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Does Size Matter?

When I opened the door to my business, I had very little understanding of just about anything in the business world.  It humors me to realize how little I knew.  Of the myriad of things I didn’t know, was how big do I want my business to be?

This is something my wife (who also owns a business) and I discussed for years without landing on anything.  This was tough for me to as I am a numbers guy through and through and I am chasing weekly and monthly and yearly goals, but there is no finish line.  It seemed to be a yearly race around a high school track that just resets on January 1.

During my first 8 years in business, the answer for us was, “We can get as big as we want”.  It turns out I have the right skillset for this business and we grew about 20% a year for the first 8 years.  Growth was easier in the beginning because my book of business was relatively small and I wasn’t losing nearly as many clients as I was gaining.

The thing about the insurance industry is retention becomes more crucial, the larger you get.  If I retain 85% of my clients every year, it’s easy to grow when you’re smaller.  If I have 1,000 policies and retain 85% of them, I still have 850.  If I write 600 policies that year, I will still grow 450.

At 4000 policies, if I retain 85% of them, I will lose 600 policies.  So if I write 600, I wont grow at all.  The business has to evolve to continue to grow.  In order to grow, I needed a larger team, which increases the biggest expense of any company.  Payroll.

My wife and I made a decision to really go after it around year 9.  We bought two agencies and opened a second store front in a neighboring town.  The goal was to fill it up with salespeople and hit numbers that nobody has seen before.  That proved to very difficult.

The fragment of the sentence above, “fill it up with good salespeople”, was the hurdle I could not jump over.    We tried to build salespeople from the ground up.  We tried to hire salespeople with a history of sales.  We tried to hire people from other insurance agencies.  We just could not find anyone that warranted keeping.  Finding and cultivating someone who can sell, remains the most frustrating part of my job.  I refuse to admit that it is me and that good salespeople are as rare as an honest politician.  It has become something I am not currently willing to hunt for.

This can be a very expensive cycle.  If we bring someone on and they are there for 3 months and all of that time is spent on training, they aren’t actively selling.  Without fail, this puts them right around the time we have them at a point where they are ready to go out and prospect and start putting policies on the board. As soon as we got them to this point, they quit.  When that happens three or four times in a row, you have to ask yourself, how much do we want to spend on this?

The other event that happened, was one of the agents that I bought a book of business from, went back into the field and absolutely pillaged my book and was targeting his old clients.  Now he was outside of his one year non compete clause, and he had a 25 year relationship with these people so there was nothing I could really do.  It was brutal. My book started to shrink, I had just taken on a building with a 5 year lease and I had staffed up.

I had never shrank before. It was strange. At first,  I chalked it up to “a bad month”, or a “a bad quarter”.  You don’t want to have more than a bad quarter.  We were writing business and our new business production was very healthy, it was just that people were leaving at a faster rate than we could replace them.

After about two and a half years, we had to ask ourselves if this is what we really wanted.  We weren’t making any more money, but we were working harder.  This is question business owners have to figure out when it comes to growth.  Is bigger better?  If you are grossing $1,000,000 but your expenses are $900,000, would you rather have a business that grosses $350,000 and your expenses are $250,000?

I am friends with some business owners whose businesses are scaleable.  They know what one location can do, they have figured out their costs, their payroll and everything that goes with running it.  They are able to place another location somewhere else and attempt to do the same thing.  And another and another, etc.

There comes another set of challenges with that.  You have to have the ability to lead, train, hire, motivate, communicate and fire.  When you started with 12 employees and now have 298, it’s a totally different business and a totally different job.  A layer of middle management needs to be installed to help with all of those skills listed above.  The owner gets farther away from the customers and is spending more time on the business than the people it serves.

From and insurance standpoint, risk increases everywhere.  Finding good people to fit those middle management roles and keeping them motivated and happy becomes paramount.  Cash flow is important as well.  Opening a second location costs a lot of money and you might have loans to pay back for a number of years which will restrict cash flow for that period of time.  If you open a second location and it doesn’t perform, it will have lasting effects for years.

I have a friend who built a company from the ground up about 8 years ago, found and groomed an incredible employee and is going to promote him to CEO.  This way the owner can a huge step back and work on other projects or even start another business.

As for my business, the last two years have been very important.  I have found that I only need one location and two professional employees to run the kind of operation I want.  We shut the other location down, and moved back into one space.  It helped me to control my spending and allowed my income to stabilize and become more predictable.

There is no right or wrong answer to the size of your business.  For me it’s about quality of life and maintaining control of what you are comfortable with.  If your business is scalable and you want a larger business with a different role, go for it.  I supposed the key is understanding what your options are in terms of size, doing your due diligence about how to get there and put all of your efforts into getting there.

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