Business Breakdowns
· Matt Reustle, Geoff Collette
[00:00:00] S0: And on the individual agent side, are they compensating their agents any differently? I understand there's a separation in terms of they let their hunters be hunters and not have to worry about the harvesting aspect as much, which I think is an extremely valuable strategy, especially with something like this. But is there anything else when it comes to compensation that differs from the rest of the industry? [00:00:00] S1: I don't know that that's particularly different. I think what's different is the productivity levels result in an ability to scale a business either as an individual corporate producer or as a business owner. In the context of the franchise channel, that's otherwise much more difficult to do. And so I think the way that the franchise commission splits work is Goosehead will receive 20% of new business commission as revenue and then 50% of renewals. And so I think that the value proposition as a franchisee is that Goosehead's effectively providing this proven go-to-market strategy and all this infrastructure, training, support in order to grow their business in a relatively unfettered way that's much less capped in terms of the profitability that they can generate relative to many other franchise opportunities and other ways of operating as an insurance agency.
· Geoff Collette, Matt Reustle
[00:00:00] S1: I don't know that that's particularly different. I think what's different is the productivity levels result in an ability to scale a business either as an individual corporate producer or as a business owner. In the context of the franchise channel, that's otherwise much more difficult to do. And so I think the way that the franchise commission splits work is Goosehead will receive 20% of new business commission as revenue and then 50% of renewals. And so I think that the value proposition as a franchisee is that Goosehead's effectively providing this proven go-to-market strategy and all this infrastructure, training, support in order to grow their business in a relatively unfettered way that's much less capped in terms of the profitability that they can generate relative to many other franchise opportunities and other ways of operating as an insurance agency. [00:00:00] S0: I want to transition a little bit into that franchising, franchisee dynamic. Is this common in the insurance space? And what would you point to in terms of the value prop of creating franchises and why it makes sense versus just having individual agents that are corporate-level agents under one umbrella?
· Geoff Collette
[00:00:00] S1: It's not very common. Goosehead introduced their franchise operation in 2012. There's a company called Brightway that began its franchise model in 2008. Goosehead has scaled its franchise business at a much more rapid clip. As with all franchise businesses, the franchisor, in this case Goosehead corporate, is effectively able to grow its distribution in a much more capital-efficient manner. There's a symbiotic nature that Goosehead has between its corporate agency and its franchise. And to have built a very successful corporate agency and then layer on franchise, which has increasingly become the main thrust for the economic engine. In combination, that is a superior way for Goosehead to thrive longer term effectively. The aspects that corporate has proven out can be taught as best practices, and they work side by side and cohesively in order for the franchisees to be successful. And in recent years, they've really leaned on adding additional producers to franchisees that are ready to scale. And one thing that Goosehead has done very well is create effectively a recruiting machine across various lines of business in order to add very productive capacity to its go-to-market efforts. The franchise model in the context of insurance works particularly well for them. Other than Brightway, I don't believe it's very common outside of those two companies, given the history basically of the captive structure that they've kind of been disrupting.
· Matt Reustle, Geoff Collette
[00:00:00] S0: When I think about the growth of the franchisees. You mentioned it a little bit there in terms of the recruiting tool. Is what you're typically seeing insurance agents from other agencies come over and create new franchises under the umbrella? Are they joining existing franchisees? I know it's going to depend a little bit, but is there anything else that goes into it besides a traditional recruiting process to open up a traditional franchise. [00:00:00] S1: From the time of its IPO through 2021, call it, the efforts on the franchising side leaned heavily on recruiting folks out of captive agencies that weren't necessarily the owners, but were motivated producers that could fit well into Goosehead's system and make a better livelihood for themselves. In the context of what Goosehead is able to sort of unleash with them? There's definitely always been a portion of folks that have no insurance background that can fit well into Goosehead's franchise system. But I think increasingly the company has been focused much more on high-quality franchise partners that have ambition to grow their business to be significant beyond one or two producers. And we can get into some of the components around that. But there was a pivot readjustment phase starting in late 2022 that has really been impactful to the level of profitable growth that the company has pursued and continues to pursue going forward. [00:00:00] S0: Maybe we can jump into that. What was the driver and the ultimate decision around what happened?
· Geoff Collette
[00:00:00] S1: Effectively, the company ran into a challenging period in 2021 and 2022 where recruiting standards had deteriorated, as they put it, resulting in a rising level of unproductive corporate and franchise agents. In addition to that, service hold times became elongated. These dynamics were amplified by a historically difficult real estate and insurance market environment. The company responded pretty forcefully with that. But I'll just walk through some of the dynamics on the housing market really quickly because that's really important to the go-to-market motion. And effectively, existing home sales drop from five and a half, six million in '21 and '22 to near four million more recently. And Goosehead has actually been able to more than offset this drop in lead flow per referral partner by adding more referral partners and actually generating materially higher lead flow per agent. Their value prop has become stronger to referral partners and clients with the housing affordability challenges that I mentioned. But it's worth noting that only 20% of Goosehead's revenue is new business and 80% of that is referral partner driven. So only call it 16% of their revenue is driven by the housing market. So what happened in 2022 was Mark Miller joined as COO in May of '22. He was a board member since the IPO. He has since become CEO in July 2024. Mark Jones Jr. was promoted to CFO in September '22. And in the second half of 2022, they basically developed a plan to refocus efforts and resources on growth that's more profitable and to strengthen its competitive moat. In short, an intense focus on operational excellence, putting in a firmer foundation for the company to scale to be a much larger business. They reorganized the sales management function, consolidating corporate and franchise sales management teams to drive significant improvements in productivity. They went through a very meaningful period of culling underperforming corporate and franchise agents and franchisees starting in late '22 that abated largely in early '24. To put some numbers around that, the corporate agent headcount peaked at over 500 in the middle of '22, troughed at around 275 in Q1 of '23 and has ramped significantly in the back half of 2024 after productivity reached excellent levels in '23.
· Geoff Collette
Corporate productivity was up 27% year over year despite those difficult housing and insurance market challenges. On the franchise side, operating franchises peaked at over 1400 at the end of '22 and has stabilized around 1100. And this is where it gets really interesting. More importantly, franchise producers has remained relatively stable, peaking at around 2100 near the end of '22. And only dipping down by about 7% in early '24 and now back up to 2100. And the company's really leaned in on partnering with a subset of franchisees who are in a position to scale further by helping them recruit new producers. So producers per franchise has increased from one and a half in '22 to 1.9 by year end '24. And franchise producers were up only 7% year over year. Yet franchise new business productivity was up 49% in 24. And what's really interesting is that when a new producer is added to a franchise, it improves the productivity of everyone in the agency. And every new producer added to a high performing franchise is equivalent to launching almost two new franchises. So what they've effectively done is taking a much closer look at where to add productive capacity into their system in the most efficient manner to drive success. And another way that they've done that is creating a pathway for very successful corporate agents to launch franchises, beginning with a very high level of productivity and ambitions to scale. In 23, 30 corporate conversions yielded the equivalent of 200 typical new franchises. And this pathway from a corporate agent to a franchise owner is now a key part of the campus recruiting effort that they bring to bear. And so in 2024, they onboarded over 800 sales agents across the business, a record recruiting effort. And EBITDA margins expanded from 14% in 2021 to 32% in 2024. And EBITDA dollars increased nearly 5x over that time period. One of the things that's most interesting is the next evolution from the company where they're building out a third distribution channel.