The “China Only” Agencies
There has been a lot of discussion in the comments here and in several threads in the forum about whether the China-only agencies might be in trouble.
I’ve talked before about how much the agencies bring in vs what their expenses would appear to be. Figure out how many families per month your agency processes on an average month and then multiply that by the fees they charge and then try to figure out what their expenses likely are (office overhead, advertising, salaries, etc). I can’t imagine that any agency who is managing their finances responsibly would have a problem.
With that being said, if we consider that maybe some agencies might not have handled their finances in the best way then what might they be looking at? That depends.
In my mind there are two kinds of agencies – those who require all fees near the beginning of the process and those who require part in the beginning and the balance near the end.
Let’s look at two hypothetical agencies:
- Agency A requires half of their fees when the dossier is sent to China and the other half when you send in the acceptance of your referral. This agency is forced to “pay as they go” since they receive money close to when most of the work is actually done. Even if the agency doesn’t have many new clients coming in they still have money coming in.
- Agency B requires part of their fee when you apply to them and the rest when you send your completed dossier to them. This agency is basically getting all of the money up front, long before they provide 90% of the services being paid for. If they stop getting new clients then their cash flow completely dries up. If they have managed their funds well they should be okay. After all, they should be getting two or three years of interest off of that money before the family that paid the money actually gets a referral, right? But, if they haven’t managed that money well then there will be problems.
The other question that keeps coming up is what happens if an agency goes out of business. Traditionally the agency makes arrangements with another agency and with the CCAA to hand off all of their families to another agency. The good part here is that families do get to complete their adoption on schedule. The not-so-good part is that families get no choice in which agency they are handed off to, and they are stuck with the new agency’s policies and procedures that they may not have signed up for.
May 13th, 2007 at 10:46 pm
Am not sure I completely agree with RQ’s logic on this one. Lets see if I can explain why though.
For simplicity I will use the example of the small agency we used. The agency essentially consists of one person. The costs of running the business consist of one salary plus whatever overhead is involved in running the business. These costs are essentially independent of the number of adoptions completed in any given year and are covered out of the “agency fee” paid by the agencies clients.
For the sake of argument lets assume that the complete agency fee is paid as soon as the client signs up. Once the overheads are paid out the owners salary is then essentially a function of how many clients signed up in any given year. If the number of new clients signing up drops by 40%, the owners salary for that year drops by 40%+. If the CCAA stops accepting applications completely the salary drops to 0.
If the “agency fee” is paid over time the situation doesnt really change. It may change the cashflow situation and financing issues but the end result is identical to the case where the whole fee is paid up front.
So the bottom line for an agency that is a one person show, is that a drastic reduction in the number of clients almost has to result in a closing of the agency.
What about for a larger agency? The economics are basically the same, but instead of an immediate closing the agency would need to scale back staff and costs proportionally to the decrease in number of new clients. But again if the number of new clients drops to zero it is only a question of how long before the agency closes.
RQ is right of course…in a perfect world…the agency would have been very conservative in how they manage cash flow and there could well be enough money to stay in operation (in some form, but likely with very reduced staff levels) until all current clients receive their referrals.
Well that is probably my 4 cents worth on the subject. Hope it makes some sense.
May 13th, 2007 at 11:17 pm
RQ,
When you get passed off to a new agency and the new agencies policies and procedures, are you also subjected to their fee structure?
Is this completely non-negotiable even though our contract with the original agency seems to be written in stone? I’m going back to our paperwork, but I don’t recall this clause.
May 13th, 2007 at 11:25 pm
Windthrow – I’m just looking at cash flow.
sks – you’re not going to find a clause, I don’t think. When an agency goes out of business they basically have to find a way to keep from being in breach of contract for all of their clients. In past circumstances when the clients have been handed off to the new agency the old contract was still in effect when it came to fee structures – presumably the defunct agency payed the new agency a sum of money to take on these new clients. But the families were then clients of the new agency and had to do things the way the new agency did them.
May 13th, 2007 at 11:28 pm
I was all for the great planning our agency said they did in order to not be hit with this increased wait in their pocketbooks. Then, I realized, that if they had planned so well, they knew the wait was getting worse and decided to leave that out of the conversation when they talked us into their program.
I wonder how long it will take till we see a few drop out. And maybe we won’t.
May 14th, 2007 at 7:26 am
I’m also wondering if we will see Agencies pick up new Countries to add to programs. Our Agency has been in negotations with Vietnam in order to join this program.
May 14th, 2007 at 8:31 am
windthrow: you assume that the owner’s salary is whatever is leftover after expenses have been paid. if that’s true, that’s a pretty poorly run business–even the tiny non-profit that I run saves money for a rainy day.
Plus if the agency is a non-profit, then there are certain rules and regs regarding how much can be distributed each year. So I am hoping there are some safeguards built-in for waiting families.
May 14th, 2007 at 9:05 am
Klem – I don’t disagree, but from what I recall of the financial statement of our agency there wasn’t a huge contingency there. I also think that most agencies lekely set up their accounting based on wait times of 6 months to 1 year (with maybe contingincies for brief increases to 18 months….the historical maximum). A 3 year wait is just such a completely different animal.
Ultimately my thinking is that in the event of a complete halt by CCAA most agencies would find a way to stay in business long enough to see the vast majority of their clients to the end. The agency would certainly be functioning a lot different than it is now though.
May 14th, 2007 at 9:17 am
Has anybody asked their China only agency how they would handle a slow down or halt in applications resulting in little to no cash flow? Even if they’re not completely forthcoming with the information, you still may be able to get a sense of their action plan,. If they don’t have one, that may be just as telling.
May 14th, 2007 at 10:34 am
RQ is correct. If an agency receives a fee for services to be rendered, it is a prepaid, not income. I am a coprorate accountant. Its all about cash flow. An agency that is running hand to mouth is going to be in trouble if they cannot receive more clients. In a perfect world, nonoe of the proepaid cash should be spent until servioces are rendered.
May 14th, 2007 at 10:35 am
The small agency that we used went of business during our wait for #2. We were handed off to a large agency. Our small agency was able to negotiate that our fees remain under their structure, not the new agency.
Also, fortunately for us we were able to travel as a small group (6 families) and not with the large agency group.
May 14th, 2007 at 3:00 pm
When I adopted daughter #1 a few years back, my agency lost its license before I received my referral. Another agency took on all of the clients and did not charge a fee.
Vicki
May 14th, 2007 at 11:26 pm
I have to disagree a little with RQ, (no disrespect intended, because she is very good at analyzing so many things), when she writes “I can’t imagine any agency who is managing their finances responsibly would have a problem”.
First of all, in their financial plans, I am sure none of them anticipated a 2-3 year wait, many old clients dropping out, and such a large decrease in new business. Now, they have to change their spending habits and adjust to the new changes – it takes time to adjust and not everyone does it well. Especially when the parameters keep changing. They still need to pay the staff, overhead, etc. during those 2-3 years of waiting, even if they’re not processing as many new applications – just to keep the doors open to service the old clients. Once we’ve paid in, that money is spent and is no longer renewed. Do they keep a high number of staff, hoping that China will eventually speed up – weather out the storm? Many business owners prefer to be loyal to their employees, and keep them so they don’t have to train new people in the future if business picks up. Sometimes, this isn’t always the right business decision. Or, do they cut staff and then scramble if they get busier? This could result in poor service, turning off new clients.
Secondly, as a business owner, I know that my future success depends on bringing in new business. It doesn’t matter what kind of business you’re in. My old clients help to pay the bills, but over time there is a certain amount of drop-out. Others will complete their business with me – and then they are no longer a source of income. Without an ongoing influx of new clients, I’d be in trouble.
Third, some agencies pride themselves on low fees and low profit (including our agency). Like Wal-mart, they don’t have large profit margins per customer. But, by dealing in volume, they have enough small profits to add up and keep them in business. Remember Caldor’s, Jamesway, Woolworth’s – these were all stores in our area who were popular because of discount prices – after many years in business, there was not enough profit built into their discount prices to keep them in business. Especially when Wal-Mart came in and cut the amount of business they were doing.
As there will be fewer new adoption clients, will the low profit margins be too low to keep them in business?
Sorry to ramble, but I worked all day and it’s after 11 pm.
May 15th, 2007 at 7:37 am
lnd7mike – I agree with everything you say as it pertains to “normal” business.
Think of it this way, let’s say an agency charges $5,000 for the agency fee and they last year they were getting 50 families per month. That’s $250,000 coming in for each of those families per month, or $3,000,000 per year. I used 5,000 because it’s easy – some charge slightly less, some charge a good bit more.
Their expenses include office rent, salaries for usually five or six people, some utilities, advertising, office supplies, communication/technology, and a trip or two to China per year for the director or someone else higher up. I can’t get that to come anywhere near $3,000,000. So, my point was that if they’ve been managing their money they should be fine.
May 15th, 2007 at 9:10 am
The economic of larger agencies are a mystery to me but if I look at our agency which had only been doing about 80 adoptions per year I am not so sure that I reach the same conclusion as RQ. At the time of our adoption, of all the fees paid there was $1,800 that was for the agency itself. All the other money paid to the agency covered specific direct disbursements and doesn’t really factor into this equation. 80 times $1,800 is $144,000. Out of this the agency has to pay the directors salary, plus all the other basic expenses and overheads of running the agency. This just doesn’t leave much room for the agency to survive if there is a significant drop in numbers or a freeze by the CCAA.
May 15th, 2007 at 9:23 am
Wow Windthrow, the least I’ve ever seen an agency charge is $3,800 for their fees. I just checked your agency’s site out and they state they only have one paid staff person though. I’m guessing the agency is probably run out of that person’s home and the overhead is almost nonexistant, which will hopefully help them make it through. And if they do have an office, with only one person working they could bring it into a home office if they had to in order stay afloat.
May 15th, 2007 at 10:36 am
RQ
She does work out of her house so overheads are relatively low. I am a bit unsure about comparing agency fees since I am not sure what is included by other agencies. For Canada I didn’t think her fees were significantly different than the largest China agency, but I could be wrong, it is a while since we did the original research.
Still trying to figure out how you would know the specific agency we used…hmmmmm. lol