Insurance agency acquisition has a lot in common with acquiring any business. It should be done methodically to make the right choice! Getting a clear understanding of the first steps toward acquiring your new company is paramount to your success. There’s no default roadmap for purchasing a business, but there are common strategies, pitfalls, and expectations to be aware of.
Energia Consulting has over 150 combined years of experience with a successful track record of aiding individuals in their acquisition process. This article is our step-by-step guide for you as you begin your insurance agency acquisition journey.
Make Sure You’re Ready
There are a few honest questions you should ask yourself as you begin planning to purchase an insurance agency. Considering these factors will help you avoid putting yourself in a tough position after acquiring your target business.
Can you effectively begin to manage the business?
Taking the reins of an agency will mean plenty of moving parts — and some missing ones too. This might mean bringing on more employees, rearranging roles and duties, or purchasing extra office equipment and space. These are additional expenses and responsibilities that can add complications if you don’t expect them.
Are you financially prepared for the acquisition?
Be sure to thoroughly vet your financial position and where the purchase of the agency will put you. Down payments especially can put you in a hole that is hard to climb out of if you are not prepared. Immediate success is not guaranteed and the more precarious your financial positioning, the more pressure you will be under.
Research the Requirements, Market, and Insurance Type
Deciding on the correct agency to acquire will necessitate in-depth research and risk assessment. Your primary step should be to examine the requirements in your state for purchasing an insurance agency. Many states require that you notify them, and some even have the power to approve or disapprove an acquisition.
The different types of insurance will come with vastly different markets. Are you selling to individuals or businesses? What are the demographics of your geographic area that provide the best market opportunity? It’s important to understand whether the market will continue to grow after you make your purchase.
Find an Agency
Once you have chosen a type of insurance with a strong market, you must then figure out which agency you want to set your sights on. There are services online that can help you look for agencies such as BizBuySell, AgencyEquity, and Agency Classifieds.
Another effective tactic is to search within your local community for agents who run their own operations that you could possibly acquire. These are established businesses, and if the owner is reaching retirement age, they have likely built a solid company that has withstood tumultuous markets.
Insurance agency sales is a seller’s market. Increased buyer competition can make it very challenging for a buyer to find a suitable agency to purchase. This is one area where working with consultants can be extremely beneficial. Instead of spending your own time cold-calling agencies or scouring online services in search of the perfect match, you can turn the problem over to a professional who does the legwork for you. As professional consultants in the insurance agency industry, Energia Consulting has many available resources to aid our clients in the buying process, including a compiled list of sellers who are serious and ready to sell their businesses and to help buyers find the right company for purchase.
Evaluate Their Book of Business
There are three main techniques for effectively evaluating a company’s book of business:
Present Value of Future Earnings Method
The Present Value (PV) of Future Earnings valuation is a method used to calculate if an insurance underwriter will be worth the earnings assuming the growth and profitability remain the same. This is based on the assumption that money made today will be worth more in future quarters.
Capitalization Method
By perusing a large amount of comprehensive data, an investor can calculate how profitable (or risky) a possible candidate for purchase is. This computational method pulls from three particular factors: Cash flow, yearly return rate, and the company’s forecasted worth. This is integrated to determine the net present value (NPV). A valuator would then divide this against an appropriate capitalization rate.
Price/Earnings Method
Calculating the P/E percentage requires a valuator to multiply the book’s pre-tax profits by a predetermined factor. This shows the relationship between a company’s value as compared to their sales performance. The Price/Earnings method can greatly aid you when considering if the price you are considering is a fair offer.
Keep Realistic Expectations
There will certainly be unforeseen speed bumps during and after your acquisition of an insurance company. This could mean challenges such as necessary changes to your underwriting, outstanding liabilities, or a lower customer retention rate than expected. If you set your expectations correctly, you can face this head-on and position yourself on an upwards trajectory with your newly purchased business.
If you are purchasing someone’s book of business, expecting some growing pains as you combine clientele and underwriting differences will smooth out the transition. There will undoubtedly be hiccups, but a cool head and realistic expectations can ensure that you make the most of your expanded business.
Another way to meet the obstacles that arise during the merger process is to partner with professional consultants like Energia. Because they have been through the process time and time again, a consulting partner has the knowledge and expertise to help guide you through the process and advise you on how to tackle challenges as they arise, creating less stress and work for you.
Energia is Your Partner in Insurance Agency Acquisition
Insurance agency mergers and acquisitions can be a complicated, stressful experience on your own. From finding the right agency to purchase to negotiating the price and securing financing, tackling a merger on your own is sure to be a stressful experience if you’ve never done it before.
The good news? You don’t have to go it alone. When you work with an experienced consulting firm like Energia, you’re getting a partner with decades of experience who can seamlessly navigate you through the ups and downs of the insurance agency acquisition process.
Energia Consulting Partners is an experienced, independent consulting practice that specializes in all aspects of the sale of an insurance agency with an emphasis on the Allstate & Farmers Insurance Company distribution model. Our consultants have more than 150 years of combined experience in the industry and over $600+ million in sales and purchases, with a proven track record of success!
If you have interest in selling your current agency and knows it is the right time to be your own boss and purchase your own agency, Energia Consulting can help you every step of the way to insure a smooth transaction.
Each company has its own specific risks to deal with, a predetermined budget, and varying levels of insurance coverage. Contact us today to see how we can help you realize your goal of acquiring an insurance company!