September 12, 2013
Thoughts on How to Buy an Insurance Agency
2 min read
OK, so you’ve been offered the chance to acquire an insurance agency. How should you go about it? How should you structure the deal? What’s the right price?
There are many considerations in acquiring an agency. Please revisit the most recent posts on this subject before proceeding. Now, let’s look at the basic steps involved.
- Get a confidentiality letter between you and the seller signed so you can ask, and they can answer, all the questions you need to.
- Do your due diligence. Verify with insurance companies their permission for the deal, the actual volume and mix of business the agency has, get a loss run from each carrier and determine if this business will fit with what you already have. Get copies of employee non piracy agreements. Realize that without these the business you buy may walk out the back door. Get and review the last 3 to 5 years of financial statements. Do a pro forma budget (over the period of the anticipated buyout) on your agency assuming the acquisition terms. What is the financial impact? What is the rate of return? Review the contracts of any services you will be assuming. Before signing the final contract interview the employees and determine which ones you will keep and which ones will be leaving anyway. There is more to do, but this is a start. Use a written checklist.
- Agree to buy only the assets and book of business of the agency and not the entity. This isn’t legal advice, but you want to avoid buying the agency’s liabilities. Require that the seller purchase an Extended Reporting Period on their E&O insurance.
- Get a written contract. Don’t be stupid and cheap. Use a good attorney.
- Structure a deal that works for you. Here are some general guidelines: The more risk the seller retains the higher the price. The longer the payout the higher the price. The lower the loss ratio the higher the price. The better organized the business is, the higher the quality of carriers, the better the mix of business, the better the automation, the better the employees, the higher the price. Try to assign some value of the deal to a non competition agreement. This can make a difference in the after tax cost of the deal (also, be sure you involve your CPA!). The inverse of all of these things is also true.
- Forget “rules of thumb.” Agencies don’t sell for 1.5 times gross, for example. Structure a deal that makes financial sense for you and your desired rate of return.
So, I haven’t told you the ideal financial structure or what to pay yet, have I? That’s because each situation is unique and calls for a careful understanding of each party’s needs, wants and capabilities. What I have given you, hopefully, is a lot to think about and many of the things you need to do.
At OAA we are not business brokers, but we have participated in many transactions and helped make a lot of deals come to reality. It’s just one more of the services we provide members. Call us for more information.