Is your agency aware that
these could be happening?
If you’re primarily concerned about valuation,
what steps are you taking to drive growth and increase profits?
By Roger Sitkins
After lengthy conversations with my Private Client Group members and several attendees at a recent speaking engagement, I was reminded that most agency principals are focused primarily on agency valuation. This comes as no surprise because, for most of them, their agency is arguably their largest personal asset.
Typically, any discussion about agency results and valuation leads to a conversation about their agency’s best resource and asset—their people. In turn, this leads to the inevitable question: How do we find more people?
It’s essential to note that none of the agency owners inquired about how to increase their profits or achieve higher organic growth. Why not?
According to the Best Practices Study and the quarterly Growth and Profitability Study (GPS) from Reagan Consulting, most agency leaders believe that neither of those two is a significant issue facing them. The profit margin is 25-plus percent, and the organic growth rate is 10-plus percent. In other words, things are going very well.
If you’re primarily concerned about valuation, what steps are you taking to drive growth and increase profits? Or are you continuing the behaviors that promise to undermine the value of your agency?
Part of the problem is that agency principals are asking the wrong questions and accepting the wrong answers. As I suggested in a previous article, there may not be a need for more people. Instead, we may need to fulfill existing sales and service capacity within the agency. Instead of focusing on hiring additional employees, we should consider redeploying the people we already have.
My recent research and experience have revealed three hidden profit and agency valuation drains that most agencies are unaware of:
- Profitable producers subsidizing unprofitable producers
- Profitable clients subsidizing unprofitable clients
- Profitable internal team members subsidizing unprofitable internal team members
Let’s examine each of these drains to determine if any apply to your agency.
Profitable producers subsidizing unprofitable producers
Our standards require a minimum of $500,000 in commission or fee income on a producer’s book of business to create an acceptable profit. If a producer’s book falls below that $500,000 threshold, you may be profiting from it, but not by much. Have you established a minimum level of net new revenue that your producers must meet or exceed each year?
Your new producers, who are still in their three-year validation schedule, are an investment in your future. However, they must be on track to validate! Keep in mind that any unvalidated producer growing at less than $50,000 of net new revenue per year is unprofitable.
Too often, we see that new producers fall behind in years one and two of their validation schedule, and then by the third year, you realize you’ve been losing money on them that you may never recoup.
Another problematic group is your retired-in-place (RIP) producers. They’re the ones who are floating along and have mentally retired but forgot to tell anyone. However, their best clients notice it and start looking to replace them. While they may not appear to be costing your agency, those with flat or negative growth can quickly become quite unprofitable.
If the top 20% of your producers are generating 80% of your revenue, this first drain exists in your agency today.
Profitable clients subsidizing unprofitable clients
I assume you are familiar with Pareto’s Principle, also known as the 80/20 Rule. You’re probably among the 99% who will say they’ve heard of it. That’s great, but are you using it? Do you analyze your overall agency, each of your departments, and your producers’ books of business according to the 80/20 principle? Or do you do it once and then forget about it for another three or four years?
Historically, we see that the top 5% of clients generate 50% of the commission revenue, the middle 15% generate 30%, and the bottom 80% generate only 20% of the commission revenue. Think deeper here: If 5% generate 50%, it takes the remaining 95% to generate the other 50%!
To easily determine if you have this second drain in your agency, ask yourself what would happen if you lost the top 5% of your clients—50% of your revenue—in one year.
Recently, I’ve taken Pareto even deeper and created the Sitkins Principle. Here’s the premise: There’s a very good chance you’re losing money on 50% or more of your clients and don’t even know it. There’s an equally good chance that the top 20% to 25% of your clients are generating 150% to 200% of your profits! I’m in the process of completing an in-depth study on this topic and will release a white paper soon. Be on the lookout for an announcement on this.
Profitable internal employees subsidizing unprofitable internal employees
A recent Gallup poll revealed that only 30% of employees are engaged, which means a whopping 70% are not engaged. As a result, it’s very likely that you have highly engaged and productive internal employees subsidizing the unengaged ones.
To easily determine if you have this third drain in your agency, examine your results in two key performance indicators (KPIs): Revenue per employee and spread per employee. If your revenue per employee is less than $300,000 and your spread per employee is less than $150,000, you have some unprofitable employees. Furthermore, we observe a negative spread per employee on 25% or more of your employees.
The bottom line
Anything that reduces your EBITDA reduces your agency’s valuation. While any excess employee or unengaged employee is decreasing your agency’s valuation by a minimum of $500,000, most are costing you more than $750,000!
For example, if you’re compensating an unengaged employee $75,000 and the agency valuation is 12 times EBITDA, that’s $ 900,000 of lost value. If you’re doing that for two employees, you’re spending $150,000 that you could be saving and losing $1.8 million of agency value! Multiply that by the number of unengaged employees who don’t follow the processes or contribute to the agency’s success, and the loss in agency value is staggering.
Certainly, there’s more to profitable growth than eliminating unnecessary expenses. In our soon-to-be-released white paper, we offer additional in-depth strategies for achieving breakthrough results at agencies just like yours. You won’t want to miss it. To receive your copy, add your name to the waiting list at sitkins.com/whitepaper.
The author
Roger Sitkins is the CEO of Sitkins Group, Inc. After over 40 years he has truly become an icon in the insurance industry having trained and mentored thousands of insurance professionals.
Roger was inducted into the Michigan Insurance Hall of Fame in 2017 and in that same year also received the Dr. Henry C. Martin Award from Rough Notes magazine. Roger is among only six people to have the honor of receiving this prestigious award.
Recognized as the nation’s top insurance agency results coach and renowned leader for improvement, he believes that if you improve the life of one person, you improve the world. To learn more, visit www.sitkins.com.
