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8 Areas to Evaluate Before Acquiring an Agency

As you move through the process of evaluating an acquisition opportunity, here are eight guardrails you can rely on.
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8 areas to evaluate before acquiring an agency

To evaluate a potential acquisition, the best place to start is with you and your agency. While there are many common attributes among agencies, the makeup of each one is unique. Taking the time to consider your goals and objectives can go a long way in ensuring an acquisition is a good fit and becomes a smooth transaction from start to finish. Once you are clear on what you are looking for, the process of evaluating opportunities becomes much more effective.

Start by asking yourself a) What are the agency's goals? And b) How does this acquisition help us achieve our goals?

As you move through the process of evaluating an acquisition opportunity, these are the guardrails you can reflect on. If at any time during your process you see that the core agency goals would not be advanced by a potential acquisition, it is time to pause and regroup.

An acquisition is a big undertaking for you, your team and your customers, so if it is not aligned with your overall goals, remember that not all deals are good deals and some of the best decisions we make in business are the ones we pass on.

Before getting too deep into evaluating another agency, asking these questions will help determine if an acquisition opportunity has the potential to be a fit for you and your agency:

  • What is your current growth plan? What would strengthen it?

  • Are you trying to grow into a new geographical location, niche or line of business?

  • Are you looking to add a particular carrier or gain access to certain markets?

  • Are you looking to expand your team and expertise? If so, which roles and what expertise?

  • Are you looking to gain and develop future owners of your agency?

  •  Are there specific relationships that you are trying to develop and build?

  • Are you looking to expand within your current footprint or into a new or complementary niche?

We all know that acquisitions add premium volume and revenue to your agency, but not all revenue is created equal. It is important to consider how a potential acquisition will fit into your overall plan. Once you know if a potential acquisition fits into your overall plan, consider how it aligns with you and your agency. Here are eight areas to evaluate before acquiring an agency:

1) Book of Business Alignment

What is the makeup of its book of business? What is the average size of its accounts? Are there any large accounts, specialized accounts or accounts that would be at risk in a transition due to a personal relationship with the current owner? Is the book heavy in personal lines, commercial lines, life or health? If it is heavy in personal lines, what percentage is home, auto or monoline? If it is heavy in commercial lines, what is the focus and do you have the right expertise to facilitate a seamless transition of those accounts? Are there opportunities to expand and cross-sell?

2) Customer Alignment

What type of customers does the agency attract? Gather data on their average account size, average number of policies per customer, where customers are located and how long they have been with the agency.

In addition, ask questions that help you understand its customers' expectations and behaviors, such as how often agency staff talk to their customers. What percentage of its customers come into the office for appointments or to make payments? What percentage pay online, utilize its app or website or expect to pay in cash? What percentage of customers have minimum limits or are monoline customers?

Asking questions like these will help you understand how you and your practices align with the agency, as well as the gap in expectations, the need for cultural change, and ultimately help you determine the risk that may exist in retaining the business.

3) Carrier Alignment

Carrier alignment can represent a significant opportunity, and misalignment can spell trouble. What is the carrier overlap? What will this purchase do to your volume, loss ratios, commission rates, potential contingencies and overall revenue?

Consider how each of the agencies access shared carriers. Do both agencies have direct appointments or is access through a network or aggregator? Do not assume that the shared carrier will automatically move all business to be written under the direct appointment. Depending on your volume and performance, the carrier may decide otherwise.

For differing carrier appointments, it is exciting to consider the potential impact that gaining access can have on your agency. It may open up an opportunity to cross-sell and expand your book, but do not overlook the process you need to go through to gain access to that carrier. You will need to consider the approval process that the carrier has in appointing new agencies, and do not assume that the carrier will appoint you automatically upon the purchase of an agency. This consideration oftentimes happens too late in the process, and agencies are faced with rewriting books, which is time-consuming and laborious on top of the integration challenges they already face.

4) Geographic Alignment

Our world is getting smaller, but many agencies still have a large concentration of their business near their location. It is important to consider where the agency is located and how much of its business is local. This will help you determine the need to maintain multiple locations, the potential commute time, how easy it will be for the team to work together and potential synergies if this merger occurs.

Also, consider how you will logistically manage integration in the short term and what managing multiple locations will look like in the future.

5) Performance

One of the best indicators of the future is the past. As you are assessing the potential purchase, look at its performance. This also tells you a great deal about the agency's culture.

The best place to start is with retention. This can mean many different things, so be clear on what the retention rate is for revenue, premium, policies in force and customers. What type of business is it losing? Is there a trend? Is it growing? What is its growth rate over the past three years? Where is new business coming from? What is its loss ratio? What is its revenue per employee? Does it align with yours or will the volume of work that your agency handles be a shock to its staff?

6) People and Relationships

The most valuable part of every agency is its people. They are the heart and soul of any business and the core of relationships. For many agency owners, taking care of their staff is one of the top priorities as they contemplate selling their agency. Their staff is often considered part of their family, so it's personal.

Therefore, it is important to take the time to understand the talent that exists, the desire to continue to work, tolerance for change, how the team will fit together and complement each other, and the culture and expectations that the team operates under. To understand this, you will need to ask about tenure, roles, accountability, compensation, expectations, and current leadership and management styles. Is the staff used to a hands-on manager with weekly sales meetings and metrics? Or do they work in an environment that is completely autonomous?

Gaining an understanding of the people, talent and culture is one of the most important steps in an acquisition. The current owner is a key player in any acquisition, and you will need to understand their expectations and willingness to work to transition their customers, carriers and staff, as well as their desire to continue to work. All these details greatly impact the future performance, ongoing costs and, ultimately, the price that you may offer.

7) Technology

Integration of agencies and cultures requires a good understanding of the technology processes in both organizations. The staff inside an agency that operates with paper files will have a big learning curve if they are transitioning into a completely paperless agency. Merging two agencies on the same systems creates a much smaller learning curve but, as the owner, you should still expect a learning curve related to the utilization of the technology or the processes and procedures that vary between the organizations. Taking an inventory of all the technology that is utilized, as well as any processes and procedures that are in place, is a healthy exercise in considering the fit between the agencies. 

8) Contracts and Agreements

Look at all contracts that are in place and how they may impact the purchase. What do the corporate documents state for both agencies, and what is the process they must go through to sell or buy an agency? Does the agency have network, cluster or aggregator relationships that could impact its sale? What is the approval process, and is continued participation in that group a requirement?

Does that fit with your goals, and do you have any agreements or relationships that will prevent you from joining or that may cause additional fees due to your carrier relationships? Does the agency have referral partners that may be impacted by a transition of ownership and change future new business leads and performance expectations? Do vendor commitments need to be satisfied?

There is a lot to consider when you are contemplating purchasing an agency or even a book of business, and you should expect several other considerations to arise as you work through the process. Take your time, ask the right questions and use your goals as the guide to determine what opportunities are the best fit for you and your agency.

If you stay focused on what your goals are and how this opportunity will help you achieve those goals, it will keep the process centered and focused. It is easy to fall in love with the idea of an acquisition but the more you know, the more likely you will make a strong decision that leads to a smooth transition.

Carey Wallace is founder of Agency Focus, an independent insurance agency consulting company.

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Wednesday, November 30, 2022
Perpetuation & Valuation