Mitigate the risks of buying another insurance agency. These four best practices could help safeguard your investment in a new book of business while maximizing your investment.
Learn how to make the most of buying a book of business to grow your insurance agency with these bank-recommended best practices:
1) Create a communication plan to announce the acquisition. The announcement of the business purchase is one of the most crucial aspects in determining the success of an acquisition.
Plan an acquisition announcement that is clear, direct and appropriate for every party involved. Transparency throughout the process can help establish trust in new ownership, mitigate fear surrounding a transition and improve the outlook for everyone involved.
Your communication plan may include the following pieces:
- Internal announcement, if applicable
- Email announcements to existing clients
- Email announcements to new clients
- Public announcement
- Client follow up
- Personal client meetings, if applicable
With a proactive approach, your announcement plan may help you retain even more value in the book of business after the sale.
2) Understand how the value of the book of business was calculated. An appraiser would look at key factors like earnings, profit margins, retention rates and an industry's economic outlook to determine how much an insurance agency for sale is worth.
Two of the characteristics we recommend looking at to determine the cost of an insurance agency are:
- Cash flow and expected earnings. Look at the cash flow of recent years to determine what kind of revenue you'd expect this book to bring to your business. Keep in mind that spending behavior in recent years may have been volatile due to pandemic-related disruptions. Yearly statements may contain outlier data that skews, positively or negatively, the revenue statements for the business. You may want to ask the seller for monthly breakdowns of profit and loss statements. Annualize months with less volatility to get a better picture of typical cash flow.
- Comparable sales in your area. Valuations often account for recent industry performance and expectations using a standard multiple. Compare the price of the agency you're interested in with recent sales in your area, or similar locations. Does the price accurately reflect the current state of the industry?
Even if you work with a third-party appraiser, you should understand the factors used to determine the listing price. Understanding the valuation process gives you greater insight into a company's true value as it pertains to your business goals.
3) Secure financing that keeps cash flows strong. A business acquisition can severely restrict your cash flow if you're not prepared with the right financing options. We advise against deal structures that leave you with crippling or constricting debt. However, you may be able to secure financing that helps you fund the purchase with loan terms that still allow for your business to grow.
We often recommend Small Business Administration (SBA) loans for insurance agency acquisitions because of:
- Extended repayment terms. This results in lower monthly payments, so there's more cash to reinvest in the business each month while you pay off the debt.
- Competitive interest rates. With interest rates in flux, the cost of borrowing runs the risk of being even more expensive. We often recommend SBA loans to eligible borrowers because the interest is based on the Wall Street Journal prime rate, keeping payments realistic based on current economic conditions.
- Flexible collateral requirements. Buying a book of business is not a purchase that includes large amounts of physical collateral. The value is mostly intangible. This can be a barrier to securing a conventional business loan since banks typically require these loans to be fully collateralized. With SBA loans, you could still be eligible to borrow large amounts—up to $5 million—even if your business model operates without many assets.
These qualities make SBA loans highly sought after for entrepreneurs that need to finance a business acquisition while improving cash flows. Buying a book of business that you could finance with a business-friendly loan like this one can help you maximize the opportunities in the initial investment.
4) Work with the seller throughout the insurance agency transition. An involved seller is one who can advocate on your behalf to their clients. It may increase the purchase price of the book of business, but seller involvement could be well worth the money spent if it means better client retention rates and an improved outlook on your management.
An involved seller will help walk clients through their transition to your leadership. They'll get the news from a trusted partner to whom they feel loyalty. The seller increases the value of their book of business by improving retention rates. And you, the buyer, maximize the potential return on your investment.
Buying an insurance agency can be a great way to grow your agency quickly and efficiently if you're making the most of the investment. These best practices should prepare you to buy a book that's worth the return on investment.
With a 100-year+ community banking history, West Town Bank & Trust works with entrepreneurs across the U.S. to grow their businesses with proven financial solutions.