Sign Company Captive Profit Center
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1) The document discusses setting up a captive insurance company as a profit center for a sign company. Captive insurance companies allow manufacturers to profit from extended warranty programs. 2) Warren Buffett discovered the value of owning insurance companies in the 1960s. He saw it could help grow his businesses, add new lines of business, use tax laws, and generate low-cost funds. 3) Setting up a captive insurance company allows a sign company to generate low-cost funds to grow the business through an extended warranty program. It can use the tax laws to accelerate this growth.
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Sign Company Captive Profit Center
- 1. A PROFIT CENTER INSPIRED BY WARREN BUFFETT Lou Polur Captivation Capital An Affiliate of Sihle Insurance Group
- 2. 727-449-2245 When I sold signs, some customers whose signs are pictured on the next page, asked for lengthy warranties: Shoppes of Wiregrass was the “Sign of the Year” award winner in 2009. Microsoft and Careplus/Humana required months of negotiation with general contractors, REIT landlords, marketing and design firms. Walmart signed up for servicing after conversations with Bentonville and local store managers.
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- 4. 727-449-2245 In reviewing sales negotiations and their questions about how long they wanted to warrant the signs, I kept thinking about a 2006 issues paper published by the International Association of Insurance Supervisors: it revealed how manufacturers use private insurance companies as profit centers. And sign companies, who are not doing this, are leaving this money on the table.
- 5. 727-449-2245 INTERNATIONAL ASSOCIATION OF INSURANCE SUPERVISORS ISSUES PAPER ON THE REGULATION AND SUPERVISION OF CAPTIVE INSURANCE COMPANIES OCTOBER 2006
- 6. 727-449-2245 Manufacturer Warren Buffett discovered the value of owning insurance companies in the 1960s.
- 7. 727-449-2245 Like sign companies, he was also in highly competitive manufacturing environments. But he saw that controlling an insurance company would help him. An insurance company would help him to: grow his businesses add lines of business that fueled that growth use tax laws to accelerate that growth generate low cost funds to finance that growth
- 8. 727-449-2245 You can implement this proven, 50 year old business model at your company: An Extended Warranty Program integrated with a captive insurance company creates a profit center that generates low cost funds to grow your business, while using the tax laws to accelerate that growth.
- 9. 727-449-2245 Captive Insurance Program * IRS section defining small property and casualty insurance company 831(b) * Micro Captive
- 10. 727-449-2245 Currently, you pay warranty-related claims on your signs through your company’s bank account. Buffett teaches us to pay claims through a captive insurance company instead. Ideally you want as many premiums paid to your captive as possible because that is what grows the low cost funds. And these funds pay the claims. It is an easy add-on sale, as well. Your customers want to pay to protect the investment in their signs for the long term. That’s what they were telling me.
- 11. 727-449-2245 Here is an example of a captive from a different industry:
- 12. 727-449-2245 To get a GMC truck, the best rates come from GM Financial, GM’s captive finance company. Through it, GM gets low cost funding to make and sell more vehicles. This captive was profitable when manufacturing cars and trucks was not. Even truck dealers have their own captives that pay dealerships to fix trucks for customers who purchase the extended service contracts or extended warranty plans.
- 13. 727-449-2245 By setting up a captive, you create a pool of low cost funds to grow your company AND you profit a second time when selling your signs. Your sign business collects the extended warranty premiums from your customers. Your business then remits this tax-deductible premium to your captive. Then your customers’ claims are settled by paying your sign company for performing warranty work, drawn from your captive.
- 14. 727-449-2245 UHaul offers insurance on its trailers through its captive. Snap On Tools’ captive insures its route men’s inventory . Stanley/Black & Decker, Ingersoll Rand have captives for their extended warranties programs.
- 15. 727-449-2245 You control the reserves because you own the captive. You get a tax deduction for putting in the premiums. You get a tax break to build up its reserves. And only investment income is taxed by Uncle Sam if you collect less than $1.2 million annually. This is one-way to use the tax laws to contribute to your growth. Its like a 401K with no contribution limits.
- 16. 727-449-2245 AICPA’s Journal of Accountancy tax analysis shows a 72% net gain with a captive:
- 17. 727-449-2245 Warranty language for the extended warranty is the starting point for building your reserves. Every type of sign has specific characteristics that can be warrantied for repair or replacement. Channel letters have different properties than a monument signs or LED message centers. Each of these poses its own challenges and creates opportunities for you to specify what you will cover. Do you cover the lights and the vinyl? Do you warrant against peeling paint? What about removing birds nests?
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- 19. 727-449-2245 By deciding the terms, the language, and what to cover, you determine your profit center’s revenue. Each warranted item has a custom calculated premium. The more protection your customer wants, the more revenue your profit center generates.
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- 21. 727-449-2245 Here’s another example: Verizon’s handset captive insurance company charges $60 per cell phone extended warranty annually. A $600 iPhone cost costs Apple about $200 to manufacture and Verizon spends approximately $300 to purchase it from Apple. Warranty Week found that among its nearly 1000 manufacturers, only about 1.2% of products had warranty claims.
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- 23. 727-449-2245 Applying this to Verizon: each 1000 people pay $60,000 annually for their extended warranties. Statistically, only about 12 people will have claims paid. The captive will spend only about $3600 to replace those phones. And Verizon also collects $50 per phone replacement fee. So for each 1000 customers annually, Verizon collects $60,000 in extended warranty premiums, which end up as $57,000 profit each year. Now that’s a profit center.
- 24. 727-449-2245 Let’s get back to signs. The founder of “Children’s Discount Furniture and Toys Supermart” approached a sign company- Art Display- with this newspaper ad. Art Display returned with a 43 letter raceway mounted channel sign that was rejected as being too expensive.
- 25. 727-449-2245 A second design from Art Display was not only accepted but ultimately catapulted the store into national prominence by creating a brand for the store:
- 26. 727-449-2245 With extended warranties you will be paid to maintain customers’ brand over time, creating a long term relationship. Your extended warranty is part of enhancing their brand strengthening its intellectual property Integrating the physical signs with their marketing and advertising
- 27. 727-449-2245 GE Lighting and 3M adhesive offer 5 year limited warranties to you, so your customers can be protected triply.
- 28. 727-449-2245 All the pieces of an extended warranty insurance company have been assembled for your sign company.
- 29. 727-449-2245 First, we review of your current sales proposals, contracts and warranties. Then, additional the information you provide is customized into your extended warranty program.
- 30. 727-449-2245 Next, you price the warranties. You can use a company like Risk Analysis Services LLC to price your warranties, project by project as your customers’ signs change.
- 31. 727-449-2245 So, what happens when your captive builds its reserves, you may wonder? What will you do with all those warranty premiums in your captive? Here’s what CFO magazine says others do:
- 32. 727-449-2245 “Companies Grabbing Cash from Captives”
- 33. 727-449-2245 Intercompany Loans Fixed Income Equity Cash Alternatives 78% Manufacturers’ Reserves Are Loaned to Parent Company: Marsh 2013 Bencmarking Study
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- 35. 727-449-2245 These secured loans can finance your sign company’s growth. They give you additional, tax-deductible ways to expand your business with more trucks, more equipment, and more space. Loans from the captive can also be used to fund operations and make raw material purchases.
- 36. 727-449-2245 Your commercial insurance programs should be reviewed and aligned with your vision. Creative thinking about commercial insurance is what captives are all about. This presentation is one example of how to incorporate this tool for sign manufacturers. Please review the website: www.RethinkingInsurance.org Then call Lou Polur for a conversation to start that review: 727-449-4425
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Editor's Notes
- Good morning! My name is Lou Polur I’m from Clearwater Florida. I have half an hour prepared for you. Shall I begin now or would you like the five word version? Let’s Get Started. Sign Here
- In 2007 I was a sign salesman at a custom sign manufacturer that was growing. Really hitting its strides. Will Griffin the owner taught me a lot. So I worked really hard pulling in some interesting jobs for the local sign market. You can see some of those jobs on this promotional piece.
- On the upper right, we installed that Sign of the Year award winner. Microsoft and Careplus/Humana signs took months of negotiating with many third parties. And I had many conversations about servicing Walmart signs. That made me realize something. Sign companies were leaving money on the table: a lot of money. In 2006 the International Association of Insurance Supervisors published an issues paper.
- It revealed how manufacturers use private insurance companies as profit centers. As I looked around the sign industry it was obvious that that was not being done here. In my years working with other manufacturers as their insurance agent, to my clients I was more than their insurance broker. They relied on my expertise and business background to help them generate more revenue. In my work with them, I suggested a role model: Someone who was also in highly competitive manufacturing environments. Someone who wanted his businesses to grow. Someone who wanted to add lines of business only if it fueled that growth. Someone who wanted the tax laws to accelerate that growth. Someone who wanted to generate low cost funds to finance that growth. Ladies and Gentlemen, I’d like to introduce you to that someone. Manufacturer Warren Buffett.
- More importantly I’d like to introduce you to his 50 year old business model which you can implement it at your company. By adding an extended warranty program for signage that is integrated with a captive insurance program, you will have the profit center that will generate low cost funds to grow your business, while using the tax laws to accelerate that growth.
- Amazingly your CPAs, your CFOs, and your insurance agents are all aware of this, but not being insiders to both insurance and signs they haven’t put the pieces together.
- I will start by explaining more about warranties, extended warranties, captive insurance companies, and the steps to get your extended warranty company started. According to the Uniform Commercial Code Article 2, every manufacturer carries an implied warranty on their product. This unwritten warranty has two parts: fitness and merchantability. By law, these warranties last four years unless your state has adopted a different time limit. Fitness means that based on the customer’s requirements, you deliver a sign appropriate for that use. For example, let’s say your customer wants a sign mounted on his stucco façade. Your installer however discovers the “stucco” actually covers a three foot thick, poured concrete wall. The 3 hour job you planned on may now take 3 days. Merchantability means legally your sign needs to be at least as good as average and your customer can expect it perform to industry standards. Implied warranties are not specific, and they often lead to misunderstandings.
- Implied warranties embolden the customer and open you up to unintended consequences, uncertainty, maybe even lawsuits.
- Therefore, the cost of an implied warranty is money out of your pocket, forcing you to reduce your profits The implied warranties are a financial drain that keep dripping. But you respond to protect your brand and your reputation. And then you go to Vegas to clear your head.
- And that can end up being another financial drain on your company. Let me show you how this negative situation can actually become your profit center. You already pay claims through your company’s bank account. Buffett teaches us to pay customers’ claims through a captive insurance company instead. The captive insurance company collects warranty premiums. Ideally you want as many premiums paid to your captive as possible because that is what grows the low cost funds. And these funds pay the claims. With outside guidance you create your own captive insurance company. With outside guidance you develop terms for written, extended warranties for each sign. And it can be easy add-on sale. Your customers want to pay to protect the investment in their sign for the long term. That’s what my customers told me.
- Here is an example of a captive from a different industry. If you want a GMC truck: you buy, you lease, or you borrow. The best rates come from GM Financial. GM owns that finance company as its captive. Why did GM set it up? To both sell more trucks and earn more profits. GM Financial, a captive, is a huge money-maker with substantial tax benefit, to boot. In fact that arm was profitable when manufacturing cars and trucks was not. Because of this captive, GM gets low cost funding to make and sell more vehicles. I propose the same thing for you: Create a pool of low cost funds to grow your company. Your captive will let you profit financially a second time when selling your signs. Your sign business collects the extended warranty premiums from your customers. Your business then remits this tax-deductible premium to your captive. Then your claims are paid to your sign company when work is required, drawn from the captive. Other industries already do this. For instance, through their extended service contracts and extended warranty plans, your truck dealers’ captive pay his dealership to fix your trucks. Local appliance dealers even have their own captives to pay their shops to fix your refrigerators and washing machines. Other companies
- like UHaul offer insurance on their trailers through their captive. Snap On Tools has a captive to insure the inventory it sells to its route men. Stanley/Black & Decker, Ingersoll Rand and others have captives for their extended warranties programs as well. You control the reserves because you own the captive. You get a tax deduction for putting in the premiums. You get a tax break to build up its reserves. And only investment income is taxed by Uncle Sam if you collect less than $1.2 million annually. Its like a 401K with no contribution limits. This is one-way to use the tax laws to contribute to your growth. Here’s a tax analysis for CPAs from their journal, The Journal of Accountancy:
- Hold on a second, I’ve got a simpler version for you.
- This slide shows $642,900 business income after tax without a Captive. Total net with captive shows One point one million dollars. That’s 72% more through the use of a captive. So let’s talk about the language of the extended warranty, since the starting point for building your reserves. Every type of sign has specific characteristics that can be warrantied for repair or replacement. Channel letters
- have different properties than a monument signs or LED message centers. Each of these poses its own challenges and creates opportunities for you to specify what you will cover. Do you cover the lights and the vinyl? Do you warrant against peeling paint? What about removing birds nests? You to set the terms and the language. It is your decision. By choosing what to cover, you are adding revenue to your profit center. Each warranted item has a premium that will be calculated for you. The more protection your customer wants, the better.
- My wife pays Verizon $60 per year for her cell phone’s extended warranty. This money goes to Verizon’s handset captive. That $600 iPhone cost costs Apple about $200 to manufacture and Verizon spends approximately $300 to purchase it from Apple.
- According to Warranty Week, only about 1.2% of products have warranty claims. In this example, 1000 people pay $60,000 each year for their extended warranties. Statistically, only about 12 people will file claims. The captive will spend only about $3600 to replace those phones. It will also collect $50 per phone replacement fee. So for each 1000 customers, Verizon collects $60,000 in extended warranties. This ends up as $57,000 profit each year. That’s the profit center we’re talking about. You know you play an important role in your customers’ success. Your signs make the crucial first impression for their businesses. You are an integral part of your customers’ brand.
- In the 1950’s the founder of “Children’s Discount Furniture and Toys Supermart” approached a sign company with this ad. Art Display’s owner Gunther Kilsheimer returned with a 43 individual channel letter sign. But it was rejected. It was too expensive. This is what Kilsheimer came back with:
- My 12 year old daughter said, “Daddy the sign company created a national brand for that customer.” And then she asked: “Did Kilsheimer have a captive so he could make money on the signs a second time?” With extended warranties you will be paid to maintain their brand over time. By positioning your extended warranty as part of their branding, you create the long term relationship to service the account. How many signs you will be collecting extending warranty premiums on? Each will impact your reserves in a positive way. Did you check your email this morning? Just before I came here, I checked mine.
- GE Lighting wants me to install their Tetra LED product in wet locations. Should I put one in my shower at home? They use 3M’s adhesive tape so it should hold in place there for five years, according to their warranty. And it make sense to follow their example.
- Create an extended warranty program for your customers just like these suppliers have done! This can be accomplished no matter the size your business. It is doable for a small operation or a national firm. Here’s how: To start,
- There’s a review of your current sales proposals, contracts and warranties. Then additional the information you provide is customized into your extended warranty program. And when customers negotiate special terms for their next project, you will be able to incorporate those modifications. Next, you price the warranties. You can use a company like
- Risk Analysis Services LLC, a company whose principal analyst has been pricing risk for Marsh, Lloyds of London syndicates, insurance companies and associations. So, what happens when your captive builds its reserves, you may wonder? What will you do with all those warranty premiums in your captive? Here’s what CFO magazine says others do:
- As a matter of fact, Manufacturers invest 78% of their cash as intercompany loans.
- These secured loans can finance your sign company’s growth. They give you additional, tax-deductible ways to expand your business with more trucks, more equipment, and more space.
- Loans from the captive can also be used to fund operations and make raw material purchases. That’s why CPAs know there are tax advantages to use captives to grow your business. That’s why the insurance supervisors call captives a profit center for manufacturers. That’s why I am motivated to help your sign business grow.
- That’s why I hope you came to the Lounge and Learn this morning to learn about a profit center inspired by Warren Buffett.