On August 10, 2019, Agency Checklist noticed a new ad by a company it had been watching, Goosehead Insurance. The company’s ad sought “entrepreneurs interested in becoming independent agency owners” in the Boston area.
Founded in 2003, Goosehead has been franchising its insurance agency model since 2012
The announcement listed as the “Key Benefits of Agency Ownership with Goosehead” as:
- opportunity to own your own business and create a legacy to pass down or sell;
- industry-leading commission rates;
- a robust product portfolio of A-rated insurance carriers that allows you to offer the best policies to your clients;
- access to our world-class licensed service team so you can focus 100% on sales and marketing to increase productivity and reduce overhead;
- an innovative build-out with Salesforce.com that improves your sales and marketing processes and manages your existing policies in force, service work, and finance and accounting functions; and,
- comprehensive training and support for you and all your licensed employees
For those readers not familiar with the company, Goosehead is a publicly-traded insurance agency that operates a rapidly expanding insurance agency franchise business. Since completing its initial public offering on May 1, 2018, Goosehead’s stock price has gone from $10.00 per share to trade as high as $49.00 per share. On Monday, August 19, 2019, its stock closed at $43.33.
Some stock analysts argue that Goosehead’s business model is “disruptive” and its forty-percent growth rate as “sustainable for several years.”
Now that Goosehead is seeking to franchise in Massachusetts, a quick profile of its operations taken from the company’s Security Exchange Commission 2018 10-k and its 2019 franchise disclosure document.
Goosehead’s second-quarter results show the company’s growth
On August 1, 2019, Goosehead published its second-quarter results. The highlights of that report will put some of the company’s financial appeal to stockholders in perspective:
- policies in force grew 45% to 408,000 as of June 30, 2019, compared to 282,000 as of June 30, 2018;
- revenue grew organically 31% from the prior-year period to $19.4 million;
- total written premiums placed increased 46% from the prior-year period to $194.0 million, with growth more heavily weighted to the Franchise Channel;
- adjusted EBITDA rose 17% from the prior-year period to $4.7 million;
- corporate sales headcount of 213 was up 44% year-over-year;
- total franchises increased by 55% compared to the prior-year period to 765; total operating franchises grew 39% compared to the prior-year period to 535;
- adjusted EPS* of $0.07 per share.
A little more background…
Founded in Texas in 2003, as a traditional insurance agency, the agency has grown dramatically.
As of December 31, 2018, the company had 389 fulltime and 14 part-time employees not including the franchisees or their employees or independent contractor sales associates. As of the same date, the company had 646 franchise locations, including 189 franchises which were under contract but not yet opened for business.
One secret of its growth, according to the company, is that its insurance agency business model, in contrast to the traditional insurance agency model, separates the sales function from the service function thus enabling agents to focus on selling, and service personnel to focus on delivering superior client service.
To provide this separation of sales and service, Goosehead operates two separate service centers that are fully staffed by licensed property and casualty service agents. The service centers’ management goals aim to have clients calling in to reach an agent in less than 60 seconds.
The service centers handle client inquiries, facilitate the claims process with Goosehead’s insurance carriers, accept premium payments, and process policy changes and renewals. The servicing agents also focus on selling cross-selling coverages and enhancing existing policy coverage to clients dealing with the service center.
In its 10-k document, Goosehead asserts that its business model offers a unique value proposition to “Referral Partners.” Referral Partners, based on the documents appear to be real estate brokers and mortgage brokers “who depend on [Goosehead] to timely place insurance policies and to provide the flexibility to facilitate necessary changes rapidly, including at the time of home closings. This allows our Referral Partners to close transactions on time and ultimately become more productive in their business.”
Goosehead represents in it 10-k filing, that “we do not compensate our Referral Partners for sending us new business.”
Goosehead focuses primarily on personal lines and small commercial policies
Goosehead distributes primarily homeowner insurance; auto insurance; other personalized products, including flood, wind and earthquake insurance; excess liability or umbrella insurance; specialty lines insurance (motorcycle, recreational vehicle and other insurance); commercial lines insurance (general liability, property, and auto insurance with small businesses); and life insurance.
In distributing these products, Goosehead represents 85 insurance companies that write personal lines and small commercial lines. As a result of this specialization, Goosehead claims that this focus “typically enables us to provide broader insurance coverage at a lower price point than in competing agents who represent only a few carriers, carriers with captivations (sic) or carriers that distribute directly to consumers.”
Dual distribution channel using the same service center
Goosehead has two distribution channels: A Corporate Channel and Franchise Channel. The Corporate Channel consists of company-owned and financed operations with employees the company hires, trains, and manages. The company develops new systems and practices through its Corporate Channel.
The Franchise Channel consists of franchisee operations that are owned and managed by the franchisees. Franchisees have a contractual relationship with the company to use its processes, systems, and back-office support team to sell insurance and manage the business. see
Goosehead’s franchise agreement and franchise disclosure document
Since 1979, the Federal Trade Commission (“FTC”) has regulated franchisors by requiring them to prepare and distribute to prospective franchisees a detailed disclosure document before selling a franchise. This document is lengthy and detailed in what the FTC requires for disclosure.
In Goosehead’s case, the disclosure document runs 270 pages, mostly single-spaced. The pluses and minuses of a Goosehead franchise are beyond this short introduction. However, in Goosehead’s case, its franchise agreement seems to have:
- One ten-year term with two optional five-year renewal terms subject to the franchisee complying with the franchise agreement.
- Franchisees pay an initial franchise fee that varies depending on in which state the franchise will sell insurance. In Massachusetts, the franchise fee appears to be $25,000 or $40,000, depending on whether the fee is paid in cash or paid in installments.
- Franchisees pay Goosehead for its services, such as operating the service centers, 20% on new policies, and 50% on renewals. New franchisees have a minimum monthly payment if their gross revenues do not reach a specified amount.
- Franchisees have no exclusive territory and may solicit sales from any location within the state in which they operate.
A final thought from the former president of a financial service franchisor
Anyone familiar with franchising knows that franchise agreement are complex documents and that before purchasing a franchise, a prospective franchisee should seek the advice of qualified legal counsel and a qualified, certified public accountant. In buying a franchise, you have to know what the document you are about to sign means legally and what the numbers underlining the document mean financially.
