Buying an Independent Insurance Agency

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There is a lot of competition to buy an independent agency in the insurance industry. This is especially true if the agent does not own an agency. Not a strategic acquirer. My firm regularly works with agents across the country to help them sell and acquire insurance agencies. We know firsthand what it takes for deals to happen. After talking with hundreds of buyers of agencies, I created a list of “rules” that I believe are important to follow.

Rule 1: Be aware of what you can afford

One of my clients once said to me that “a good agent dreams large”. This is a wonderful philosophy. Realistic thinking is key when buying an agency. My rule of thumb is that buyers need 20-25% of the potential purchase amount in cash to cover the downpayment and operating capital. A $200k cash reserve could allow a buyer to purchase a $800k-$1M agency. To meet the seller’s downpayment requirement, you will need to be able borrow at least 50% of the purchase price from third parties. Although some transactions still require substantial seller financing, this has decreased in recent years due to increased buyer competition and the availability of third-party financing.

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Rule 2: Line up your money

Three parties are involved in most acquisitions: the buyer, seller and financier. To make a deal happen, all three parties must agree to the terms. Sometimes the seller acts as the financier. Other times, it might be an investor. But, often, a third-party lender is involved. Only a few lenders can finance the purchase insurance agencies. There are a few lenders that finance the purchase of insurance agencies. Some are asset-based lenders like commercial banks, others are cash flow lenders like SBA lenders, and some are commission-based lenders such as Oak Street Funding. Each lender has its own deal structure and underwriting guidelines. These guidelines will determine whether a lender is able to lend money for one deal or another. Understanding how lenders decide what loan amount they will lend, the requirements of the borrower and the permissible structure for a transaction is crucial. Many buyers miss out on great opportunities because they need to find financing, while other have done it already and can move quickly with an offer. Many deals fail because buyers don’t understand the requirements of lenders and make offers they cannot fulfill.

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Rule #3: Be aggressive

It is not possible to effectively acquire insurance agencies at a part-time pace or at a leisurely rate. Others buyers may be more aggressive and have employees who work full-time on acquisitions. To find the right one, you may need to examine 15 possible opportunities. It is not a good idea to miss a great opportunity because you are moving slower than the competitors. Outsourcing is an option if you don’t have time or the desire to purchase agencies. My company contracts with approximately a half dozen highly qualified buyers to run marketing campaigns for agencies across the country. Because we have experienced the process many times, we know all the pitfalls and challenges. This allows us to generate opportunities for clients and also gives them the benefit of our knowledge. You should at least have a proactive strategy to identify opportunities, analyze them carefully, and decide whether to pursue them.

Rule 4: Learn the process

Buyers who close transactions are familiar with the process and can move quickly with confidence. The general process is as follows: (1) Introduction of the opportunity, (2) Disclosure of both parties, (3) Release information on the agency. (4) Meetings with the seller. (5) Written offer and negotiation. (6) Due diligence. (7) Execution and removal of closing contingencies. (8) Closing. It can take between 3 and 6 months to close the transaction, depending on how motivated the parties are.

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Rule No5: “Show Yours” to See Their

The disclosure phase is where you, the prospective buyer, share information about yourself including your finances and sign a confidentiality/non-disclosure agreement, and then the seller or his/her intermediary releases the necessary information to you about the business. The goal of your initial research should be to understand the financial situation, business operations and book of business. This is not the time to do due diligence. A written offer should be subjected to thorough due diligence. The seller may lose interest if you ask a lot of questions before making an offer. A buyer who is too cautious will take 2-3 times longer to move forward than a more experienced buyer, which can lead to missed opportunities.

Rule #6: First impressions count

Remember Dale Carnegie’s famous advice: “Be hearty in your approbation, and lavish in praise” when you meet with an agency owner in order to discuss a possible sale. Do not try to negotiate, as this could easily lead to an adversarial discussion. This is your chance to show that you are a qualified candidate and build rapport with the seller. Ask intelligent questions to get enough knowledge about the business to make a move. Experiential buyers will often communicate their plans and ask for information from the seller about how they plan to proceed. You must have a good relationship with your seller. Many obstacles can be overcome during the acquisition process. Do not assume that the agency owner only cares about how much money they get for the sale. Many owners have invested years in building their agency and built close relationships with customers and staff. Selling the business can be difficult. Because the owner does not want his/her legacy to end, he/she may have sold the business to someone else. The money is important but it’s not everything.

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Rules #7: Keep the process moving

Neglecting to manage the negotiations well can lead to prolonged and sometimes even fatal delays. Make sure you have all the details in writing when making an offer. It’s not a good idea to go back and forth about a dozen times before you reach an agreement. Then, when you get to the end of it, you realize that something was missed. This can lead to deal fatigue and erode goodwill. To assist in the negotiation and preparation of a purchase proposal, use an intermediary who is familiar with insurance agency sales transactions. A “middleman” can ease tension, and if they are an expert M&A advisor, they can help ensure that the purchase agreements include key items. You can provide the seller with a list of due diligence so that they can begin to put together what you need while the contract negotiations are underway.

Rule #8: Be flexible on deal structure

Buyers miss great opportunities because they don’t see the forest for the trees. They are unable to see the bigger picture and will not compromise on one thing. I don’t recommend that you submit to every demand of a seller. But, you should evaluate the size and significance of the value gap. Are you ready to let go of the chance? Is there a way to bridge this gap?

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Let’s look at a simple example. A seller wants to sell an agency for $500k. The business is valued at $425k. This leaves a 15% gap. Is it possible to convert the difference into an earn-out while still generating cash flow? The seller will be able to extend the financing terms for longer and have more notes. He/she will keep a note in stand-by (no payment) for at least a year until the cash flow improves. Consider the cash flow, risk, and total cost of capital. Not just the purchase price. It is often possible to come to a common understanding with the seller’s motives. It’s likely that the owner is not flexible and unrealistic . This means they are not motivated.

Rule #9: Do your due diligence

While I wish the world was honest, even good people sometimes forget important details in order to avoid problems. Expect the other side not to give you everything you want. Request it once you have signed a purchase contract or LOI. Wait for it. There are three types of due diligence: 1) financial, 2) operating and 3) legal. You should understand your revenue and expenses from both a historical and pro forma perspective. A twelve-month trailing revenue history in a P&C agency can be used to predict the performance of the next twelve months. However, it is possible for an account, producer or bonus to be lost that could affect the trailing twelve-month look back, but not be carried forward. You can compare the monthly trends year-over-year. Hire a CPA to dig if the agency is involved in accounts receivable. The operational side of things is to understand the culture and work environment of the agency, from how the office is run to the quality employees and customers. What are the technology and processes being used? Are there any opportunities to improve them? How does the compensation of producers compare with the rest of market? Does their book of business have any vesting? Before you move forward, make sure that your business is fully understood. It’s not always what you discover that should concern you.

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Rule #110: Create a post-closed game plan

Professional buyers will have a plan of transition for after closing. The owner’s goals and the importance of the business will determine the length of the transition period. The owner may be able to leave the business after one week, while others may require him/her to stay for several years. Remember to sign new agreements with agency staff and producers even before closing. Non-compete agreements between employees of the selling company and their employees are often not transferable to buyers. Other details include the transfer of trust money, appointment with carriers, redirecting commissions to your bank account and many other small details. The first few months will be very busy so you need to be ready to go.

You should expect to spend time and resources if you decide to create a play for an independent agency. Expect unexpected problems and stress to rise to the surface. Although you may need to kiss many frogs before you can find your prince, you will get better at it.

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