Survival Tips Keep Agents From Walking Off The Cliff

To that end, I would like to share a few tips on how to survive what promises to be one of the most challenging years your agency will ever face.

o Receivables Management:

Be very, very careful with client receivables in 2009. I recently spoke to an agent who was in the process of writing off a six-figure receivable from one of his best and oldest clients–a construction contractor who was being forced out of business. The client, a longtime personal friend of the agency owner, had promised the agency owner for over nine months that the premium would be paid. It never happened.

Company-bill and premium-finance arrangements are great ways to keep from alienating valued clients, while at the same time ensuring that your agency doesn't become yet another victim of the credit crisis.

o People Costs:

Our industry is fortunate in that drastic head-cuts are the exception rather than the rule. Rare is the agency or broker that has to slash its work force to survive tough times.

I recently reviewed a survey of agency owners planning to provide 2-to-3 percent merit/cost-of-living increases to their staffs in 2009. But in light of your agency's 2008 results and prospects for 2009, is this really a good time to be increasing compensation?

This may be an excellent time to hold the line on payroll costs to ensure your employees still have jobs this time next year, and that strategic hires and other key investments critical to your agency's long-term success can still be managed this year.

One major broker recently announced a hiring freeze for all personnel other than sales. Have you carefully considered your people costs and what you plan to do today to ensure 2009 doesn't create significant financial problems for your agency?

o Budgets Make A Big Difference:

While most agency owners understandably focus their attention on the top line, managing the bottom line this year will be of critical importance. While you can't control pricing in the marketplace or the economy, you can manage your agency's expenses and bottom line.

I was speaking late last year to an agency owner regarding his firm's financial picture in 2008–flat revenues overall, lower contingents, higher compensation costs–all of which led to a whopping double-digit decline in profitability. He confessed that he was not even aware of the scope of the profit decline until very late in the year.

In retrospect, had he clearly seen what was happening earlier in the year, he would have managed his expense picture much more carefully (by freezing compensation and bonuses, eliminating discretionary expenses, and postponing a costly telephone system upgrade, for example).

How can you manage what you cannot see? Unless you have a firm grasp on your expected results–your budget–you have little chance of effectively responding to bad news. A budget, among others purposes, serves as an invaluable early warning system to ensure any ticking time bombs in your agency's financials are identified and defused sooner rather than later.

o Don't Become The Greater Fool:

Have you heard of the "Greater Fool" theory as it applies to insurance agency purchases? The theory tells you that the crazy price you're talking yourself into paying for an agency makes sense because you know (really?) there's a greater fool out there willing to pay the same price (or even more!) for it.

Don't make a bad business decision simply because there's someone else out there willing to do it, too!

Merger and acquisition activity on the part of financial institutions, private-equity buyers and many publicly traded insurance brokers has slowed significantly. As a result, independent agents are likely to find themselves in a position to compete for deals that would have been out-of-reach in the recent past.

Simply put, a largely diminished buyer pool creates substantially less competition for available deals.

Beware paying what you believe to be the "street multiple" for an agency whose value may be substantially less. Agency valuations that might have been appropriate just a few years ago, especially during the most recent hard market, often cannot be justified today.

Unfortunately, many sellers and buyers are not aware of this fact! Make sure you know how to effectively compete on agency acquisitions without giving away the farm. Otherwise, you may be the next "Greater Fool."

This is a year to keep your eye square on your agency's financial ball. Make sure that when the market and economy turn for the better, you're ideally positioned to take advantage of new opportunities, rather than having to undo past financial mistakes.