional stress on your working capital because of the pandemic. Put systems in place to monitor and control your expenses. Don’t underestimate the cost of new equipment and software, training and marketing that may be required as a result of COVID-19. Always look for ways to reduce unneeded expenses. With each business decision, ask yourself: “How does this affect my cash flow?”

Consider borrowing. The Fed has signaled it will keep interest rates low for the foreseeable future. Rather than draining your working capital, you may wish to borrow to pay for the cost of new office systems or hiring another producer. Well-run agencies with good cash flow will be able to access capital on more favorable terms than agencies that are deemed a higher risk.

Create a digital presence. Agencies that are able to adapt to the new digital environment will be in a better position to weather the pandemic. That means engaging customers in new ways to provide added value. Invest in your data management systems. Knowing your customers and markets will allow you to be more nimble and to quickly assess new opportunities and identify unprofitable lines of business.

Continue to build client relationships. Check on your customers during the pandemic. For some clients, just receiving a phone call can further cement your relationship with them. Invest more time in serving your clients and staying active in your community. Your involvement will pay off in referrals and goodwill. Pipelines get rebuilt that way, which leads to growth.

Have a succession plan. Now’s the time to groom a successor if you’re planning to perpetuate and retire. Have a plan for how your agency will transfer ownership. It can be in stages over time to ease the exit and maximize tax advantages. The important thing is to have a plan and to communicate it to your staff.

Your exit strategy may be the single most important business decision you make. Invest in your agency now, and you should have no problem selling it when it’s time to retire. Continuing to grow your agency organically is always a good strategy, especially in these uncertain times.

David Tralka is the President and CEO of InsurBanc, a division of Connecticut Community Bank N.A. He is responsible for keeping the bank focused on being an innovative provider of financial products and services for the independent agency community. An expert on agency mergers and acquisitions, agency perpetuation and financing, Tralka has presented at numerous venues nationwide.