The insurance industry is undergoing rapid changes. Experts estimate that 75 percent of insurance agencies will undergo a transition of some kind in the next decade, as Baby Boomer owners eager to enjoy retirement look to sell their firms, and younger agents and brokers wanting to establish their own businesses seek acquisition opportunities.
All of these transactions will require one thing: capital.
Whether you are an aspiring buyer intent on expanding, or an agency owner looking to retire and sell a business you’ve worked hard to build, there will be ample opportunities for transition events in the coming years. Finding financing to capitalize on these opportunities is another matter. Currently, banks are reticent about funding insurance agencies with annual revenues under $5 million. That leaves aspiring buyers and sellers alike without the means to finance their ambitions.
Common Lender Traps
If banks have become more cautious about lending in general since the 2008 financial crisis, they’ve become downright hostile to the idea of financing an insurance agency. This caution stems, in part, from ignorance about the industry. Most banks have an imperfect understanding of how insurance agencies operate. They gauge the value of a business by measuring its hard assets—something most small and mid-sized agencies are lacking—and are blind to the fact that an insurance agency’s worth resides in its book of business.
The dearth of hard assets puts agency owners at risk when seeking a loan. Agencies eager for capital will sometimes make the mistake of capitulating to lenders, putting up tangible collateral in exchange for financing. Many insurance owners have pledged their property—including their homes and cars—to get a loan, unnecessarily jeopardizing their personal finances.
In other instances, a bank may demand a percentage of commissions as security on a note, or insist on convoluted revenue sharing schemes, making their financing dependent on variables that are difficult to meet. Similarly, many lenders charge high interest rates on a loan for an insurance agency transfer—and that is assuming that a buyer or seller is able to find the right lender and negotiate the loan at all. These arrangements can make it considerably less profitable to either sell or buy an agency.
Deals That Go South
And then, there are the broken deals. In many instances, a lender will step up to the plate and offer to finance a loan contingent upon a certain deal structure; for example, the buyer needs to put 10 percent down, the seller needs to put up a note for 15 percent, and the bank will finance the remaining 75 percent of the deal.
“In many instances, the buyer and seller have reached a deal, but they haven’t addressed what the lender wants to lend,” says Sam Patterson, principal of Springtree Group (STG), which specializes in M&A and transition financing for agencies with less than $5 million annual revenues. In other cases, says Patterson, “lenders or banks drag a deal out, then say no at a critical point in the process.”
Alternate Financing Opportunities
What these pitfalls should make clear is that you need to work with a lender or intermediary that understands how to determine your agency’s true value, and that has experience working in the insurance space.
Springtree Group works almost exclusively with agencies earning less than $5 million annual revenues, and has long-standing relationships with 10 different banks and private lenders to arrange for acquisition financing. As such, STG can provide unique lending tools to help agency owners structure a successful business transfer. In addition, Springtree Group can provide debt financing that is not attached to personal assets, and most loans have a low 6 percent interest rate, with no or few prepayment penalties.
“Our job is to determine the very best lender to meet a borrower’s specific needs, and then handle the negotiations between the two to get the borrower and lender properly juxtaposed on a given deal,” says Sam Patterson.
Whether you are a buyer or a seller, by partnering with a firm that understands the unique aspects of the insurance world, you can minimize the risks associated with securing a loan and get the financing you need to turn your ambitions into a reality.