The Hardest Sell.

Agency principals can maintain the benefits of ownership if they steer clear of some common mistakes.

Every day, we receive calls from agency principals who want to talk about the latest competitor who has sold out to a larger agency, a broker or a bank. As their competitors fall, they hear rumors about the prices paid and the opportunities that come with being part of a larger organization.

They also hear about the troubles that forced some of their competitors to sell. The declining pool of independents makes them wonder, "Should I be thinking about selling? Will I be able to compete? Will I be able to deal with the uncertain future?"

We tell them the answers to these questions can only come from them. They need to ask themselves how much being an entrepreneur matters and whether they are willing to give up their independence. They should consider whether they are willing to put the same effort into the business that they did at its beginning. Are they open to learning new things and changing to be stronger and better? Do they believe they have something better to offer--approach, expertise or talent, for example--than their competition?

Being an entrepreneur brings many benefits, but in today's world, it also brings serious responsibility. Maintaining the benefits means avoiding the following mistakes that some agencies have made:

* Not Maintaining Aggressive Growth. Most agencies can consistently achieve a 90% retention rate of their customer base. With a good effort, they can sell just enough new accounts to offset the typical loss of revenue. But with the predictability of the revenue stream, they can be lulled into an expectation of minimal growth and the loss of the sales edge that is so important to good growth. They also might neglect to hire new producers and take the time to train and manage them. New producers bring on new customers, enhance growth and offer the potential for perpetuation.

* Not Developing a Perpetuation Plan Soon Enough. It is never too soon to choose successors and to determine how ownership will be transferred. Many agencies wait until the owners need to retire to start the plan. At that point, they may not have the right people to run the business or the financial strength to carry out a buyout. The retiring owners may want a certain price for the agency but have inadequate cash flow to fund the buyout. The new owners find themselves financially strapped, unable to make the payments and unskilled in making the business decisions to strengthen the agency.

* Not Staying "In Trust." Being "in trust" means maintaining enough cash and accounts receivable to meet carrier accounts payable. Some agencies believe that they do not have to stay in trust unless their state mandates it. But being "out of trust" means the agency is not maintaining its fiduciary responsibility. It is not accepting responsibility for collecting payments from the customer on time and for maintaining the cash cushion to make those payments to the carrier on time. Careless management of this ratio has forced many agencies to sell--often for a fraction of their worth.

* Not Managing Debt. Taking on too much debt for an acquisition or for buying out partners can destroy an otherwise strong agency. Bad acquisitions are often made by friendly competitors who pay too much or fall to do due diligence because they trust the local agent they have known for so long. Most perpetuation plans are leveraged buyouts, which fail across all industries, not just insurance. Both before and during the buyout, the need is critical to keep a strong balance sheet. Every agency should maintain a positive current ratio and a positive tangible net worth. Strong cash-management controls are critical to ensure that long-term debt can be managed and that the business is capable of paying it off in a reasonable time period.

* Not Seeking Professional Advice. In today's challenging world, professional advice is important to running a successful business, but it is particularly important when the business develops problems. A good adviser presents an honest picture of the agency's problems with honest solutions for solving them. The adviser can look at critical financial ratios and business practices and work with the agency owners to improve the business practices. Solutions may lie in dealing with poor performing producers or managers, overcompensated owners, improved productivity of the service staff or better use of automation. Not seeking the advice of a consultant soon enough can push an agency farther into trouble and eventually force a sale.

Sharon Cunningham, a Best's Review columnist, is president of Business Management Group, Hartford, Conn., a management consulting firm.