The insurance industry is ever-changing. Carrier policies, global events, and the increasing use of technology all play their part in creating an insurance industry that must be increasingly flexible. Part of the ongoing fluidity is the constant shifting of agency ownership. Old owners retire, new players enter the game, and some agencies merge to increase their profitability. If you are looking to buy or sell an insurance agency, basically an insurance agency acquisition, read on to learn a little bit more about the processes involved.
Buying an Insurance Agency
Whether you are looking to scale up your current business or join the insurance world for the first time, purchasing an existing agency is a great way to get ahead in business. Not only can you acquire an established, diverse clientele, but you gain an experienced employee base. For those already in the insurance business, buying an agency is also a great way to add insurance products you don’t already sell and instantly grow your business. But where to begin?
Evaluate your needs.
Before seeking out an agency to buy, start by making sure you are financially ready. Although most sales rely on multi-year payment agreements, you will still need to have access to a sizable downpayment in order to purchase. If you are just starting out, you may also need to get an insurance producer license.
Finding the right insurance agency to buy
Unless you know someone personally or through business contacts who is looking to sell their insurance agency, your next step is going to be searching for an agency to buy. You could do the tedious work of cold calling agencies in your community in search of an owner looking to retire – but your best bet is going to be a resource that has already aggregated resources for you, such as an online directory or, even better, an insurance brokerage consultant, which have books of industry contacts and can help matchmake a deal for you.
Conduct due diligence
Once you have found an agency that interests you, you’ll need to ensure it’s a good fit and a safe purchase. Many agency owners sell because they want to retire, but for others the sale may be driven by a lack of profit. If that is the case, you may want to do some additional digging to figure out if the market in that particular area is bad, or if it’s an issue elsewhere.
You will also want to check that the agency has the appropriate licenses required by the state, that the agency carries appropriate lines of insurance for the licenses they carry (i.e. that they don’t carry products they aren’t authorized to sell), and that the insurance carrier will allow the acquisition.
Negotiate the price and secure financing
Once due diligence has been done, it’s time to negotiate the price and secure funding, which includes finding a lender and figuring out how to structure the transaction to both parties’ benefit. A significant factor in this step is figuring out the agency valuation, which is no easy feat. There are several ways to measure what an agency is worth and no right way to decide. This may be an area where partnering with a professional can help you get the best value.
Selling after an Insurance Agency
Maybe you already own an agency but are looking to retire or move on. You’ve worked hard to build your business up and want to get the best deal possible. But where to begin?
Start planning early. Selling an insurance agency can take up to several years, so you’ll want to give yourself ample time to prepare. Start by gathering and organizing documentation on your business. Prospective buyers will want to see this information, and by reviewing it during the planning stage, you’ll have time to uncover any information gaps that might serve as red flags to prospective buyers. At this time you may also want to engage a brokerage consultant to advise you in the sales process.
Find prospective buyers. Unless you already have a family member or employee lined up to buy the business, the next step in selling your insurance agency is finding a buyer. This is another area in which a brokerage consultant can help. As they deal with mergers and acquisitions every day, consulting firms have the industry insight and contact information necessary to find the best buyer for your business. They will also screen prospective buyers for you so you don’t have to sift through unsuitable offers to find serious candidates.
Negotiate and close the deal. As part of the selling process, you will also need to have the value of your agency estimated. Once you have found a buyer and acquired your valuation, it’s time to negotiate the terms. Sellers want as much cash upfront as possible while many buyers prefer a smaller amount upfront followed by payments over a set course of years. Structuring the transaction to your benefit may take some finesse. Once terms are settled on, you and your buyer can move on to the Letter of Intent and then the Purchase Agreement.
The steps for mergers are similar to those outlined above, but with a few extra considerations. In cases of buying/selling, there is usually very little overlap between new and old ownership. In instances of mergers, the relationship between the two parties will be ongoing, which means both parties will want to pay extra attention to whether their values, communication and leadership styles, and culture are compatible.
The Benefits of Working with Insurance Consultants
The process of buying, selling and merging an insurance agency can be tricky. No matter which position you are in, you want to ensure you are finding the perfect match and receiving the most accurate valuation – both of which can be accomplished by partnering with an insurance consultant. As professionals who deal with mergers and acquisitions everyday, consulting firms have a wealth of industry contacts and can help pair you with the right buyer and seller. They are also well-versed in valuations and know when and how to seek a second opinion.
Energia Partners’ consultants have a combined 150+ years of experience in the insurance mergers and acquisitions industry, along with $600+ million in sales. If you’re in the process of buying, selling or merging an insurance agency and want assistance, give us a call today!