Monthly Archives: February 2012

10 Ways to Attract and Retain Great Employees – Parts 1 & 2

The “human factor” has always been paramount for the insurance industry. In today’s business environment, clearly the long-term winners will be companies that provide a flexible and challenging work environment, along with employee recognition and rewards. Organizations have to be willing to share their successes. If employees are asked to share the risks, then they have to share the rewards.

Employment Exhibition


In our work as consultants we often discuss what owners and employees think are the key motivating factors. Most business owners initially think money is the key issue. However, many employees state that they are looking for challenges, recognition, and empowerment.
Despite the current softness in the economy and the rise in the unemployment rate, the shortage of skilled insurance workers is still restraining growth for many agencies. Given this environment, what can a firm do to retain and attract the best and brightest employees, while challenging them to achieve the business’ goals?
First, recognize that money, by itself, will not do it. High performing employees are searching for something more than just a high salary. The typical employee compensation plan should include a total package of rewards, recognition and environment. Some of the elements are “satisfiers” that allow a firm to attract and retain employees such as benefits, flex-time and training. Other elements of compensation are “motivators” such as bonuses, incentives, challenge, and opportunity. A well designed plan will have long term and short term compensation components.
The key to attracting and retaining the best people to the firm is the use of a “total compensation” approach. It is also a critical component in improving employee performance. A firm that takes the time to carefully customize a “total compensation” package will transform individual employees into high performing, and committed employees.
There are three basic ingredients to the total compensation package that every agency must have:
1.         Challenging Work
The old system of directing and monitoring every task that an employee performs is out. Employees with multiple skills and authority are in. For example, a major retailer has a one-paragraph employee handbook that states: “Rule #1: Use your judgment in all situations. There will be no additional rules.” To truly perform at this level requires enormous trust in the employees. However, if a business is able to perform at this level it will reach incredible heights.
Provide additional opportunities for learning and skill development to spice work up. Encourage the staff to take classes to get licensed and for courses to earn the necessary CEUs. But, an expansion of training could provide more flexibility through a higher skilled workforce. Send the employees to Dale Carnegie, Microsoft software training, business skills seminars, team building sessions or a sales class (such as Dynamics of Sales sponsored by CIC).
2.         Work Environment
Today’s workforce is looking for flexibility on the job and balance in their life. Management needs to evaluate ways to realistically provide this sought after flexibility in work. For example, tradition has it that the employees work in an office with established work hours. Could the firm allow for variations, such as 4-day workweeks, working at home two days a week or job sharing? Flexible work hours are becoming a common tool to attract and retain good employees.
3.         Recognition and Rewards
Non-cash recognition awards are a very effective way to reinforce the agency’s values. They can be a low-cost, high-impact element of the total compensation package. For example, employees who provide outstanding or innovative customer service receive special awards. One way is for employees to be nominated by customers or their peers.
Management needs to think about the types of awards that make sense for employees. Here are some examples:
¯Provide a day off with pay
¯Provide tickets to sports, music or cultural events
¯Take out an advertisement in the local newspaper thanking your employees for their contributions
¯Provide a donation in an employee’s name to the charity of his or her choice
¯Pay for tutoring for the winner’s child
¯Have the winner’s car detailed during work
¯Pay for the winner’s house to be cleaned
¯Pay for an evening out for the winner and their spouse – dinner and babysitting
Once the basic ingredients are established, the firm can then look into advanced tools to attract and retain employees. The following are some of the approaches that owners should also consider:
4.         Profit Sharing
Although money is not always king, it still has a lot of clout. Firms that establish a bonus plan based on the business profitability will have employees that strive to increase sales and cut expenses. Profit sharing can be based on the profitability of the overall business or by profit centers such as commercial lines versus personal lines versus life and health. The pool of bonus money can then be distributed to the staff based on management’s discretion.
A variation of profit sharing is to reduce the employees’ base compensation while providing quarterly bonuses based on a department’s performance. A plan that tracks employee performance will then allow them to see a direct correlation between their effort and their compensation.
Even in this economy, great employees are hard to find. You need to work hard and smart in order to find those star performers. Below are six more ideas for your agency to find and keep those high performers.
One of the key steps to take is to do your homework before you even begin the process of hiring a new employee. First, you need to identify what you are looking for. This includes the responsibilities for the position, skills required and your basic expectations for the type of person you want to hire.
We are very excited to offer to you our new employee hiring service through our partner, Insurance Hiring Systems. This is a great resource to help you do your homework before you hire and then have access to many tools that make sure you hire the right person.
10 Ways to Attract and Retain
Great Employees – Part 2
5 and 6            Phantom Stock and Stock Appreciation Rights
Stock appreciation rights (SARs) and phantom stock are both specialized deferred compensation techniques designed to provide an employee with the economic benefits of stock ownership without the employee actually owning any company stock. When an owner cannot or will not change the existing ownership structure, SARs and phantom stock are often used, to provide an employee with some sort of incentive compensation based on the actual business performance.
A SAR is simply a grant to an employee which gives that person a right, at some specific time in the future, to receive a cash award equal to the appreciation in value of a certain number of shares of company stock. In concept, SARs are similar to stock options, but different in several points. Stock options require the employee to purchase the company’s stock at the grant price. However, SARs do not require a cash outlay from the employee. The employee only receives the appreciation in value of the stock.
Phantom stock on the other hand can be viewed as units of value, which directly correspond to an equivalent number of shares of company stock. These phantom stock units are then granted to an employee for a specific period of time. When the maturity period is reached, the employee is then compensated directly in cash, based on the value of the phantom stock. Unlike SARs, the amount of compensation with phantom stock usually includes the underlying value of the stock as well as any appreciation above the grant price. Another difference is that SARs are typically paid out when the employee chooses to exercise the SAR, while phantom stock typically has a fixed award date.
7.         Deferred Compensation
Deferred compensation is a method for producers to build long term value for their efforts directly related to their books of business. We recommend using deferred compensation instead of ownership in the producer’s book of business. The plan is often phased in over time until the producer is fully vested in the plan.
The agency benefits by having a system that encourages the producers to build their books as well as remain with the firm. It must be noted that a deferred compensation plan (as well as SARs and phantom stock) creates a contingent liability for the firm, which does negatively affect agency value. However, deferred comp is also “consideration,” which helps uphold the covenant not-to-compete in a producer contract. This is another good reason to include deferred compensation as part of a producer agreement.
8.         Split Dollar Life Policies
A split-dollar plan is a way to provide life insurance for an employee or their spouse at a reduced cost to that individual. The premium for the insurance is shared by the employee and his or her employer (thus the name “split dollar”).
It is an effective way to retain key employees while the business is reimbursed for every dollar it advances. From the employer’s perspective, split-dollar is an inexpensive method of buying life insurance for any personal or business needs of select employees. It enhances employee loyalty by providing substantial insurance benefits. Some split dollar policies can provide funds, which may be used for additional employee benefits in the future (deferred compensation, salary continuation, stock redemption, or retirement income).
From the employee’s perspective, split-dollar can help replace needed family income that would be lost at the employee’s death or help pay any estate taxes. If the employee owns the policy and collaterally assigns the policy to the employer, the employer can borrow against the cash value to the extent allowed by the collateral assignment form.
9.         ESOPs
Employee Stock Ownership Plans (ESOPs) are a way for business owners to sell shares in the company or to provide an additional benefit to all qualified company employees. These plans were initially created as a win-win for business owners and employees. ESOP contributions are tax deductible as are dividends if they are paid to employees directly, on their behalf to the ESOP or applied to the loan payments of a leveraged plan. Because the ESOP is funded with pretax dollars, the company’s tax savings may increase even further.
The selling shareholder can also defer the capital gains on stock sold to an ESOP as long as the ESOP owns 30% or more of the company’s stock and the seller rolls over the sale proceeds into qualified replacement property (stocks or bonds of domestic companies). Employees pay no tax on the contributions until they are entitled to receive the stock when they leave the company or retire. At this point, the company generally buys back the stock through a buyback provision in the ESOP.
ESOPs are expensive to set up and maintain. Businesses need to be a certain size before it makes financial sense. We recommend that agency owners do their homework before seriously considering this option.
10.       Stock Equity
Stock ownership usually conjures up visions of importance and respect. Producers and employees feel that having the word “Owner” on their business card will improve sales and stature. Often the employees only understand the benefits of stock ownership and the drawbacks are ignored or not understood.
Agency owners are often unclear themselves whether or not they should offer stock to an employee. They usually first think about it either when a current employee is about to walk out the door and may not come back. Owners might often feel that they are forced to offer stock in order to entice a new producer to join the firm or to retain the currently employee, such as a producer with a book of business.
We recommend that owners think long and hard before offering stock to an employee. The decision whether or not to make an employee an owner needs to be based on a review of many factors. The right decision can propel the agency forward for many years to come. The wrong decision can mire the firm in unimportant muck.
A Final Thought
A good principle to follow is that if you want outstanding results, you need to be prepared to pay outstanding rewards. Implementation of a “total compensation” plan will motivate employees to improve not only their own performance but the performance of the firm as well.
Written by: Bill Shoeffler, CIC


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Popcorn and the Movies – Popcorn Lung Disease

It is that season again—the Golden Globes; Academy Awards and all the fashion and anticipation.  I

List of U.S. state foods

know people who attend two and three movies a day just in anticipation of the big night so they can make “educated” guesses to who the winners will be.

As for me, I go to the movies for one main reason—I love the popcorn AND the butter that I put all over it and go into the dark room and eat every piece one by one.  At least that is what I used to do until I started reading one too many articles on the chemicals in the popcorn—more specifically the flavoring and coloring that is used.  The first article I remember reading was published in USA Today on September 5, 2007 titled:  “Popcorn Makers Work to Remove Chemical”.  The article reported that:

“…The nation’s largest microwave popcorn maker, Con Agra Foods Inc. will change the recipe for its Orville Redenbacher and Act II brands over the next year to remove a flavoring chemical linked to a lung ailment in popcorn plant workers.  Four of the nation’s biggest microwave popcorn makers are working to remove a flavoring chemical after a leading lung research hospital warned that consumers also could be in danger from the buttery flavoring Diacetyl. The chemical Diacetyl has been linked to cases of Bronchiolitis Obliterans, a rare life-threatening disease often called Popcorn Lung…”

Now that’s a disease that was not on my list of neuroses—Popcorn Lung Disease! As I read the article not only was I convinced I had the disease but my insurance brain kicked in gear and I saw all sorts of insurance issues including the obvious Workers Compensation; Products Liability and the potential for Mass Tort Litigation (MTL); the issue of the long term occurrence and which carrier(s) would tender notice and which would tender defense.

Clearly the story did not end there– in fact that was just the beginning.  In an article published on on 10/25/11 titled,  “Diacetyl Popcorn Worker Lawsuit Filed over Health Problems”, details are provided on a lawsuit filed by workers in an Illinois popcorn manufacturer facility for injuries caused by Diacetyl.  The lawsuits are referred to as the Popcorn Lung Lawsuits alleging that the workers were repeatedly exposed to the chemical on their job. The plaintiffs allege they have suffered lung cancer, pulmonary fibrosis, chronic obstructive pulmonary disease (COPD) and other respiratory and pulmonary ailments as a result of Diacetyl exposure. They accuse the manufacturers of failing to warn workers about the risks associated with exposure to the chemical, and of failing to provide for the safety of workers who might be exposed to the chemical.

The list of defendants in the lawsuit is long and far reaching including:  Berje, Centrome, Chemtura Corporation, Consumers Flavoring Extract Co., DSM Food Specialties, Flavor Concepts, Fona International, Frutarom USA, Givaudan Flavor Corporation, International Flavors and Frangrances, Kerry, O’Laughlin Industries, Penta Manufacturing, Phoenix Essantial Oils and Aromas, Sethness-Greenleaf, Sigma-Aldrich Corporation, Virginia Dare Extract and Wild Flavors.

More than 300 popcorn lung disease lawsuits have been filed nationwide, with most of those coming from employees of popcorn manufacturers. However, a growing number of popcorn consumers have been diagnosed with the disease and have filed lawsuits against companies that manufactured or used the flavoring.  One of the largest awards to date was awarded to a man who worked at a Flavorchem Corp. plant in the Chicago area for $30 million in a Popcorn Lung lawsuit. According to a report in the Joplin Globe, the verdict is the largest rendered to date in a lawsuit involving the chemical Diacetyl, an ingredient in butter flavoring. The verdict in the case was awarded to Gerardo Solis, 45, who worked at the Flavorchem plant between1998 and 2006 when he was diagnosed with Popcorn Lung. The lawsuit named BASF Corp., a supplier of diacetyl and the world’s largest chemical company, as a defendant.

While some of the larger microwave popcorn manufacturers have stopped using Diacetyl, the chemical is still used in thousands of products, including microwave popcorn, frozen foods, cake mixes and butter flavored cooling oils. Unfortunately, it is not often listed on ingredient labels, so there is no way for consumers to protect themselves from exposure. When the chemical is heated, say in a microwave, it is released into the air in vapor form.

In June of 2007, the Food & Drug Administration (FDA) was informed of a patient who had developed Bronchiolitis Obliterans despite never having worked in the popcorn or flavorings industry. Reportedly, the man had been eating at least two bags of butter-flavored microwave popcorn every day for 15 years prior to his diagnosis. The FDA is now investigating to see if his disease is linked to the consumption of Diacetyl in microwave popcorn. Watson’s doctor theorized that the inhalation of Diacetyl fumes from bags of microwave popcorn caused his illness.

As we look at the various lawsuits and insurance response the issues of occurrence; application of deductible; and SIR are at the heart of the arguments.  In the case of International Flavors & Fragrances, Inc. v. Royal Ins. Co. of America (Appellate Division, First Department; 10/30/07) the specific issues of Toxic Popcorn Long as relates occurrence, deductibles and SIRs were discussed.  In the case, a number of employees of a manufacturing plant claimed toxic exposure to substance found in butter flavoring. The battle, not uncommon in claims of this nature, was between the insurer and the insured over the number of occurrences as each was subject to its own deductible for products liability claims.

International Flavors & Fragrances, Inc. (IFF) entered a declaratory judgment action against its insurers, including AIG seeking a declaration of coverage under eight general liability insurance policies in connection with a class action lawsuit filed against plaintiffs in Missouri by 30 current and former employees of nonparty Gilster. The underlying plaintiffs alleged that IFF manufactured and sold butter flavoring to Gilster used in microwave popcorn packaged in its Missouri facility. The butter flavoring contains diacetyl was alleged to cause lung impairment and other respiratory system injuries. IFF admitted that at least 18 separate shipments of butter flavoring were sent to the Missouri plant from 1992 through 1996. In dispute is the application of deductibles or “self-insured retentions” (SIRs) in the amount of $100,000 or $50,000 for each “occurrence,” which is uniformly defined in all of the policies as “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.”

AIG claimed each personal injury claim was a separate occurrence which applied a separate deductible. IFF claimed that the exposure was a single occurrence with one deductible. After a long and fairly well-reasoned discussion, the court determined that under the language of the policy, there was no occurrence without injury and there was no injury until there was exposure and illness. Accordingly, the court found that each individual plaintiff suffered an accident upon being injured by the exposure so there were 30 accidents, and not one.

And the cases continue to be filed across the country.  So not as to ruin your next experience at a movie theatre or at home while watching the awards show I suggest you consider vodka instead of popcorn.  At least that is what I am doing this year!


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Current State of Insurance Marketplace 2012

With worsening results of profitability in the P & C sector in the US insurance marketplace for the past several years the industry has been in what can be described as a state of suspended animation.

As of January this year, the majority of industry leaders believe that the market is now in the beginning stages of a hard market.  A survey conducted by the Insurance Information Institute ( at the 16th annual Property/Casualty Insurance Joint Industry Forum revealed the opinions of some 260 insurance executives regarding the following:

  • 63 percent of respondents believe there will be an improvement in personal auto and 67 percent expect an improvement in homeowners
  • 72 percent of respondents expect an improvement in commercial lines
  • 55 percent do not expect an improvement in workers compensation.
  • 67% believe that premium growth will be higher;
  • 78% expect an improvement in profitability in 2012

The majority of reinsurance treaties renewed January, 1st and in certain areas, such as catastrophic loss, those reinsurance rates increased significantly.  As often happens, those additional business expenses are slowly trickling down to the insurance buyer in some areas of the insurance market.  The market appears to be reacting as it often does with some fragmentation and volatility; some mid-market and large accounts are seeing property rate increases while the smaller accounts have seen only slight increases in pricing.  Poor returns on investments and continuing large catastrophic losses have also had their impact on the current market.

What is striking is that within three months, insurance executives opinions have changed from 87% believing that the market is soft or at the bottom of the cycle, to 78% today believing that we are at the point of price increases.

So the soft market cycle that we have been in since 2006 seems to shifting and entering a new phase.  Could it really be the return of a “hard market”?  As is often the case, you will know it when you see it, but all indications are present.

What does this mean to you and your client?  Well, more revenue for you, but your clients deserve a heads up, particularly if they are in the manufacturing, wholesale, retail or construction business as future contracts need to be written to include the higher cost of insurance.  The previous hard market came at a time when the overall economic outlook was not as grim, so this may be a very hard pill to swallow for some of your clients.


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Restructuring Your Agency to Merger, Cluster or Acquire

It is tough out there! 

Companies demand higher volume, offer lower commissions and limit or withdraw from the region.  Natural disasters almost seem common place.  Legislative actions reform health care, Workers’ Compensation and auto insurance.  Profit margins are dropping.

The average agent or broker may feel that they are a mere cork bobbing on the ocean.  If a firm is not growing it will disappear.  Many agents need to consider some action in order to survive.

The first step needs to be to work on internal growth.  This usually begins with hiring new producers.  Finding a good producer, however, is difficult and hiring a bad producer is costly.  It may be better to initially use leverage with your existing operation.  Use telemarketers or other sales techniques to attract new clients.  Expand the pie and sell new coverages and additional lines to exiting clients.  Try to free up the time of the owners and other producers so they can focus on sales by using experienced Account Managers.

The next step is to look for external solutions.  If an owner is close to retirement or does not enjoy the responsibilities of being an owner, then it may make sense for them to sell the agency.  It will require planning and time.  The actual sales process typically takes around one year.  Also, to maximize their equity, sellers usually need to work for two to five years to ease the transition of ownership.

If an owner would like to remain in the business for several more years and enjoys being an owner, then there are three more options to explore.  They can: 1) form an association or cluster with other agencies, 2) merge with another agency, or 3) acquire another agency or book of business.
In these turbulent times, many agents are not sure what is the best solution to their woes.  There are clear differences between merging versus clustering, versus acquiring.  There is no one correct answer, each situation will have its own proper course.  It is important, however, to be well informed about all the options that are out there.
A cluster is a group of agents and brokers forming a joint venture or association to market and place their individual books of business as part of a larger book.  The objectives in forming clusters include:

 Developing more clout and improved profit sharing agreements with markets due to volume consolidation.

 Generate economies of scale due because of better utilization of existing facilities, overhead expenses, automation and personnel.

 Create a potential market for a future buy-out when an owner wants to sell.

 Create a new platform to design and launch new products, new lines of business and additional services.
While achieving one or more of these objectives, each cluster member can maintain independent ownership of their accounts or agency.  Clusters can take many forms.  They range from all cluster members housed in one office and the members share the staff, to each cluster member maintains their own office and staff.  For smaller agents, the advantage of clustering can be summarized in one word — survival.

Pros and Cons of Clusters
One major concern with clusters or associations is the lack of commitment.  The clustering versus merger option can be compared to living together versus marriage: you are partners, but there is no real commitment.

When a cluster member leaves with their book of business, a void is created with markets, shared expenses, or shared personnel.  This could be fatal to a small cluster.  It is important that all members share a common vision for the cluster and are willing to put in the time to make it succeed.  The proper screening of members and creative cluster contracts can mitigate problems of uncooperative members or prevent members from leaving.

A cluster is typically an organization managed by a committee of owners.  Each owner has his or her own ideas – often a rigid set of ideas – established from having been a sole owner for many years.  Cluster members need to operate as a team with a few leaders in order to be successful.  Unless each participant is willing to place the ultimate executive authority with a few individuals, there is often an inability to develop basic functional goals and implement decisions.

Accounting needs to be centralized.  Each participating firm may have different operational efficiencies.  Accurate expense allocations are important to determine an equitable cost sharing of expenses so the more efficient firms don’t bear a disproportionate amount of the costs.

A cluster may not be able to obtain the extra influence with carriers unless one or more of its participants already have an existing preferred relationship.  An insurance company will have to approve of each participating firm in the cluster before agreeing to establish a relationship with and a new contract in the name of the cluster.  Often, those firms desiring to cluster have small books of business or existing placement problems.

Insurance companies are, naturally, aware of this threat of adverse selection.  Most insurance companies would rather deal with merged organizations versus cluster groups.  Clusters need to work with the companies while in the formation stage and share the cluster business plan and member screening process.

Sometimes a cluster can be used as a prelude to a future merger.  It is a good idea because it will allow the two firms to get to know each other before a formal joining of forces.  If it does not work out, the separation will not be as traumatic because a cluster is easier to dissolve than a merged entity.  For some owners, however, the initial commitment is important, so this two-step approach may not be desired.  .
Associations or clusters, when properly organized are a good option.  The dilemma is that many are not properly organized because of some of the reasons already discussed.  Since clusters often fail to fulfill the expectations of owners, we often recommend that firms consider merging as the alternative to clustering.  When properly structured, a merger will bring in more benefits than clustering.

Mergers usually have some of the same objectives as a cluster (i.e., more clout with carriers, economies of scale, better market for buy-outs, more production and management talent, etc.).  Markets are more likely to contract with a “merged” entity rather than a cluster due to its more permanent nature.

Merged firms are fully committed to operate as a larger, stronger and unified entity.  Stockowners still enjoy the advantages of ownership in the entity, but not of their book of business.

Avoiding the Pitfalls
Bringing together different firms into a single operation will be tested by cultural differences between the original businesses.  The personalities of the owners need to properly mesh and all parties need to share a common vision for the new entity.

Strengths must compliment weaknesses.  Weakness should not be compounded.  On paper, a good match would be between a predominantly sales-oriented firm and a firm focusing primarily on servicing existing accounts.  However, the management priorities will differ and may result in conflicts among owners.  Creating a simple strategic business plan for the new entity before final merger will help the partners work in concert with each other.

Compensation to the owners is usually a difficult issue and needs to be equitably established.  When owners are equally compensated, resentment occurs if one owner does not do their fair share of the work.  Compensation to the owners should be based on contribution to the firm using three components: production, management contribution and ownership percentage. We have articles and worksheets on owner compensation, if you need more information.

Some owners perform better by themselves and would rather not have additional partners.  Also, some agencies are well established and only need to add a little more volume.  For these two groups the acquisition of a book of business or an agency might make sense.  Growth by acquisition can be a very valuable tool but only when part of an effective strategic marketing plan, including finding a “compatible” book and ensuring the transaction is well planned and structured.

Acquisition Process
The first step is to evaluate the book of business.  Does it fit in well or compliment the agency’s existing book?  Was the selling producer heavily involved with the clients?  Find out how the book of business was produced and serviced.  The buyer must make sure that their agency can properly service and maintain the accounts.  Otherwise, the acquisition will be a “wasting asset.”  Often the seller will need to assist for a few years in order to ensure a smooth transition with the clients and markets.

Will the acquisition also include other producers, CSRs or support staff?  If so, they must fit into the buyer’s existing culture.  Just like with mergers, cultural differences between firms can create morale and other problems.  Avoid being forced to retain employees, make sure continued employment is at the buyer’s discretion.

Next, what should you pay for an acquisition?  Study the cash flow and the risk involved.  Do not pay based on a multiple of commissions.  Many buyers believe that they will not lose money when they base the purchase price on retention and calculate the value using a multiple of commissions.  This approach ignores risk and the expenses associated with the acquisition.  Purchase price must be based on the true profitability of the acquisition and the risk of that profit continuing.

The profit margin, the terms of the pay-out, risk and retention level are directly related to the ability of the buyer to make a profit on the acquisition and must all be analyzed together.  If too much is paid, too fast, a buyer will never break even on the deal!  Keep in mind the cost in hiring professionals to value the business and assist in the transaction could save many dollars more if the deal was not properly structured or the price was too high.

A FINAL THOUGHT The distribution system for insurance is constantly evolving because of events outside of the control of the agency owner.  Many agencies will need to consider restructuring the way they do business in order to survive.  Whether an owner decides to merge, join a cluster or acquire, all alternatives and issues should be carefully evaluated.
COMMON ESSENTIAL ELEMENTS Clusters, mergers and acquisitions are very different yet the keys to their success are the same.  The following steps should be applied to increase the likelihood of successful mergers, clusters or acquisitions:
 Analyze your current situation.  Can you grow internally?  Should you sell?  Does a cluster, merger or acquisition make sense for you?  You should review each option in parallel to understand which option is best for you.

 Do an extensive search for potential partners.  Networking often works best.  Hire a professional who can do the search while maintaining your confidentiality.

 Carefully evaluate each potential partner to ensure that personalities, corporate cultures and long term goals are compatible.  Take the time to know them and their families.  Remember – business partners spend more time together than married couples!

 Do extensive due diligence.  Make sure all information is exchanged…all closets should be opened and all skeletons removed.  Check on references and talk to company representatives.  Review the client files and computer database.

 Hire qualified professionals (CPAs, attorneys and consultants) to review financials, value the businesses, structure the deal, assist with the review process, provide advice on legal and tax issues and prepare proper documentation.

 Draw up a mutually agreed to Letter of Intent outlining general terms of the transaction.  This will become the basis of the formal professionally prepared purchase/merger/cluster legal agreement.

 Establish and agree on a compensation plan for stockholders based on ownership, production and management responsibilities.  Establish the travel/entertainment and auto policy for owners and producers.

 Design a plan on what the new entity will look like before any transaction is complete.  What changes will be made to management, facilities, staff, operations, and automation?  What synergies are created that can be exploited.

 Understand the impact the transaction will have on your carriers.  Evaluate if there needs to be a consolidation of markets and/or if a new market should be sought out and added.

 Discuss the retirement plan of any owners within five years of retirement.  The approach to the buy-out should be drafted.

 Draw up buy/sell agreements between shareholders in the event of death, disability or retirement.  Cluster members can draft a contingent buy-sell agreement with one or more of the other members.

About the Authors.
Bill Schoeffler and Catherine Oak are partners in the international consulting firm, Oak & Associates, based in Northern California.  The firm specializes in financial and management consulting for independent insurance agents and brokers, including valuations, mergers acquisitions, clusters, sales and marketing planning as well as perpetuation planning.  They can be reached at            (707) 936-6565       or by e-mail at Visit their new web site at


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