YOGI BERRA BUSINESS PHILOSOPHY 101:  When you come to a fork in the road - take it!  What to do when your agency is at the crossroads.

Leader's Edge, November 2006
Author:  Robert J. Lieblein

FAST FOCUS

• Enhancing an agency’s value is a worthwhile climb that requires careful steps.

• Standing still is a sure journey to failure.

• Sometimes the best decision is to sell or merge.

How often has a client come to you and said, “My situation has changed and I need to reevaluate my insurance package”?

What? You got such a call just yesterday? You get one a week?

You should be applying that very same kind of thinking to your own business—evaluating not just your coverage (let’s hope you keep that up-to-date), but your entire operation.

There comes a time in each agency’s life when it reaches a business crossroads, that point when you search your soul for the answer to the question, “What’s next?”

That’s where we turn to one of the greatest philosophers of our time: Yogi Berra. He had it right when he declared: “When you come to a fork in the road, take it.”

Let’s examine just how you might do that and reap the benefits.

Whether or not you feel you’re currently at a crossroads, you certainly are seeing the traffic whiz by in both directions in today’s turbulent and competitive market. Just staying up to the speed of those around you provides a constant challenge. Product rates are soft, you’re getting older and worry about a lack of agency talent to perpetuate internally, segments of the economy are shaky, and consolidation means your competition gets bigger and uglier by the day.

Cap those challenges off with personal ones like kids entering college, the next generation taking over the firm, or rosy images of retirement, and you’ve got a perfect storm for a blood-pressure-related event.

Now that this picture has you thoroughly stressed, how about we disarm some of bogeymen by walking through some planning steps.

The theme in all my writings is the importance of increasing shareholder value. I have provided many examples of ways that both publicly and privately held agencies can increase shareholder value. I want to step back and go to the bare basics of strategic planning. The critical decision that every CEO or owner must make is the choice between three divergent directions. Every strategy or tactical objective is based on one of three approaches:

• Keep the company operating in a steady-state,

• Enhance the agency, or

• Find a buyer or partner. 

Let’s break those down to their component elements and make sure you fully understand the road hazards and travel advisories.

Stay As You Are (Least Advisable)

Staying as you are, continuing to milk the cow of your current client base, is the least attractive option. I’m certain you can name many reasons why, but here are a few popular ones: You face great uncertainties in a static rate environment; costs will continue to rise just to maintain the status quo; competition will continue to heat up, especially among middle-market firms; and such a course adds little or no shareholder value to your holdings. So let’s be candid about this strategy: While it truly is a valid strategy, it will fail over time. Time is the variable, but whether it be one, three or five years, the do-nothing strategy will ultimately fail and you will consistently lose shareholder value over time to the point where either you close down your agency or sell at a significant discount.

I have seen agencies where indeed this was the right decision, but this falls in the 5% category. So while I understand why certain agency owners have done this, let’s not do it, as it is the road to failure.

That was an easy decision. Next!

Enhancing the Agency (Caution, Dangerous Curves)

Making the decision to enhance agency value may sound like an easy decision, but in reality it is the most difficult path to take. Why? Because you must make changes, take risk, invest capital, all with the goal of increasing shareholder value year over year.  There is no easy path to take—no magic solution, no step-by-step plan, but rather a well thought out vision focusing on both long-term strategic initiatives and short-term tactical objectives.

How is that done? Build on your competitive advantage, fine tune your financial strategy, develop an acquisition strategy and establish sound financing.

Competitive advantage—This is the path of least resistance to steady agency growth in revenues, profits and shareholder value. Perform a soul-searching assessment, identifying your firm’s position in the marketplace today and what you can do that will add value for your clients. Competitive differentiation can be reduced to the following questions: What do your clients truly need and what services can you provide to meet the needs of your clients? This is much different than what I find my clients initially asking: What does my client want and what does my competition offer? There is a significant difference between what a client wants and what they need and what your competitors offer versus what solution you can provide to address a need. Competitive advantage is a key component to your survival.

Financial strategy—How will you maintain your plan to enhance the agency? It’s most often accomplished on the backs of green. To reinvest, to meet your goals or to expand, those greenbacks must be flowing.

Reinvestment allows you to build infrastructure and expand operations. Make certain that your plans for reinvestment allow realistic profits, draws or expenses for shareholders. It may go without saying that profit must be sustainable, but let’s say it anyway: Be realistic when budgeting projected revenues and expenses. There’s nothing worse than having to correct course every quarter when projections are butting heads with reality.

Does your agency financial plan include those realistic yet challenging goals? Poor strategy or inadequate recordkeeping can create a black hole that sucks all the energy from your plan. A business plan should set both short- and long-term goals and should be revisited on a tight schedule to ensure that milestones and objectives are met.

Concentrate on metrics—Evaluate your revenue by line of business. Track profitability by territory or chart acquisition costs versus administration costs. The benefits of being a metrics wonk include enhancing your efficiency and proficiency, understanding loss-leaders and unprofitable clients or markets, leveraging your most profitable clients or products, and understanding where most expenses are being appropriated.

Acquisition strategy—Does your agency have an acquisition strategy that will enable it to expand geographically, by market or by product? Do you have an M&A policy? Is there capital available to put that plan in place? Don’t forget to evaluate the cost of capital needed for an acquisition strategy and the expected rate of return on the acquisitions.

You might be charging headlong into an acquisition because you have the money and the rate of return has put dollar signs in your eyes, but don’t spend that capital yet. Does your plan include a path to integration? It will be needed if you’re to benefit from such efficiencies as economies of scale. It’s not uncommon to see an acquisition flounder or fail because the challenges of integration were not fully addressed.

Perhaps you have a roster of candidate firms that you think will fit well as acquisition targets. Drill down from the first level of evaluation to consider whether the staff will fit within your firm. Also look at the firm’s compensation packages and growth expectations compared to your own. Finally, take a mood check and see if deep down you feel that the firm will fit, from a cultural and philosophical perspective.

Acquisitions are a popular way for an agency to grow, but they’re not without risks. Dumb M&A can be worse, much worse, than no M&A at all.

Financing strategy—Make sure you have a solid financial backing, either through internal cash flow or through third-party financing arrangements. The conservative agency owner funds all growth through internal cash flow. But this is not always a practical approach for every agency. As a matter of fact, why do companies go public? A key driver is to access the low cost of capital to help fund growth.

But this is not a realistic solution for the privately held agency. Therefore, make sure you practice smart borrowing. How much does your lender know about your business, and how much does he understand insurance? There are many banks that evaluate risks based on a “bricks and mortar” attitude of tangible assets and balance sheets. With the vast majority of an agency’s value lying in intangibles, your banker might see you as a higher risk, when in reality your firm is extremely stable by insurance industry standards. If that’s the case, you may not be getting as good a debt deal as you deserve.

The bottom line: Explore and build financing relationships. Just like new business development, sometimes it takes time to close the sale, and in the case of financing, it takes time to find the right financing partner that both understands your business and the risks associated with a growth strategy.

Find a Buyer (Often the Right Road)

The third path for an agency at the crossroads is to merge or find a buyer for the business. This might not be in your plan, but we need to address the issue. Once again, I go back to the basic decision that you must make as a CEO or owner. If you agree that milking the cow is not the smart strategy and you do not have the desire, the capital, the people or the energy to truly try and enhance the value of your agency, your third option is to sell or merge with another agency. Some CEOs and agency owners have “Pollyanna vision” and see things through rose-colored glasses. Avoid this mistake that many owners make about their agency, and make the tough decisions. Selling or merging is never an easy decision, but it is one of only three key choices that every agency owner needs to evaluate every year.

Conclusion

When you face up to those critical choices, very often deciding which way to turn requires deep soul-searching. If you don’t have the map—your business plan and strategy—making any sort of decision is tantamount to a coin toss. That’s not a very good way to handle such an important moment in the evolution of your business. Continuing your business as it is without trying to enhance your agency may be that thin edge that is impossible to maintain. The side marked “enhance value”—meaning growth in revenues, profits and, most importantly, shareholder value—will certainly contain many challenging twists and turns. The decision to sell or merge may sound like you failed, but for many agencies—including certain public companies—it is often the right choice to maximize shareholder value and the only viable road to take. In today’s uncertain marketplace, carrying that map and referring to it often is a necessity. As a CEO or agency owner, you need to choose this road every year.

The path you take depends on many factors, both internal and external, some controllable, some outside your control. Ultimately, every agency owner has to take the road that says sell or merge, but that may just mean the internal perpetuation of your agency. So until you need to take that road, make sure you understand what it means to enhance shareholder value and thoroughly understand all the options and implications before you get to that fork in the road.

Lieblein is a contributing writer and managing principal of WFG Capital Advisors. rlieblein@wfgca.com