Home › Common Pitfalls of Insurance Agency Acquisitions

When you are on the path to purchasing an insurance agency, it is important to know and understand the pitfalls of insurance agency acquisitions. Between state requirements, risk evaluation, outstanding liabilities, and more, knowing what to expect can save you a few large headaches. 

This article will break down how to go about acquiring an insurance agency, as well as the major pitfalls to watch out for and plan for as you work towards making an offer and owning such a business.

How to Acquire an Insurance Agency

Acquiring an insurance agency is much like developing any business, and should be done methodically to make the right choice. That being said, there are a few things that are specific to this industry that must be considered when attempting to buy an insurance company.

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 determined a good 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. 

Evaluate Their Book of Business

There are three main techniques for effectively evaluating a company’s book of business:

1. 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. 

2. 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. 

3. 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.

Make an Offer

You can’t acquire a business without making an offer! Because there will certainly be negotiations of some kind, make sure that you have your ideal price range figured out beforehand. When the deal is being closed, don’t forget to take care of any requirements by the state you may need to complete. 

The Common Pitfalls You Can Face When Acquiring an Insurance Agency

Having an acquisition on the table may be exciting, but it can quickly go south if you run into a few major problems. There are parts of the insurance industry that can create pitfalls for someone acquiring an insurance agency.

Outstanding Liabilities

It’s not uncommon for businesses to have some outstanding liabilities, but those liabilities can make or break an acquisition. Things like outstanding debts, unpaid taxes, and outstanding commissions should be taken into account when considering the financial situation of an insurance company. 

Reputation and Retention

While you may be buying a business — name and all — that doesn’t mean it is the exact same company as it was under previous ownership. Customers recognize this too and may have mixed reactions. Furthermore, you may be acquiring a business with good sales but a poor reputation. This is an underlying factor that will change the outcome of your future growth.

You should see how the existing executive team handles issues with their reputation. Are they proactive or reactive? Checking this minor detail out can help you gauge how much work you must do to boost the company’s reputation and market value as the new owner.

Acquisition Thresholds

It is common for a policy to have an acquisition threshold, which is commonly 15 to 20 percent of the buyer’s revenue per their most recent financial statements. If an insurance carrier goes above this threshold, they could incur the extra risk that requires changes to the underwriting. These changes often translate into restrictions on coverage or higher premiums. 

Other Professional Services

While you may understand the ins and outs of the policies that your target company is servicing, be wary of other additional services offered by the company that you are acquiring. Insurance agents’ E&O policies specifically name which individual professional services are covered. These add-ons must be explicitly named and protected under the buyer’s going-forward policy. 

Consider whether you want to retain, terminate, or add additional services. These all amount to a certain level of risk that you will be taking on to provide more professional services. 

Energia Partners Can Help You Overcome These Pitfalls

Energia 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 professionals offer a wide variety of process delivery for the agency owner which supports all agency operations. Our consultants have over 150 years of experience in the industry with a proven track record of success!

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!