In today’s challenging market, many agency owners must be feeling more than a little unstable. In fact, they are delicately balancing on the brink of a dilemma. To keep their business vital, it’s important to take a sober look at their agency’s prospects.
Flat rates, stagnant markets and multifaceted competition have put agencies in a very difficult position. Decisions must be made to continue the agency’s vitality or, in some cases, simply to keep it from going under.
A sound business plan and well-developed strategy are the first tools an agency owner needs to map their firm’s future. If you’ve arrived at a challenging crossroads without the proper strategic maps or global positioning system to guide you, your people will be left blindly stumbling around in circles instead of advancing in the right direction.
Basically, an agency owner has three directions to take: stay right where you are, enhance the agency, or find a buyer or partner. How can these three difficult choices be better understood?
o Stay The Course:
In most cases, the least advisable choice would be to stay the course. Even if your current plan is paying dividends, it is wise to question how long that will continue.
In today’s business climate, an agency cannot remain financially healthy unless it has some growth. The rate environment could remain static or even worsen, and with it would go your profit margin.
Costs will surely continue to rise, making it more expensive to maintain the status quo. Competition will be on that arc, too, as consolidations and newer players keep eroding even the most stable markets. Middle-market firms are especially susceptible to this scenario.
Finally, staying on the current course is a slow-to-no growth proposition, and that does nothing good for shareholder value.
Many agency owners choose this route of stripping earnings without an eye on reinvestment or creating value. This is often referred to as “milking the cow.” But even old Betsy will stop producing milk if she is not fed properly.
Modest corrections can keep the business going for a time. Additional shareholder investments can do that, as well. But long-term stability and success is much more likely with a growth plan.
o Enhance The Agency:
If growth of some sort is on the agenda, the challenge is balancing risk and reward in a volatile environment.
The first tenet of growth is that it needs to incrementally add value. The increased worth must be measured in relative terms, compared to overall industry growth rates as well as larger economic indicators. Growth must be able to keep pace with inflation, industry trends and anticipated economic actions, or a wise investor would rather put those new dollars in the bank.
What actions can fuel enough growth to meet such guidelines? That will depend upon each individual firm and its prospects. Break it down into four components: a competitive strategy, a financial strategy, an acquisition strategy and financing.
In general, an agency that seeks competitive differentiation will do better. Ask what the firm must do to truly enhance each client’s world? In MBA terms, what’s the value proposition?
Unique service propositions are very important for an agency or brokerage. Consider how the agency services its clients and uncover any areas (service, product lines, loss control, etc.) that will help win or maintain a client. More than being a growth strategy, such distinctiveness is virtually necessary for survival in today’s market.
Focus next on a financial strategy. How can the agency be enhanced to support growth? Many agencies can benefit from regularly reviewing their reinvestment strategies, considering how to boost infrastructure and finance expansion.
Update (or create) a financial plan and make sure it has concrete goals attached. For a reality check, create an external committee of advisers to provide business acumen and insights on effective growth. Don’t examine a single tree so closely that you lose sight of the forest.
What’s the firm’s acquisition strategy? Hopefully, it is more than simply reacting when a local competitor has decided he wants out. For measured growth, consider an acquisition strategy that contemplates expansion by geographic area, market or product.
Cost of capital is a key consideration. Guidelines must be set to provide an expected rate of return that makes the investment worth pursuing. Also address integration issues. A truly integrated purchase will allow for maximized economies of scale.
The savviest acquirers also set targets for type of acquisition, and then identify candidates that fit their framework. Consider the cultural identity of your firm and target firms, and include such issues as staff compatibility, compensation plans and growth expectations of each firm.
Finally, does the target appear to assimilate into your firm’s practice from an intuitive and philosophical perspective?
If an acquisitions path is sought, the groundwork has been laid for vetting candidates, and sound financing must be in place. Financial advisors, both internal and external, must be able to advise the firm whether a new acquisition is worth the investment, based on the cost of debt and the margin expected to result from the purchase.
Many agencies have difficulty finding a lender that truly understands–and therefore will adequately finance–their agency growth. Banks that primarily serve bricks-and-mortar clients may not comprehend the value of an agency model, and hence the agency may not get competitive rates or adequate financing capacity.
Seek a cash-flow-based lender. Make sure the lender sees beyond the balance sheet and understands the agency’s intangible value, as well as the value of its recurring cash flow.
o Partner-Up Or Sell:
The third choice for an agency at a crossroads is to find a buyer or a partner. This is neither a quick nor easy solution to the problem of stagnating markets and flat rates. In the current environment, even though it is the path taken by many firms, consolidation is not the wisest choice for everyone.
A detailed financial analysis can shed light on the question of whether to sell or continue the business. Consider the risk of reinvestment and the likely overall financial result versus the tax-effected results of partnering or selling to another firm now.
Calculate the agency’s market value, and then consider the owner’s current compensation and potential compensation–either in the current firm or in another business after the sale.
Compare the investment potential of this package, which could be the owner’s net worth, with the expected return if the owner reinvested in the agency and continued operations. (This process includes too many details to fully outline here.)
Many agency owners have considerations beyond personal finances. Some seek to perpetuate the firm to the next generation, while others have minority shareholders with disparate or conflicting goals. Financial calculations must be made with the entire mix of goals in mind.
Ultimately, a sale or partnership is a long-term undertaking. Such deals often take three-to-five years to culminate, and much administrative energy must be expended to make the transaction successful. Therefore, the situation should be carefully contemplated before any decision is made.
Summing up, continuing the business in a steady state may be the short-term solution while the groundwork is laid to map out a long-term plan. For those with a current business map in hand, the future should be less hazy.
Whether choosing to build for the next generation, continuing to operate in a steady state, or seeking out the perfect partner, endeavor to understand all the options before you’re selecting a course of action.