contract document

What’s in Your Contract?

March 15, 2022

The 4 Cs has proven to provide an effective framework for insurance agency owners to develop a strategy for themselves, their agency, and their families. The 4 Cs were initially developed to help agency owners evaluate offers they were receiving on the sale of their agency within the context of their financial plan. However, over time, it has become apparent that the 4 Cs are a useful tool for all agency owners regardless of whether they’re selling their agency. In fact, a good number of agency owners have gone thru the 4 Cs financial planning process and have elected not to sell their agency. With that in mind, I’ve updated them and specifically, the 4th C related to Calculation:

1. ClockHow much longer do you plan on working?

Outlining a timeline for how long you want to work is the first step in the process. The timeline will drive the decisions around compensation closer.

2. CompensationHow much money do you need to support your lifestyle and that of your family?

You need to compare that number to your agency’s current valuation. You will have more flexibility in the sale amount if you have earnings after the sale and own assets outside your agency.

3. CultureWhat is the culture of the agency you are considering selling to?

Study things like the acquiring agency’s reporting structure, what role your staff will have, how decisions are made, and by whom. Spend time getting to know the team and type of clients at the acquiring agency.

4. Calculation/ContractHow is your earnout calculated?

This won’t impact you until after the deal is signed but is critical to understand before agreeing to a deal. Know the growth needed to hit your earnout targets and understand how overhead expenses are applied and who is responsible for the calculations.

The 4th C, Calculation, is evolving into Contract review. Calculating earnouts is still a critical component to an agency owner’s wealth but is done after the agency has been sold and is part of the Contract review C.

Over the past few months, I have spoken to many agency owners who had outstanding agreements with partners, family members, and vendors that needed to be reviewed and better understood before they could proceed with transitioning their agency. Family agencies tend to have handshake or outdated agreements that don’t reflect the current state of the agency.  Business relationships and family dynamics are constantly changing, and it is important that legal agreements are aligned with these relationships. It is best to amend or create agreements when the agency is running well, and relationships are in a good spot. Agency owners who put off reviewing contracts and shareholder agreements are surprised when they are unable to transition their agency due to outdated or misunderstood agreements.

The 4 Cs are intertwined, and your contracts will impact your Clock and Compensation when putting together your financial plan. In the spirit of spring cleaning, now is a great time to clean out your file cabinets and take an inventory of your contracts.