Preparing for an Agency Acquisition

You’ve paid your dues as a broker and you’re ready to take your career to the next level by purchasing an independent insurance agency. Or maybe you’re an established agency owner and want to broaden your market reach by acquiring another brokerage in your region. Perhaps you’re a private equity investor looking to enhance your portfolio with a profitable insurance business.

Whatever your motivation, buying an insurance agency is no small undertaking. The process can be difficult and time consuming—and the purchase can end up costing more than you anticipated if you skip the necessary planning. By understanding the details involved with an agency acquisition, you can help ensure that the transaction goes smoothly, and that you pay the fair market value for the business.

The Right Fit
Before purchasing an insurance agency, you should determine whether the business aligns with your goals. Do you want to manage the day-to-day operations, or are you looking for a self-sustaining venture to add to your investment portfolio? Do you want to specialize in certain types of coverage? How important is geographical location? When you invest in the business, you are investing in the community, and your desire to connect with residents and other professionals in the area is an important consideration. Similarly, you want to understand the seller’s motivations. Is the owner retiring or making a career change, or have market conditions put the business in a slump? The answer will determine who has leverage during the negotiations.

Financial Matters
How do you plan on funding the purchase? Depending on how the deal is structured, you may need up to 25 percent of the asking price available in cash to cover the down payment and operational expenses during the ownership transfer. Will you be paying cash for the business, are you hoping for owner financing, or do you want to work with a lender to arrange a leveraged buyout? Most traditional lending institutions are averse to financing insurance agency acquisitions, because the business generally has few tangible assets and revenues are based on recurring commissions. Arranging the right source of financing ahead of time is imperative to a successful agency transfer.

Time Commitment
Buying an insurance agency is a complex process involving numerous steps, and the closing date often is 6 to 12 months from initial contact with the seller. Yet, although the process can be time-consuming, you need to be aggressive to find and pursue worthwhile buying opportunities. From getting your own financial house in order to reviewing the agency’s revenues and commission statements, assessing the business valuation, negotiating the deal and drafting a Letter of Intent, the necessary due diligence and legwork is substantial. Heading into the process with proper expectations will help you keep your cool—and your objectivity—as the deal comes together.

Professional Guidance
It’s important to have an experienced lawyer who specializes in mergers and acquisitions and understands the insurance industry to help with negotiations and draw up the purchase agreements. A general practitioner will be unfamiliar with the complexities of structuring an agency acquisition and could put the deal at risk. Working with a business broker who offers expertise in insurance agency transactions can streamline the purchase process and ensure that you don’t overlook any critical steps along the way.

Springtree Group (STG) specializes in insurance agency ownership transfers and follows a proven four-step process to facilitate a successful acquisition. From vetting qualified buyers to defining the details of the sale and conducting necessary due diligence, STG uses a hands-on approach and engages with intermediaries, accounting and legal experts to provide agency buyers with unprecedented guidance and support. STG also has long-standing relationships with multiple lenders and can develop the financials for both the buyer and the seller for mergers and acquisitions.

Visit our website to learn more about Springtree Group’s general capabilities and insurance agency financing solutions, or call us at (972) 395-8811. By leveraging our experience and expertise, you can know the true value of the insurance agency you’re buying, reduce the risk of a broken deal or post-closing surprises, and hit the ground running when the transfer is complete.