Hiring the Professional Services Your Agency Needs
Updated: Mar 19, 2021
I make a lot of my money fixing and/or assessing problems created by "professionals" who agencies hired in the past to assist them with agency valuations, contracts, accounting, and even once in awhile agency management system issues. I much prefer helping agencies build their futures rather than doing rehabilitation projects that would never have been necessary if the original professional had been honest and competent. Here are a few ways to avoid hiring the wrong "professional."
This is where agency owners are taken advantage of the most by professionals who should know better. Agency owners are not schooled in the intricacies of business appraisals, so they are easy victims. It is much like people who buy insurance. Consumers don't know the differences in what they are buying so they buy cheap or they buy based on someone else's recommendation (although that person most likely did not know what they were doing either).
First, different kinds of business appraisals exist, and one needs to know which business appraisal is required (by law in many cases) or recommended. Second, two extremely basic factors are required, especially for those mandated by law and regulation. The first is that the math must be correct and the second is just as important, that they use the correct report format.
A few weeks ago, I saw a firm charge an agency upwards of $5,000 for an appraisal that did not meet any, ANY, of the requirements. This firm was recommended by a carrier or association -- neither of which has a clue what regulatory requirements are required. It was easy to see the appraisal was a complete failure because the wording that described the kind of appraisal that was performed failed the legal test. You see, tax law is quite specific about the description of a valuation. The appraiser seemed to understand this fact because she used a specific title that did not meet legal requirements BUT simultaneously protected herself from clients suing her for preparing the wrong report. It was a sneaky approach and the client had no idea they were deceived.
The second clue was that the definition of "value" was 100% wrong relative to the applicable tax law. The definition of "value" can be as complex as the definition of “occurrence” in an insurance policy. Many definitions of "value" exist. Each has their place. One must work with an appraiser, attorney, and/or CPA who understand which definition is applicable for a valuation, buy-sell agreements, and litigation.
The valuation report was a complete waste of $5,000. It was noncompliant at every level. If you want to avoid wasting your money, here are a few suggestions:
Look for an individual with a high professional valuation certification. The most common and arguably easiest (though not necessarily easy) to obtain is the CVA. My designation is at the higher CBA level. The IRS actually almost demands (there is some wiggle room) the appraiser possess the applicable professional credentials for the valuations that are submitted to them.
Cheap appraisals are worthless and often carry conflicts of interest. I have seen a couple of appraisers offer cheap valuations but in the fine print, they get to keep the agency’s data and market the agency for sale. They then make their money off the sale if it eventually occurs.
Different kinds of appraisals exist. Frankly, your best interests are not likely served if your appraisal is for internal/tax/litigation purposes if the appraiser has the right to market your agency. The conflicts of interest are high, and the appraisal standards required are completely different.
Understand what definition of value is applicable for your purpose. Hopefully your accountant is adequately educated about valuations and can assist you in answering this question. If not, an honest and well-educated appraiser can assist. The National Association of Certified Valuation Analysts also has considerable reading material available if you want to learn on your own.
Until you go to court or the IRS reviews an appraisal report, it is difficult to appreciate the need for an appraisal report to comply with the required report writing format that includes all of the sections that are mandatory. These requirements increase the price of a valuation because the extra time required is significant. However, when a report is contested, failure to comply is far, far more expensive.
Hire someone who specializes, truly specializes, in performing valuations. I know some appraisers who "specialize" in insurance agencies, but don’t comply with the standards. Hire people who specialize in insurance agency valuations and will not cut corners. Insurance agency valuations are unique and actually require a bit of an unusual methodology relative to most businesses. Generic appraisers do not have this knowledge.
If I had a nickel for every poorly written contract I have seen written by a person licensed to practice law, I could retire. Good attorneys cost extra, but they are worth it.
Hire attorneys who have knowledge specific to your needs and/or whose egos are not so large they will accept the insights of others who know the subject well. Where this specific issue intersects with business appraisals is with regard to buy/sell agreements. Well written buy/sell agreements must address the agency's value one way or the other. Many options exist but one point is mandatory in a well-written buy/sell agreement: The definition of "value" must be supplied.
Most of my clients' attorneys do not know the difference between the numerous legal definitions of "value." This lack of knowledge is a major problem, especially when they are so incompetent they interchange terms with different legal meanings throughout the buy/sell agreement. The most common terms they interchange incorrectly are "fair market value" and "fair value." These two terms may seem quite similar, but in most jurisdictions (not all) the resulting values are extremely different.
Most attorneys do not specialize in business valuations so they don't know the difference, but I'd argue they should not write agreements on subject matter for which they lack proper knowledge, at least not without consulting an actual expert. Other attorneys get rich every single day litigating these kinds of wording errors in contracts because the differences are significant.
Similarly, when hiring an appraiser that appraiser better know the difference between fair market value and fair value too.
Insurance agency accounting is extremely unique. I believe that hiring a regular accountant to do an agency's accounting without educating them on the unique features required is asking them to complete an impossible task. An example is that all independent agencies must use a combination of cash AND accrual accounting. Doing otherwise is not an option, even under the new revenue recognition rules this combination still applies.
The new revenue recognition rules also make agency accounting even more complex. Ask your accountant about their experience. Ask detailed questions. One accountant advertised he was the guru of agency accounting in a specific state. He said he was the accountant for lots of direct writers, but he royally screwed up the accounts of an independent agent who had to hire me to fix the errors. Agency accounting procedure is not the same as for a regular business. Also, verify that any accountant you hire knows independent insurance agency accounting versus direct writer accounting.
It's one thing to not know something as an attorney or accountant. Hiring a professional who acknowledges their lack of knowledge specific to valuations or insurance or insurance agencies but asks to be taught without you paying for their education, can result in a great experience. Hopefully this short article helps you to ask the right questions so you avoid wasting money, or worse, finding yourself in litigation or being questioned by a regulator all because the "professional" you hired was either incompetent specific to the task or unscrupulous.
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.