Yes, I still read the local newspaper (in my case, the Washingtonpost) in hard copy every so often, and today I came across this article on the value of annuity contracts — or as Warren Buffett calls them toll bridge businesses — to small service providers like heating or air conditioning contractors.
So what’s a tollbridge business? Essentially, it provides a service — often one that’s a low cost — that you pay for with some regularity. But the benefit of tollbridge businesses is that they provide a steady stream of revenue between major tasks and further, increase your stickiness to your customer. Here’s a tangible example from the article:
I [writer] wanted to know more about these tollbridge businesses so I called Ken Tucker and asked him how much my heating and air conditioning service agreement — and the 700 other customers who have them — contributes to the bottom line at his company.
“The service contract is our bread and butter,” said Tucker, who is 45 and a native of Silver Spring. The 700 contracts bring Tucker about $140,000 a year, or less than 10 percent of the $2 million in gross revenue the company collects. But it leads to a lot more money because it keeps the company in regular touch with its customers. And on many visits, technicians find something additional you need (remember my coils?).
“These are the people we take care of,” said Tucker. “My mantra is repeat customers. They are customers who, if they ever need to have equipment, we are the first they look at.”
The money helps his cash flow too. “We bill those service contracts out March 1 and Sept. 1, and it increases our cash flow before we stock supplies for the season. So when I have to buy my heating supplies to stock my trucks, I use the cash flow from the September service contracts.”
He said his goal is to double the number of service contracts to 1,500 a year. That would bring him around $300,000 in reliable cash.
Can lawyers implement the “tollbridge business” concept? Absolutely, but it needs to be well conceived. I know many lawyers who’ve attempted to sell “outside counsel” arrangements, charging a set fee fo a certain number of services, but who haven’t succeeded because the work scope was too ill defined. To make the tollbridge concept work, it’s better to focus on smaller tasks, that are definitive in nature and follow up on tasks already performed. Consider:
–After incorporating an LLC, offer an annual corporate check-up to ensure all annual corporate paperwork is filed and that there haven’t been any changes to the LLC structure.
–For trust and estate clients, an annual check up to review the plan and determine whether any updates are needed to reflect changes in marital status, acquisition of new property or changes in the law.
–For bankruptcy or consumer credit clients, an annual post-filing monitoring report of credit status.
–For divorce clients, an annual review of terms of separation and determination as to whether any changes or amendments are required.
As for pricing the service contracts, if you’re thinking billable hours, I’d make them approximate an hour or two of time, if you use flat fee or value billing, set them at a cost to approximate other comparable type services or to reflect the value to the client. Finally, you’ll want to check your bar’s rules to determine whether you can treat the service contract fees — which are essentially, an advance of fees – that may be considered property of the lawyer immediately upon receipt. (see, e.g., DC Bar Ethics Opinion 264 for some of the ethics issues involved in these arrangements). If you need to put these fees into a trust account, these tollbridge plans lose some of their value as a revenue stream.