Many agency owners feel a bit unstable in today’s difficult market. They are actually delicately trying to balance on the edge of a dilemma. It is important to look objectively at the prospects of their agency in order to keep it thriving.
Agencies are in difficult situations due to flat rates, stagnant markets, and multifaceted competition. It is necessary to make decisions to preserve the agency’s viability or to prevent it from falling apart in certain cases.
An agency owner must have a solid business plan and a well-developed strategy in order to chart their company’s future. Without the proper strategic maps and global positioning system, you will find your staff lost at crossroads. Instead of moving forward, they will continue to stumble around in circles.
An agency owner can choose to stay where they are or improve the agency. Or, find a buyer, partner, or someone else. These three difficult decisions can be made easier.
o Keep the Course: In most cases, it is the best choice to keep the course. It is a good idea to ask yourself how long your current plan will pay dividends.
An agency can’t be financially sound in today’s economic climate if it doesn’t have growth. Your profit margin could be affected by a stagnant or worsening rate environment.
As costs rise, it will be more costly to keep the status quo. As consolidations and newer competitors continue to erode even the most stable markets, competition will also be on the arc. This scenario is especially dangerous for middle-market companies.
The bottom line is that staying on the current path is a slow-to nil growth strategy, which does not benefit shareholder value.
This route is often taken by agency owners who want to take their earnings and not look at reinvestment or creating new value. This is sometimes called “milking the cow”. Even old Betsy can stop producing milk if she’s not properly fed.
For a while, modest corrections may be enough to keep the business afloat. You can also make additional shareholder investments. A growth plan is more likely to lead to long-term stability, and greater success.
o To Enhance the Agency
Growth of any kind is possible, but it is difficult to balance risk and reward in volatile environments.
Growth must incrementally increase value as the first principle. It is important to measure the increase in worth relative to industry growth rates and other economic indicators. If growth is not able to keep up with inflation, industry trends, and expected economic actions, wise investors will prefer to put the new dollars in the bank.
What are the best actions to drive enough growth to meet these guidelines? This will vary from one firm to the next. It can be broken down into four parts: a competitive strategy; a financial strategy; an acquisition strategy and financing.
A competitively differentiated agency will generally do better. Ask the firm what it must do to make each client’s lives better. What’s the value proposition in MBA terms?
A brokerage or agency should have unique service offerings. Look at how the agency serves its clients. Find out if there are any areas (services, product lines loss control, etc.). This will help you win or keep a client. This is more than a growth strategy. It is essential for survival in today’s market.
Next, focus on a financial strategy. What can be done to improve the agency’s ability to support growth? Regularly reviewing reinvestment strategies can be a benefit to many agencies. It is important to consider how to increase infrastructure and finance expansion.
Make sure you update or create a financial plan. To give you a reality check and to offer business insight and tips on growth, set up an external committee. You shouldn’t be so focused on one tree that you lose sight.
What is the firm’s acquisition strategy for? It should be more than reacting to a local competitor’s decision to leave. An acquisition strategy which considers expanding by product, market, or geographic area is a good option for measured growth.
The cost of capital is an important consideration. It is important to establish guidelines that provide a reasonable rate of return so that the investment is worthwhile. Integration issues should also be addressed. Integration will enable you to maximize your scale.
The most successful acquirers set targets for the type of acquisition they want, then find candidates who fit that framework. Take into account the cultural identity of both your target and target firms and consider issues such as staff compatibility and compensation plans.
Is the target able to integrate into your practice from an intuitive and philosophical standpoint?
The groundwork must have been done for the selection of candidates and sound financing must be available if an acquisition path is being considered. Both internal and external financial advisors must be able advise the firm on whether or not a new acquisition is worthwhile based upon the expected margin and debt costs.
Many agencies struggle to find a lender who understands their agency and will finance it adequately. Banks that only serve brick-and-mortar clients might not understand the value of an agency model and may not be able to offer competitive rates or sufficient financing.
Look for a cash flow-based lender. The lender should be able to see beyond the balance sheet and comprehend the agency’s intangible assets as well as its recurring cash flow.
o Partner-Up or Sell
An agency that is at crossroads can choose to find a buyer, or a partner. This is not an easy or quick solution to stagnant markets and flat rates. Consolidation is not the best choice in the current environment.
An in-depth financial analysis is a good way to determine whether the business should be sold or kept. You should weigh the potential tax-effected effects of selling or partnering with another company now against the risk of reinvestment.
Calculate the agency’s market value and then calculate the owner’s compensation and potential compensation, either in the current company or in another business.
This package could represent the owner’s net wealth. It is possible to compare the expected return on investment with the expected return if he/she invested in continued operations and the agency. (This is too complex to describe here.
Agency owners often have other considerations than personal finances. While some owners want to keep the company going into the next generation, others are looking to make it profitable for minority shareholders who have different or conflicting goals.
All goals must be considered when making financial calculations.
A sale or partnership is ultimately a long-term endeavor. These deals can take up to five years to complete and require a lot of administrative effort to ensure success.
Before making any decisions, it is important to carefully consider the situation.
In summary, it may be a good idea to keep the business running while you lay the foundations for a long-term strategy. The future should not be so hazy for those who have a business plan.
You have many options, including whether you want to build for the next generation or continue to operate in a stable state, or if you are looking for the right partner.