Dirty Little Secrets I’ve Learned About Buying Insurance Agencies & Brokerages

Insurance Agencies & Brokerages

So, business has been good.  Sales are up.   Claims activity is low. Retention gets better each month.   You’ve almost spent next year’s contingency  three times in your head, and have visions of your family enjoying that little vacation you keep imagining.  But if business is good, wouldn’t another agency make it even better?

I often hear agents say that they’ll “just ask the marketing rep who’s for sale the next time they stop in.”  Don’t bet the ranch on that one.   Of course, after a friendly visit to your agency he’ll close with some non-obligatory line promising to let you know if he hears something.   Yeah, right, and I’ve got forty acres of prime swamp land in Mississippi that I’ll give you a smokin’ deal on, too.   Do you honestly believe that if you’re one of his or her smaller agents, you will get that call?    No, when he comes upon that juicy little tidbit, he’s gonna race to his car and call one of your larger competitors; you know, the one he plays golf with while you’re out struggling to make a buck to pay your bills!  Maybe a bottle of expensive wine, dinner, use of his vacation home, a plane ticket, or some other little gift will quietly change hands, but you won’t be part of the equation.  Mark my word!

Before you run out and drop half-a-gazillion on another agency, you should ask yourself some questions, such as:

  • If I buy another agency, how will my existing agency be impacted?
  • Will the acquisition give me bigger books of business with some of my existing carriers and increase contingency potential?
  • What carriers does the other agency represent that I would like to represent?
  • What niches, if any, does the other agency work in? Do I understand and have a passion for those niches?
  • Can I merge the other agency into (one of) my existing location(s)?
  • Has the agency run into any legal problems, terminations, or financial issues that you might be aware of?

Then I identified a list of agencies in the areas we did business in that I wanted to buy.  Then I created a marketing campaign aimed right at those agencies. (Heck, they knew I understand marketing, just based on all the clients I have taken from them). I started out with a letter introducing myself and the fact that I buy agencies.   If I saw something in trade publications that I thought might impact their agency or one of their carriers, I’d clip it and mail it over with a handwritten note to the owner.

But the bait that made the fish bite was the handwritten letter (maybe written by me) and signed by an agency principal I had bought out for cash a couple years earlier.  The letter, “handwritten” on a piece of 8 ½” x 11” yellow lined paper with blue ink, went on and on about the rat race and day-to-day hassle of running an agency.   Then it talked about this guy (describing me) who had been writing to him for ages wanting to buy the agency, and I came along and put bags of money in his pocket.  For good measure the “handwritten” letter (printed commercially in my own handwriting) was crumpled, dribbled with coffee stains, and placed in a vinyl bank deposit bag (from Amazon) with a couple generous handfuls of shredded money (available from the Feds).  The money bag became the mailing envelope and had both my unique nine-digit return address and a hand-written address label on the front.   Postage was less than $3.00 and total cost of the mailer somewhere around six bucks, but it made agents reach out to me when they were ready to sell.

Whatever method you use to contact prospective acquisitions, be sure to give them direct and confidential ways to reach you.  Yes, your cell phone, private email, home phone, etc., because when they call you, it won’t be to talk about your golf game or last night’s Red Sox game, it will be business, and they do not want the whole world to know they’re calling you.   They won’t want you coming to or calling the office, or being seen with you having lunch until the deal is done and over.

So, the day comes that you’re scheduled to meet and after you get through the uncomfortable small talk, etc., most of them will ask you that God-awful question:

“What Multiple are You Currently Paying for Agencies?”

“Well, Gollllly Sargent Carter, I don’t know. . . “  Never get pinned into answering this question from a potential seller.  Instead, tell them that you “utilize a few valuation methods including gross (commission) revenue as well as an EBITDA calculation of the last three years” to come up with an offer that is affordable for you but puts the most money possible in their pocket.  “When I take all of your numbers back, I’ll start working on that.”   You dodged his question honestly, and just let him know that you’re going to want to see his books.”  I won’t get into specific multiples of sales or EBITDA because the numbers will vary drastically depending on many factors including but not limited to whether or not you’d merge this business into an existing location or run it separately;  shelter cost, like labor cost, is very expensive.  (You’ll want to calculate EBITDA both on the existing business, and also how that business will perform under your model, whether stand-alone or merged into your office).

Shelter and labor costs are super-expensive.   Don’t let your ego convince you that you need more locations than necessary.

“I’m not holding any paper.  I want cash, and I’m heading to The Villages to . . . .”

You probably could care less about what he plans to do when he rolls into God’s Waiting Room in Central Florida in his Winnebago, and I certainly don’t want the visual, but there’s a way around this one too, and I’ve done it a few times.   For “round numbers sake”, let’s say you and the seller agree on a purchase price of $100,000.00 and he wants cash on the barrelhead.  You know you could offer a retention arrangement, or owner financing with a healthy down payment, but you also know he wants cash and will take less money if he can get it.   GO TO YOUR BANK, AND GIVE THEM THE $100,000.00 IN THE FORM OF A CD OR WHATEVER YOU NEGOTIATE FOR THEM TO THEN TURN AROUND AND LOAN YOU BACK 100 CENTS ON THE DOLLAR OF THE CASH YOU GAVE THEM AS COLLATERAL.   AT THE END OF THE FINANCING PERIOD, YOU OWN THE AGENCY FREE AND CLEAR, HAVE PAID THE BANK SOME TAX-DEDUCTIBLE INTEREST AND YOU GET YOUR HUNDRED GRAND BACK FROM THE BANK!!

You Need Professional Help.  Seriously.

So, you’ve come to terms with Retiring Rick, your-soon-to-be-ex-competitor, and you want to get his signature on a contract as soon as you can, before word gets out and one of your other not-so-friendly-competitors shows up with a bigger offer.  DO NOT CALL YOUR ATTORNEY unless he or she has experience in buying and selling agencies.  There are several aspects to an agency acquisition that are very specific and these can run from carrier appointment contingencies, how unearned commissions are handled, producer contracts and ownership of books, employment issues, and more.   I consider my own attorney to be an expert at this based on the number of deals he has done for me, and the purchase contract he has developed over many years of acquiring agencies for me;  please don’t ask me for a copy of his agreement as you’ll get to see it if you retain him.

A strong CPA, with experience in this area, is also crucial and will help you decide how to allocate the asset purchase, corporate structure, etc.

A few tidbits I’ve learned . . .

  • If the seller doesn’t own the building or you will not be utilizing that location, lease the space for a period of time to keep signage in it directing clients to YOUR office. Wouldn’t it be a shame if you moved and a competitor moved in.  One time I almost bought a competitor’s office right out from under him:  you have to be very careful.
  • Employees are an issue. Do any of the staff or producers own their book?   Are there any “special deals” in place with staff.   Have any promises been made you need to be aware of?  Anyone there who plans to leave and start their own agency and they don’t have a covenant not to compete.
  • After the closing, you need to notify the clients. I’ve found the best way to do that is a letter from the former agent with a picture of him handing you the keys standing in front of the office. Maybe have the staff in this picture too.  Will he be sticking around as a consultant for awhile?
  • How do the wages in this agency compare with the wages you pay your own staff, and will you need to make adjustments?
  • Are you buying the assets or the corporation and do you understand the risks you run if you purchase the entity?

These are just a few of the things I learned over the years as I acquired a dozen agencies or books of business.   While I don’t know it all, I sure hope that my experiences can work to your advantage.

Chenango Team
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