Buy An Insurance Agency
The Good, The Bad and The Ugly
No, we are not here to talk about Clint Eastwood gunning down some bad guy in the Old West. Although Eastwood is the favorite actor of the author of this blog. However, when talking about revenues over a period of years, a buyer will want to know the "why" behind the financial picture. It's easy to sit and look at financial statements and say this is a good or bad prospective seller because revenues are up or down by a certain percentage.
Accounting is easy. Getting behind the numbers is the real skill.
Let's take a look at why revenues might be going up:
- The owner has hired top-notch producers.
- New carriers have been brought on board that expand their markets.
- The agency moved to a higher growth area of town.
- The agency has developed a new niche market.
- A new marketing campaign has been successful.
- Changes in State or Federal laws.
- A purchase of another agency.
- A new large account has been acquired.
Some reasons why revenues might be falling:
- The owner has been on "mental cruise control" for a number of years. He's nearing retirement and has not been managing the business as aggressively as he did 10,20 or 30 years ago.
- Loss of a significant long-term account.
- The agency is in a declining neighborhood.
- Poorly performing producers.
- Lack of a marketing plan.
- The divesture of a portion of the agencies business.
- Loss of carriers.
Now we even go one step deeper in the thought process. You look at the financial statements of the seller and revenues have been going up 15% year-over-year for 3 years. However, you discover it's all due to one large commercial account in town that is owned by the owner's brother-in-law. This might be a real concern. Another reason might be the seller's two top producers out of a group of 10 account for the majority of the new business. What happens when and if these producers leave the agency?
On the flip side of the equation we talk about falling revenues. The seller, by no fault of his own, loss his biggest carrier. However, he has recently found a replacement carrier that is allowing him to re-acquire the lost business. Also, let's say he's been on "mental cruise control" but the agency had a 27 year tracked record of increasing revenues and profits prior to the last three years. Don't you think that is a significant fact?
Whether a cursory examination of the "numbers" shows good news, bad news or very ugly news, keep searching deeper to find out the backstory. A good seller will be up front, open and honest about your questions. The concern comes when sellers start evading answers or provide partial truths. Your "gut" will tell you when he is not playing straight with you. Walk away when someone is not be truthful even if the numbers show good news.
Many buyers lollygag during the courting process when working with a prospective insurance agency seller. They find a lead or have a first interview and then they let things sit for several days or weeks before taking the next step(s). As with all types of sales, time is of the essence. If you received a call from a new business in the area seeking to change their business insurance, would you wait several days to go see them? Of course not.
When an agency owner is ready to sell his agency, he doesn't stop his world just because he was introduced to one prospective buyer. You need to take action if you have further interest. On the other side of the spectrum are those who waiver because they are unsure if they really want to go forward with a particular insurance agency seller. If you have that "gut feeling" that you don't want to go forward, listen to your gut and move onto another prospective selller. In order to be respectful, you should politely inform the seller that you've decided not to go forward and thank them for their time. Maybe you'll have interest at a later date.
The whole point is to make a decision today one way or the other and move on! Great businessmen typically like to make quick decisions as opposed to not making any decision at all. If you are right 51% of the time, you'll be okay.
Cash Is King...Financing Is Golden
Many insurance agency buyers get so excited about buying an agency that they overlook how they are going to pay for a transaction. Many well-established agencies will have cash on-hand to make a purchase of an agency their size or smaller. If you are seeking to buy your first agency (you are not in the insurance agency business already) or are trying to acquire a much larger agency, you will probably be in the market to get a business loan.
These "loans" can come from three sources:
- the seller
- specialized lenders
Getting a loan from the seller is the most desirable as the approval process is short and sweet. However, the pool of sellers wishing to take on a loan after they leave is somewhat small. As for banks, you can apply to your local bank for a loan but you'll have the usual hassle of paperwork and "loan ratios" to worry about. Specialized lenders in the insurance agency business also have their pros and cons. They have employees who only work with buyers like you who want to acquire an insurance agency. So, it will be easy to "talk shop" about what you want to get done and how the process works. They will ask for three things before granting approval: 1.) your personal credit score , 2.) an income statement and 3.) statement of assets and liabilities. So nothing is guaranteed.
The overall point is that before you fulfill your dreams of buying that agency down the street, think through how you are going to pay for the transaction.
Don't Forget The Broker!
Many times the seller you are interviewing was introduced via a business broker. The broker contacted you (or you responded via an ad) and now things are looking up on closing on an agency. Make sure that you take the time to return the call or email to the broker when they inquire on how the interviewing process is going from your point-of-view.
It may seem trivial as you feel that the coast is clear and you are near the finish line with the acquisiton. Many buyers don't realize the behind-the-scenes conversations brokers have with sellers over a period of weeks and months. Since the broker is semi-independent of the negotiations, he may have knowledge about the motivations and concerns of the seller that may not otherwise be known. These small tidbits may help during the final "push" to closing day.
Furthermore, unless you own or work at a very large agency, it's unlikely that you'll be involved with the number of transactions a broker is involved with over the course of a working career. Use the experience the broker has garnered to your advantage.
The broker may also be useful during the offer and counter-offer stage. Both the buyer and seller may not want to divulge or bring-up a concern directly to the other party. The broker can run "interference" between the two groups when an awkward subject arises.
As a final thought, by keeping a good relationship with the broker, you'll have a better chance at future sellers in the area. Do you think you'll be first on his list if you haven't been courteous and returned his calls and emails?
Create A Rapport First
Many insurance agency buyers want to delve into the "numbers" before they have a first meeting with a seller. From the seller's perspective, they may not want to give out confidential P&L, tax and employee records without "knowing" the potential buyer. It's best to have a phone call or a meeting with the seller first before asking for these details. You'll receive a much better response.
It's very similar to dating. If you move along too fast with things, your potential long-term girlfriend may just walk away as she thinks you are being rude. However, if you show deference, courtesy and a sense of understanding you'll do just fine. Think about it, would you try to kiss her without first knowing her name?
During the first phone call or meeting, it is okay to ask a few "high-level" questions that will give you an idea of the seller's financial situation. However, some things not to ask are :
- How much money did you pay yourself last year?
- Do you have any expenses that were "personal" in nature that were run through the agency?
- Have you been audited by the IRS before?
Likewise, don't make any statements that reflect on their past decision making:
- Seems like you have too many employees for the amount of revenue being received.
- Your office still looks like it is in the 1970s.
- It smells like cigarette smoke in here.
Furthermore, many times the seller may rely on others for carrier-specific information. Thus, it may take them time to gather information from their carriers via carrier representatives. So, be patient on items that the seller may not have readily in-hand.
Ideas of financial or business related questions that could be discussed during a first call/meeting are:
- Are your commissions/revenues stable over the last number of years?
- How are your loss ratios?
- Do you (the owner personally) handle any large or significant agency accounts?
- Has there been any changes in the carriers represented over the last few years?
- Is your commercial insurance specialized with niche clientele?
- How many employees do you have? How long have they been here?
These are simple, non-threatening questions that will mostly certainly start the conversation off on the right foot. If they are asked at the correct time, the conversation will flow naturally and the seller will most likely offer information that otherwise he may not have given. Go with the flow and see where the conversation heads.
It's Not Real Estate
From time-to-time, many buyers will turn-up their noses about paying a fee to a broker to help find a seller. There are sellers that pay fees to help market their agencies, however, these situations are limited. As with all markets, supply and demand dictate fees and who pays. In the current market, there are many more buyers over sellers, thus it's generally a seller's market so-to-speak. This doesn't mean that a seller just puts a "For Sale" sign up and a magical offer appears from nowhere with all of the terms their hearts desire.
So if you are new to the market for buyers and sellers of insurance agencies, please do realize it's not like real estate. If a broker is involved, you'll have many more opportunities brought to you if you are open to paying a fee. Most fees are a percentage of the transaction price and are due at closing. Thus, you won't be stuck with any up-front costs. Furthermore, never pay money up-front to someone you don't know.
As a closing note, any fee that is paid will be adjusted one way or the other in the overall transaction. Thus, if the fee is $15,000 and paid by the buyer, he'll be adjusting his offering price a little lower to include this amount. Likewise, if the seller pays the fee, he might ask slightly more to his asking price to cover the fee. In the long-term most buyers buy an agency and hold onto it for many years or even decades. So how does a small fee affect the overall decision to buy or not to buy when considering a lengthy period of time? It doesn't and shouldn't.
Love & Marriage & Acquisitions
One of the frustrating things first-time buyers or smaller agency owners face, is a spouse who suddenly gets cold feet regarding an agency purchase. The spouse seems initially supportive of buying an agency but then they want you to back out at the last minute. The major concerns a spouse may have include:
- They don't want to relocate.
- They are intimidated with the new financial commitment you are taking on.
- They feel the commitment will take away time with the family.
These are all valid concerns, however, any potential buyer needs to talk with their spouse in a very serious manner before they start the acquisition process. In this way, there are no last minute surprises as well as disappointments. Likewise, the spouse needs to realize that you are an entrepreneur and that's why you struck out on your own. You crave the risk and reward of small business ownership. You enjoy your independence and don't want to be confined to other peoples rules. Life is too short to delay your dreams!
Swim In The Deep End...But Not Too Deep!
Many buyers will overlook potential sellers as they (the sellers) don't "fit" their current business. For instance, a potential seller may have a very strong "commercial" book and the buyer does only "personal" accounts. Furthermore, a buyer could have a strong suit in "preferred" or "standard" business but overlook a significant seller who specializes in "non-standard auto". The general idea is to venture-out just a little in your business strategy. Maybe you will find a niche that gives an edge against your rival across town.
For example, if there's a seller just down the street and he has a profitable and tidy book of business with non-standard auto, don't pass up consideration of the seller just because you've never sold this type of product. If you are at $450,000 a year in commissions and his book is $95,000 in commissions, it's not too much to chew off. The new combined agency would have just 17% with the "new market" of non-standard auto. As a contrarian example, if that same seller is at $350,000 in annual commissions, maybe it would be better to pass on things as non-standard auto would represent 44% of the new agency.
The thrust of the message is to swim out to the metaphorical "deep end" and try something new. However, make sure that you don't go too far out, otherwise, you may regret your decision.
Great Expections!...Or Lack Thereof!
Buying or selling an agency is like dating and marriage. In the beginning both parties have great expectations and they are elated about the future. Life is great and the future is picture perfect.
Then comes the engagement period. This is where you find out more about each other. You meet each others family. You find out that your future spouse doesn't have the best credit history or they may have a criminal record. You meet your future brother-in-law who lives in the basement of the parents house. Many days are good but "real life" comes around a bit. The general mood sinks just a little but your are still looking forward to the wedding day.
The same is true when you are buying or selling an agency. In the beginning both the seller and buyer are elated about getting the transaction done. The seller is looking forward to handing the daily responsibilities over to the new guy. He may be even thinking about how he'll spend his extra time with his family or traveling. The buyer is excited as this might be his first independent P&C agency or he's adding another one to his small but growing empire.
The easiest part of the process is when the buyer and seller have a "meeting of the minds". After the buyer and seller agree upon the basics of the selling price, payment terms and generalities of how to run the agency post-sale, the real work occurs.
Many of the items that come at this point include:
- Collection of Due Diligence
- Submitting applications for financing
- Bank appraisals of the business
- Real estate appraisals (if applicable)
- Bank underwriting concerns or requests
- Legal paperwork (i.e. Purchase Agreements, Letters of Intent etc.)
- Employee and Consulting Agreements
All in all, the bureaucracy of buying or selling an agency comes into play at this stage. This is where expectations can tumble and frustrations mount. The average time from when a buyer/seller meet until the transaction closes is anywhere between 4-6 months. So, don't get in a down mood just because banks, lawyers, underwriters, CPA's and the like get in the way. It's just part of the process.
As a side note, there have been agencies that went "A-Z" in the buying/selling process in one week or have taken as long as 9 months, but, those are outliers. Be patient and focus on what the end result of your hard work will look like!