Who’s Buying Who

This week I’ve got a riflescope’s view on selling one of the largest independent books in the state of California.

Every week I reach out to the broker community looking for the stories that will inspire us to be better at what we do and introduce you to an industry professional that’s got it figured out.

Today, I’m going to do this a little differently.

I’m going to change the names to protect the interviewee, but trust that this is a person you’ve heard of if you’re working the West Coast.

We’ve seen agency consolidation for several years now. If we look back to our pre-ACA era, the typical commission rate was something between 6.2% and 7%. The new normal is more like 5.5%.

In other words, medical loss ratios have put pressure on the traditional health insurance business model.

Some agents sold because they couldn’t make the numbers work. Some agents sold because they didn’t want to make the numbers work. Then you have the agents that are selling because they figured out how to create success in the new market and the big houses are making offers that are hard to turn down.

We’ll-call-him-Michael was approached with an offer that got him thinking.  As he explored the possibility of letting a major corporation acquire his business, he discovered just how much his family would benefit financially. He saw numbers in the millions plus upside for future performance.

Understanding how his agency attracted these offers can go a long way in helping you build your own business so I was excited when he agreed to break it down for you.

Michael was successful as soon as he opened his doors. In his words, “I was profitable in year one. I’ve given talks for different business groups about business models and it’s really simple. Income, which I control, minus expenses, which I control, equals profit. It doesn’t have to be more complicated than that. It’s even on my whiteboard today.”

Michael cut his teeth at a General Agency and then stepped out on his own as an independent agent. He wanted the same things every broker wants, the flexibility that comes with self-employment and a chance at financial independence. As the bread winner for the family, he had all the incentive he needed to take a chance on himself and earn them the best possible care.

In year one he needed $50 thousand in earnings to make the numbers work. He did $100 thousand. What he didn’t do next is what made all the difference.

He could have started hiring, he could have leased a bigger office to impress his clients or he could have invested in all of the latest marketing strategies. He didn’t. He kept bootstrapping it.

According to Michael, “The rough parameters are that I hire one employee every two years on an as needed basis. I used direct mail and then I went the telemarketing route. With telemarketing nobody’s going to tell the truth. They’re going to do 1/3 of what they say they’re going to do, but that’s okay because it doesn’t take a whole lot of business to make telemarketers make sense. Even 1/3 is going to make you money if you manage your other expenses.”

Of course, the ability to speak to someone is no longer in the top three functions that a phone is designed for, so for those of you just getting started, the internet’s interpretation of telemarketing is the Pay per Click model.

Having started his career at a General Agency, Michael says he also knew he could leverage those relationships to expand his reach and his expertise. “A lot of brokers on the high end move away from using GAs. They think a General Agency is for new brokers getting into the business, but I utilize them to death. GAs are like any other form of support, though. You need to weed out the good from the bad.”

Although he’s always worked small group health insurance, Michael originally split his time fairly evenly between life insurance and group. He also had his hand in some IFP and Medicare in the early years.

Half-way into his tenure he decided that his time should be dedicated exclusively to small group. By then he had hired specialists to handle other products.

“Just as an example, now I have an expert doing Medicare. He’s been doing Medicare his entire career. It made us better. I had been trying to reinvent the wheel each time I came across a need I wasn’t prospecting for and that was a disservice to my clients,” Michael said.

That is one of his secrets.

Each employee in Michael’s agency has a very specific job and deep expertise in their forte. That’s why his business now supports hundreds of group accounts and 85-90% of his new business comes from referrals.

The other secret is that Michael continues to run his business lean. He hired the right people and only the right people. Which is why he has the jaw dropping margin of 80%. Can your agency say that?

Even his staffing model for account managers is thought provoking.

Michael tells the story, “I had four account managers and one day a gal walks in and tells me her husband is moving away for his job and we both decided she better go if she wanted to stay married so then I’ve got a hole in my ship and I needed to fill it fast. I did like to keep someone in the bullpen though, someone that did quoting and marketing for me. He’d been with me for more than a decade, but it was his time to do something different, too.”

I don’t care if you’re Michael or the CEO of Marsh & McLennon, if you lose 2/5 of your service team and each service member is supporting more than 75 groups, you’re in a bad way.

If you’ve been doing this for a while you know these are things to be expected. There will be storms you need to weather but you don’t need to go it alone. I encourage you to reach out to your networking group or Masterminds to find the creative solutions that will turn rain into rainbows.

Michael learned from his situation and created a better business from it. Today, he’s gone from four to three account managers but each one has someone to help them and then to inherit their book.

With two decades of experience in the industry, Michael has been uniquely successful because he learned to handle both sides of the equation and he maintains the discipline to work both sides every day.

And that’s why the large houses came knocking. One of them offered a multiplier of eight so Michael took their offer for lunch. That’s when his education began.

“I sat down with them and they said, I’m going to have a hard time going back to our bosses telling them you need more than three times your profit. When I said a factor of eight, I meant EBIDTA,” Michael explained.

Next Michael discovered that his agency didn’t fit the traditional model. According to the large houses that were reaching out to him, most agents run with a 30% profit margin. His 80% profit margin was throwing off every calculation they ran.

Michael knew the value of his business and he didn’t need someone to tell him it would be crazy to settle, so he reached out to another very well-known agent and they began to work together evaluating the interested companies.

In the end, he opted to accept a deal that not only made sense financially but that let him keep his agency even if he didn’t keep the bank account. Michael isn’t afraid to work. He chose to keep doing what he’s doing and if he successfully meets all of his sales targets, he’ll earn additional pay outs for him and his family.

Not bad for a life’s work.

If you've got a unique take on the industry, message me. I'm looking for other insurance professionals that want to share their knowledge and insight for the benefit of our community.

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For prior articles on Ancillary Exchanges, Masterminds, Mentorship, or the Abundance Mindset, see my prior posts.