Can Your Relationship Strength Be One of Your Greatest Risks?

Joey Giangola: Carey Wallace, how you doing today?

Carey Wallace: I'm doing well, Joey. How about you?

Joey Giangola: Carey, I'm doing great. I'm doing great. I want to know this before I really go anywhere. Is there a common household tool maybe or item that you just, for whatever reason, refuse to use to make a simple task easier?

Carey Wallace: Wow. I would think a level.

Joey Giangola: That's a good one.

Carey Wallace: We moved recently and we hung a lot of pictures, and I could've made it a whole lot easier if I would've used a level, but I chose to hang things using my eye.

Joey Giangola: So anytime somebody comes over, now you can play a little game. Is this level or not? And then get some feedback. Carey, for me it's any type of brush or SOS pad when cleaning dishes. For whatever reason, I just can't seem to keep them on hand. I will do whatever it takes to clean a dish without those on, and it would probably make my life a lot easier and faster. Just doesn't make its way into the regular rotation.

I think the more interesting question here is moving this over, and we can go probably in many different directions, but moving this over to the world of insurance. Is there something that you see agents, we'll say, neglect or refuse to acknowledge the existence of when it comes to operating day to day in the world of insurance that could maybe speed up things, make things a little bit easier? Is there something that stands out to you in all of your years?

Carey Wallace: I think that insurance agents focus on revenue. I believe you should probably focus on the total package, which would be profit. That would make your life a whole lot easier as an agency owner, I would say.

Joey Giangola: That's a subtle question. I want to dive into that a little bit. What do you think the reason is for focusing on the revenue versus the profit? And what do you think is missed when you're able to dive into the profit a little more?

Carey Wallace: I think if an agency owner gets into a situation where they want to invest in something inside the agency or they want to do something, the answer is typically, well, we can sell X more policies in order to be able to set ourselves up in order to be able to do that. When, in fact, I think that there could be investments that have been made along the way that could stop and actually fund some of the things that an agency order wants to do. Look, our industry right now, there's a ton of technology, a ton of insuretech. There's a lot of shiny syndrome going on. If you think about am I measuring what this was meant to do inside my agency and evaluated that, I think you'd find a lot of opportunity to reinvest in something else. But instead, we look at the revenue and say, "Well, how much more do I need to sell in order to get that?" Does that make sense to you?

Joey Giangola: Yeah. Basically moving the puzzle pieces around a little bit as opposed to looking to create new ones, I guess. Have you seen examples where it is successful, where agents are able to do that deconstruction of what is available and reallocating of resources?

Carey Wallace: I have, actually. Honestly, when you value an agency, you have to look at all of that. It's funny. Going through that process, I've been able to see agents take a look at how much I'm allocating towards compensation or how much I'm allocating towards marketing or how much I'm allocating towards maybe some discretionary expenses. Once you uncover that, it's like, oh, I could probably do something a little different and think about this differently throughout that process. For instance, an agency that I was working with was able to hire an operations person, allow the person that was being not forced, but by default going into that role, focus on sales, and they were able to actually grow significantly the next year. But when I first met them, they said, "Well, we don't have funds in order to hire someone new." We were able to actually uncover they did have the funds to hire someone, they were just allocating it differently.

Joey Giangola: Is there a healthy mixture that you've seen in terms of spreading things evenly, I guess, around the pie? I'm sure this is a very delicate topic for most agency owners, but I would imagine some similarities start to pop out after a while.

Carey Wallace: It's a really interesting question. Everyone is asking, what's the magic formula for how much do you spend on each category? I will tell you what I see is agencies that are growing double digits and that are investing in infrastructure in order to grow, there is a common thread. They're spending more in marketing and more in technology than the average agency is. They're also probably spending more in outside services, meaning they're investing in someone to come in and help them build policies and procedures or possibly use virtual assistants. You can see by making those investments, they're growing faster, they're more profitable, and they're actually getting some acquisition opportunities because they now have created the capacity. Honestly, the trend is they're breaking the mold with some of these benchmarks in order to double down and invest in their agency, whereas others that are not spending anything in marketing or very little in technology are not positioned to acquire.

Joey Giangola: Those are traditionally areas that we would put at the very bottom. What does it take, in your estimation, to get those on the radar of the agencies that are looking to grow? And what has been the focus? What are some of the techniques and things that they are putting the money into to help with that?

Carey Wallace: The biggest expense in any agency is their people. I think we all know that. I think in order to put that on the radar is, how are you compensating your people? Are you using compensation structures that grow with the agency? Are you providing just base salaries that never move and shift and aren't actually incenting people to grow the business? Those are the ones that it's very obvious. Maybe some people are overcompensated inside the agency and there's an opportunity to think about it differently. Number one place you'll always go is compensation because 50% of the resources or more are in compensation. If it's more, we got to figure out why. Is there opportunity to change that and reallocate to other areas?

How do you get the other things on the radar? I think you ask a ton of questions. What are you trying to do? What are you doing in order to position your agency to be able to grow? Sometimes agents aren't, they're just sitting on their books of business. But if they are, then we have to ask, is it doing what you wanted them to do?

Joey Giangola: Carey, I don't think I've ever asked this question. Is it a bad thing for an agency owner that has worked X amount of years to just say, "I'm good"? Because we sometimes want to put that down as it's this negative thing, but at some point, you have to be okay with what you've done. Is there a conversation that is had when people are at a certain point on what they want to accomplish and being okay with it?

Carey Wallace: I think that's a fair question. The problem is, Joey, if you watch our news and our headlines, those same agency owners may want to get the multiples that are published for their agency after they've stopped investing. It's totally fine to be good. It creates a great lifestyle inside that agency. The problem is you can't expect to get high multiples for an agency that's not growing, that's not profitable. Those two things don't compute. I think if you're going to not invest in your agency, you also have to have realistic expectations about what you can possibly get for that agency, if that makes sense.

Joey Giangola: Well, now that you've brought us here, Carey, what's a healthy set of expectations to have to get those multiples, to get to the point where they might want to walk away from something they've spent their entire career building?

Carey Wallace: I think here's the thing, Joey. Your agency either pays you now or it pays you later. If you have a ton of discretionary expenses that are being taken out of your agency, and I mean discretionary meaning they're really not related to selling insurance, but maybe they are to augment the lifestyle of the owner, and you're not investing that in that agency, it's paying you now. Someone who buys your agency will take those expenses out, they'll reinvest inside that agency, and hopefully make that agency grow, operate much more profitably, and hopefully get to a higher volume.

Agencies that are growing double digits are profitable, and I mean around a 30% EBITDA, and have a volume of $1.5 to $2 million. Those are the agencies that are sought after. They're going to get some serious multiples provided they have low risk in certain areas. But if you're not at that volume, you shouldn't expect to see the multiples that we see all the time. You're not going to get nine times EBIDTA, you're not going to get 11 times EBIDTA, you're going to get closer to seven times EBIDTA. Or depending on what you're thinking of doing, if it's an internal, it really depends what can cash flow based on all those decisions you're making. A bank's not going to loan you money that doesn't cash flow. It really depends what's most important to those owners and what they're willing to get paid later versus getting paid now.

Joey Giangola: This is more of an existential question, but let's see if we can handle it. Again, of agencies selling out and things like that, just what it might do long term to the industry. Do you think there's a challenge of going to bigger money pools, if you will, versus staying with a family run agency or something like that? Is there any issues with that process overall over the long term? Because it's something that we continue to see year over year as a growing trend. Is that something that we should just be aware of or do you think it's not really much of a problem?

Carey Wallace: I think that any agency that's thinking about exiting, they're going to decide what's most important to them. What's most important is the agency stays in the family, the agency stays in the community, the name stays the same, those things. You have to be okay with possibly taking a lower price or a lower multiple for your agency. What's happening now is more and more, either we're waiting too long, so that's not feasible. They're having to only sell externally and give on some of those things possibly. If you're at a certain size, it's really tough to not pay attention to the multiples that are in place that are private equity backed.

It's three different ways. You can sell internally, you can sell externally to another retail agency that might have a bank loan, and then you can sell to private equity. That is a whole other ballgame. If you're at a certain size, it's super tough to not pay attention to what that private equity will look like. I'll also tell you, the players in private equity are changing and moving and shifting. Some are saying, "Hey, we actually want to target the 40 to 45 year old owners and give them a trajectory where they have two bites at the apple." It is unbelievable how attractive independent insurance agencies are, and it's tough to not pay attention to what's out there.

Joey Giangola: Well, that's going to be my next question. If somebody were sitting here today, what would be a good runway roadmap for them to follow depending on where they thought their agency was? What's realistically for them to get it in shape to be in a position to do whatever they would want with it? How soon should they get prepared for that? Obviously, it's like, you can always start today sort of thing. But is there a nice guideline that you would like to maybe put out there to the world for them to at least think about?

Carey Wallace: If you think about the factors that impact the value of your agency, you want to be focused on doing that all the time. As a rule of thumb, if your agency is getting valued, people are going to look back three to five years. It used to just be three years, five years with COVID, just to make sure we have a good trajectory of what that agency's doing. You should be maximizing your ability to grow and demonstrating the ability to operate profitably, and then minimizing any of the risk.

For instance, your agency should be as transferable as possible. This is tough for some agency owners to think about. But if you can minimize the risk with any carrier, with any producer, with any owner, that people are doing business with your agency because of a person that may or may not be there in the future. So minimizing that as much as possible, it makes your agency transferable, if that makes sense. You should be thinking about that three to five years in advance. So if you need the expertise in order to transfer those accounts and make sure they stay continuous inside that agency beyond this transition, again, you're going to get a higher multiple because the likelihood of them staying is higher.

Joey Giangola: Carey, I don't know, but you just trickled a line of gun powder out from the traditional handbook of insurance and just lit it and watched it go in. I'm going to have to ask, because I think people are maybe dealing with this in their head at the moment. How would one go about doing such a thing to reverse course what would be theoretically generations worth of relationship building and I'm that person to that person sort of thing? How do you do that, and again, even such a short period of time of three to five years?

Carey Wallace: So you're talking about changing the relationship and introducing another person possibly to step in as your successor in customers. I think that's the one you're talking about, correct?

Joey Giangola: Right. Just again, removing yourself from that transaction, from being that person.

Carey Wallace: Well, think about it. Number one, expose new people inside that account, which is completely foreign to many producers. This is my account. I'm the person. I run it. If you want to exit and you want to get the highest multiple, you need to make sure that other people inside your agency have visibility inside your key customers. It goes beyond visibility. It also means they have to actually have your blessing. Really, how that producer owner feels about the successor will determine how the customer will feel about that successor. So not only introducing them, but giving them responsibilities. Showing that you actually believe that this new person is qualified, has the skillset, has what is needed in order to help this customer. And if not, help them build that skillset in order to make sure that you give that confidence to that customer. It's a tough process and sometimes it's not overnight, especially if it's a highly specialized area.

Joey Giangola: It feels like would this be an area where maybe bringing in somebody from the outside, a third party to help mediate these situations, is that something that you've seen work well in the past?

Carey Wallace: I think so. Also, you should be really, really smart about who your possible successors are. Maybe they have a skillset or a complimentary part of their business that's a nice fit, and then they will pay a premium for what you have. If you don't have the skillset inside your agency, it's yet another reason to look outside your agency and really think about who those potential successors would be. But yes, absolutely.

I had an agency that had charter schools was a huge focus inside the agency, and there was one person who did them. He had a designation, he had done it for 20 years. It was a two-year process to introduce someone else in those schools to make sure they stayed. It was pretty significant. Even with that, there was no possible way to transfer 30 plus years of knowledge from one person to another. But at least there was exposure inside those customers to make sure that they had some confidence that this wasn't someone they'd never met before once this agency owner exited.

Joey Giangola: You bring up a great point because depending on the type of business the agency relies on depends on that renewal. Everything renews once a year, but depending on the size of that process, it's going to take a while to pull out of that. Do you think there is enough foresight... A better question. Do you see enough agents walking to the table having done enough prep work? Or often enough they're just at the time having regrets of not starting sooner and not putting their affairs in order, if you will?

Carey Wallace: I think more times than not, people are not ready. This is a tough conversation for many agency owners to even think about, what am I going to do next, let alone starting the process to plan for it is really very difficult. I think a fair number of agency owners find themselves at the point where they're saying, "I'm ready to go. And now I have this whole prep work in order to, again, shore up my agency and maximize the value, and I'm out of energy." You really have to start this process early. People say all the time, run your agency like you're selling it tomorrow. But unfortunately, that doesn't happen. I think it happens really energetically, probably the middle of your career, then you plateau and you get to the point where you want to exit and you're selling low, sadly. You're not selling high for your agency, you're selling low, and that's unfortunate. Too often, agency owners are waiting to plan past when they're willing to stay and do the plan.

Joey Giangola: Do you have any exercise or do you have a question that you ask somebody to see if they are truly ready, again, emotionally, physically, just to be able to start that process? Is there something that is a tell for them to at least start thinking about it?

Carey Wallace: You mean start planning? I ask every agency owner, "Do you know the value of your agency? And if you don't, why not? And when do you think you're going to exit?" And then the very next question is, "What are you planning to do when you exit?" It's funny. Most agency owners struggle with the last question the most, and that's where we have to spend the time. Because if you have no plan, you're never going to exit. The next thing you know, you're going to be working well into your 70s, possibly your 80s, and that's really not the time to sell your agency.

Joey Giangola: All right, Carey, I've got three more questions for you. The first one is, what is one thing that you hope you never forget?

Carey Wallace: I hope I never forget to tell people how much they mean to me while they're here.

Joey Giangola: Indeed. Very easy to not do. On the other side of that, Carey, what's one thing you still have yet to learn?

Carey Wallace: Oh, goodness. How to control my emotions in a decision and pause before I actually act.

Joey Giangola: All right, Carey, last question to you. If I were to hand you a magic wand of sorts to reshape, change, alter, speed up, really any part of insurance, what's that thing, where is it going, and what's it doing?

Carey Wallace: To speed up insurance, I believe that I would help independent agents be responsive in the quoting process.

Joey Giangola: Simple enough. Carey, this has been fantastic. I'm going to leave it right there.

Carey Wallace: Thanks for having me, Joey.