The Current Political Environment Impact on Insurance Agencies
With the new administration preparing to take office in January, the insurance industry is bracing for major shifts
Agents have two choices if they want to grow their existing business. They can grow organically, a gradual strategy that involves expanding existing sales and finding new customers and markets. The second, faster option involves immediate growth through acquisitions. Acquiring a new book of business immediately increases agency revenue, and can dramatically expand its base of customers. (Learn more about these options here.)
If acquisition is part of your growth strategy, doing your homework will ensure you know exactly what you’re getting. “Buying a book of business requires careful planning and patience,” explains Sam Patterson, CEO of Dallas-based Springtree Group, the leading insurance industry mergers and acquisitions consultancy firm. “It can take months to find qualified sellers, select the agency that’s the best fit, and arrange financing.”
Whether you work with an acquisition specialist or go it alone, know what you want to buy. Make sure your expectations are realistic and affordable.
Kelly Drouillard, general manager of insurance lending at Live Oak Bank — the largest SBA loan provider to the insurance industry — divides reviewing an acquisition into the six Cs. “Buyers need to determine their Capabilities – do they have the financial strength and acumen to complete the deal and integrate the merger? Will the acquisition have positive Cash Flow on Day 1? Will the existing Customers transition over in the merger? Are the Carriers a good match and will they enter into a contract with you? What is the Culture from both an employment and technology perspective? How do Compensation (commissions on new and renewal business) and benefits match your agency’s offerings? You’ll want these critical strategic factors to mesh.”
Once you target an acquisition, devote substantial time to investigating how the agency operates to determine if it’s a strategic fit. To help ensure you make the right decision, we’ve developed this Agency Acquisition Due Diligence Checklist.
Most likely, you are buying a small, privately-held company with no public audits or records. It will take time to find and review the information you’ll need. You should plan to focus 80% of your time and energy on verifying all the seller’s financials. If needed, consider hiring someone to independently verify the strength of the book.
Call in experts as needed to review bank statements for operating and trust accounts. Are the trust accounts appropriately funded and have they been used only for paying premiums to the carriers? Are profit and loss statements and balance sheets available? What do the agency’s expenses look like and could you run the business more efficiently? “Some sellers use their agencies like a piggy bank,” explains Dan Bywater, vice president of Ohio-based Ready Capital, a national specialist in insurance agency lending. “If a prospective agency expenses things like cars, trips or family ‘salaries’ that are unrelated to agency operations and will not continue after the sale, you can add those expenses back into cash flow estimates. These common accounting practices will make a difference in your bottom line.”
Request production trend data
Ask for carrier commission reports, retention rates, and agency management system reports. Has the agency been stagnant or growing in recent history? Have they added or lost carriers? Are there one or two accounts that make up the bulk of their business? (If yes, risk might be too concentrated.) If the book is mainly commercial policies, when do they renew? Could it be almost a year before you receive commissions? Note: By including appropriate language in your buy/sell agreement, you can control unanticipated changes to commissions or carriers.
Understand existing contracts and agreements
Do you plan to negotiate non-compete agreements with agency staff? Are these agreements in place and will they transfer? Will all existing carrier contracts move with the book? Are there other agreements and contracts you will be responsible for carrying out?
What’s the agency’s status with federal and state tax authorities?
Does the agency have a history of paying their taxes fully and on time? Are taxes filed and current at the time of review? Look for any unusual line items on the returns that you should question or get additional information on.
Do they carry the necessary insurance?
Will your acquisition be fully covered throughout the transition period for professional liability, errors and omissions, workers compensation and data breach insurance? Are there any outstanding legal issues?
Status of Loans and Debt
What kind of loans are they carrying? What are the payoff amounts and due dates? Are there any liens on assets?
Assess whether your target’s everyday operations will merge easily into yours.
Do they affiliate with networks?
The agency may have a network affiliation with an organization like SIAA, Iroquios or Pacific Crest. If they do, it could affect the sale, book transfer, or your ability to secure financing.
Employment/Management Issues – This might be a good time to consider modifying employee assets in both agencies. Do you plan to absorb existing staff or consolidate operations? Will you need to hire or lay off? Have you identified the top performers in the new agency? There may be personal relationships between the existing owner and clients. Are there key client relationships you must maintain for your new agency to succeed? And will the seller provide the introductions needed to facilitate the transfer?
How do they handle technology and intellectual property?
Will you be negotiating for computers, equipment and software? Are client files kept electronically or on paper? Are they well organized? (It could take a lot of time to organize paper files and convert them to an electronic system.)
Geography, Location and Property
As negotiations become more serious, you will likely draw up a non-disclosure agreement. Once this is signed, visit the agency and experience the office first-hand. Meet the staff and conduct interviews with key players. Observe how the business is run. Is the office in a good location? Will you maintain two locations or consolidate? Do any lease, landlord or tenant issues exist? Which of the firm’s hard assets will you acquire?
Make sure you understand and are capable of marketing to and serving the agency’s customer base.
Are your books complementary?
Does the new book integrate well with your existing book? Can you service the business with existing employees? Will you be expanding into new markets with the acquisition and do you know and understand the customer base?
How will the purchase alter your competitive landscape?
Are there new challenges associated with the purchase? How will you market to the new book? What has/has not worked for the current owner?
Once you’re sure this is the right acquisition, start to arrange basic financials before meeting with a lender. Can you come to the table with a down payment in place? Securing 100% financing from a lender may sound simple, but it comes at a higher cost. The more equity you can arrange, the lower your financing costs.
You may want to consider asking the seller if they’re willing to finance a portion of the purchase or negotiate a buyout plan. This solution offers two benefits. 1) You can often secure an excellent interest rate. And 2) the financial relationship will keep the seller engaged in and helping with the new acquisition.
Once you have a down payment, decide how much additional financing you need to complete the acquisition. Then schedule a complimentary consultation with one of our Lending Advisors, using the form below, or the Schedule A Consult button at the top of the page.
And check out our Due Diligence Checklist, to help you manage your due diligence process.
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With the new administration preparing to take office in January, the insurance industry is bracing for major shifts
Insurance agencies have a unique window of opportunity to leverage lending strategies that not only ease tax burdens but also fuel growth for the coming year.
There is little argument that if you can double your agency’s premium book, the inherent renewal economics will more than double income.