National Preparedness Month: Selling Opportunities

selling opportunities

National Preparedness Month is about taking the necessary steps to prepare for natural disasters or the unforeseen emergency. When it comes to preparing for the unexpected – the first step is to check your insurance coverage. Without the proper coverage your ability to take care of family and business is going to be compromised.

It starts with strategic thinking about the locale and the region’s history. With a little planning and guided preparation, the events are manageable. Considering individual preferences, regional situations and state preparedness requirements the right insurance policy can help to rebuild after distress.

Your insurance agent has access to the resources for immediate and long-term needs – it’s one reason for meeting with an insurance agent regularly. Agents take the time to share the preparedness information, necessary coverage options for your location and what to do in the event of a catastrophe.

Whether the coverage is for a private residence or a commercial enterprise caused by a natural tragedy or a manmade misfortune, counteracting the after effects is possible.

Are You Prepared?

Too many times, clients believe they have sufficient coverage – generally, the information is based on previous conditions or standard practices. In the case of an emergency that could be life-threatening. Today’s insurance agency is aware of the vulnerabilities for both the individual and a working business.

Insurance agencies know all about the federal or local resources and can assist with processing insurance claims – easing the burden for private individuals and businesses. Your agent can assess the current insurance policy and identify the potential risks.

Across the U.S. natural weather hazards exist – the damages and financial grievances incurred can be minimized with some planning. The advent of technology has introduced new forms of hazards – regional power outage triggering business disruptions or accidents resulting in property damages interfering with daily routines.

Financial Risk Mitigation

Buying insurance before the disaster lessens the loss, hardships, and damages to personal and business property and liabilities. When’s the last time you reviewed your company or individual insurance policy? Are you aware of the policy deductibles, the waiting periods before coverage begins and the process of notification when the disaster occurs?

Is your residence or business in a noted flood zone? Did you know there’s a National Flood Insurance program? Standard coverage may not cover all-natural disasters like flood, earthquake, pollution or tornados. For most insured clients separate policies can be purchased or a rider can be added to an existing policy.

Have you thought about business loss? Reimbursement profits and expenses during business shutdown fall under business interruption coverage. Supplier failure as a result of uncontrollable mishaps can cause business losses – contingent business interruption coverage helps to replenish the loss. Did you know, endorsements (riders) to standard policies can cover the added expense of expediting delivery for machine replacement?

Decision Making and Readiness

Preparedness is about meeting the challenge of rebuilding after a disaster or emergency. The worst time to decide or even think about insurance is during the crisis. Being prepared gives you the ability to make quick and accurate decisions when time is of the essence.

As we approach National Preparedness Month, develop a business and family plan with recovery strategies to safeguard your family and protect your business. New technologies and past lessons are excellent guidelines for implementing advanced preparedness. Make an appointment to see your insurance agent. The effort will give you peace of mind in an emergency and it’s the best strategy for speeding the process of renewal.

Conduct a drill to test the emergency training procedures to make sure they work. For some, refining and relearning the roles necessary for survival will make a difference.

Conclusion

Do the research on preparedness, prevention regulations, current national standards and best practices for alleviating disaster costs and increasing your well-being during a tragedy. Your insurance agent can develop a coverage plan that’s right for you. Ask about premium discounts for added precautions. Talk with your agent about preparedness – looking out for your welfare is what they do.

Navigating the Commercial Loan Process

commercial loan process

If you think a loan is just a loan – stop. The purpose of a commercial loan is to generate revenue, make improvements (equipment) or commence new construction development. Generally, these loans have short durations, some have balloon payments and pre-penalty fees when it comes to paying off the loan early. What all loan processes share are the guidelines (underwriting), limits (pre-approval) with terms and conditions (closing).

Understand commercial loans are associated with real estate (property). Lenders base the final approval on the financial strength of the business along with the owner’s ability to make a profit. Although creditworthiness along with the value of the property are still considerations in the process – they are not always final decision factors for approving a commercial loan.

Before you begin this process, be sure to work with a broker. They will walk you through the progression to make sure you get the best terms, least fees, and doable conditions available from various lenders. Financial institutions like banks and credit unions have specialized departments to process commercial loans. Lenders could also consist of private financial investors or other capital resources.

Preview of Qualifications

Starting with the preapproval assessment, the process is looking at the financial history of the business and its assets. Lenders may prefer an entity (corporation, LLC or partnership) versus an individual ownership – it’s a legal strategy to instigate legal foreclosure avoiding any court delays.

As lenders review the business plan, they’re interested in how the funds will be used to generate future revenue. Remember financial investors follow the industry performas – they know the prevailing trends, industry competition, and the future outlooks.

During the evaluation, lenders review the borrower’s experience and the enterprise’s cash flow. A steady net income of twenty percent or higher than the enterprise’s debt is a healthy position to be in. Both help to define the risk of securing the loan and avoiding the possibilities of default.

Repayment Examination

Whether the business is young, newly partnered or, recently purchased lenders use the loan-to-debt ratio. It determines the level of risk associated with the loan. High debt ratio to equity equates to higher risk. Without an established financial record for the business, personal assets may be used as collateral, giving the lender the option to seize the assets on default.

Breaking down the enterprise’s finances reveal the ability to repay the loan. At this point moneylenders are working on the best investment loan for your enterprise by comparing the entity’s past data, recent growth trends aligned with the industry’s projections.

This information outlines the loan terms and determines the Debt Service Coverage Ratio (DSCR). DSCR measures the cash flow generated as a result of the loan to pay back the debt.

The Assessment

All lenders require some form of guarantee to repay the loan. These documents reveal how entities manage slow seasons with less revenues, industry shortfalls and operational debt. Industry ratios and liquidity assessments – cash in the bank and excess cash flow – verify the enterprise’s financial health and stability.

  1. Tax files for the past three years with all of the details and attachments (schedules).
  2. Financial statements – These documents show how the business spends its earnings.
  3. Accounts Receivables (assets) and Accounts Payable (liabilities).

Loan Propositions

Your broker can guide you through the loan provisions of prepayment penalties. Not all commercial loans impose this fee, but it does have some trade-offs. Sometimes a lower interest rate accompanies the penalty provision extending the life of the loan – this prearrangement may benefit the enterprise.

Here, the agreement maintains the loan to its maturity date, establishing a long-lasting financial relationship producing the lender’s projected profit. Principle portions of the loan can be paid early – not in full to avoid the prepayment fee. Legally some states do not allow prepayment penalties – ask questions.

Conclusion

Commercial lenders offer working capital directly related to an enterprise’s property, inventory, and equipment. The purpose is to generate revenue growth opportunities for the business. With the help of experienced brokers, the right loan can be effective.

History of Insurance: Why It Matters When You’re Considering an Acquisition

It’s difficult to imagine a time when insurance wasn’t an integral part of managing risk for both individuals and businesses alike. But insurance has evolved over the millennia from something we would barely recognize to the products of today.

To understand the current insurance industry and all of its potential, it’s important to learn its past. Where will insurance will go in the next decade, century and beyond? The clue may reside in the interesting history of insurance.

It’s Older than You Think

The first recorded insurance product was “sold” over 5000 years ago. That’s 3000 BCe, in China.

In those days transportation was less reliable. A merchant could lose a year’s work if his wares didn’t make it to their destination. He wouldn’t be able to feed his family.

The merchants developed a clever plan in which many merchants would share many transport vessels. Their good spread among the ships rather than all being on one boat.

If a ship was lost, each merchant only lost a portion of their goods. Their fellow merchants each carried a portion of the risk. And so insurance was born.

Less than 2000 years later in 1790 BCe, the Babylonians developed a similar system to combat the risk of loss during transport. Lenders offered special business loans to merchants that would be considered paid in full if the shipment didn’t arrive at its location.

This system encouraged more merchants to finance transportation, thereby allowing lenders to earn more interest, offsetting the cost of the occasional lost or damaged shipment.

In More Recent History

Let’s take a brief look at the past several centuries before moving into modernity.

1666 AD

The Great London Fire destroyed over 13000 houses and other buildings. People who’d lived and worked in the same place for generations came to the realization that they could lose everything at no fault of their own.

This new understanding led to a new industry. The first casualty insurance company came into existence.

1751 AD

The concept of insurance as a way to manage risk spread through Europe. Those traveling to the “New World” adopted the idea. Benjamin Franklin promoted the concept of insurance as a way to prevent the devastation caused by fire.

On to the 19th Century

As the Industrial Revolution in the US approached, people became concerned about new kinds of risk. As new risks entered to the forefront, insurance companies developed new products to manage that risk.

Accidental Medical

In 1850, accidents that required costly medical care became a concern. More people were being injured by new technologies.

Insurance companies around the country who had previously insured primarily against fires added accident-only medical insurance to their lines of business.

Demand for New Building Codes

Here’s a piece of notable insurance history. Around this time the Philadelphia Contributionship for the Insurance of Houses from Loss by Fire was instrumental in pushing for better building codes to reduce the chance of fires, thereby allowing agencies to lower their costs and the related premiums.

Life Insurance

Soon after, cutting-edge companies like these added life insurance to the number of risks as a person could now manage through insurance.

Life insurance took some time to catch on. Opponents saw it as an attempt to put a monetary value on human life. But soon more people recognized that it’s not putting value on a life, but the wellbeing of those who depend on them.

Car Insurance

As Henry Ford made cars more accessible to the average person, people were already well aware of the risk of injury from property damage from motor vehicles. Traveler’s introduced an accidental policy in 1864. By 1889, we already had car insurance policies somewhat recognizable today.

Growing Pains

The insurance industry was there to help offset risk in a world that many perceived to be more dangerous than days gone by. But with this came opportunities for people testing the industry’s limits, sometimes to the point of fraud.

By the early 20th century it became clear that the industry needed to be regulated to protect the consumer and the integrity of legitimate agencies.

By 1945, federal regulations were established to this end.

Health Insurance

During WWI, a wage freeze pushed employers to get creative to attract the best workers. Employer-paid health insurance emerged as a result.

Innovations and new product offering continue into the present.

Today

The Internet has transformed the insurance industry in just the past several years. The quickly emerging “gig economy” is changing how many people acquire insurance. New risks and consumer demands get identified and gain steam every day.

This leads to new opportunities for agency growth and acquisitions. identifying and pursuing the opportunities will help ensure that your own agency continues to thrive.

All About Agency Due Diligence

Agency due diligence means that you’ve taken the necessary steps to understand what you’re acquiring in an agency acquisition. Any time you purchase an existing business, you’re not only acquiring  the good:

  • Goodwill
  • Lines of Business
  • Revenues
  • Talent
  • Technology

You’re also acquiring liabilities and obligations like:

  • Debts/Overhead
  • Retirement packages
  • Outdated systems
  • Employee compensation
  • Any liens, fines or ongoing litigations

All of this and more goes into the agency valuation both on the open market and specifically to you. Agency due diligence impacts your ability to get financing, attract investors and grow as a company once the deal is done.

Having all of the information organized and available helps the sale go more smoothly.

Every agency and acquisition is different. It’s not possible to provide exhaustive lists of everything you need to do due diligence. But here’s what to consider to ensure you discovered what you need to know.

What Due Diligence Is Necessary on the Business Side?

  • Acquire data on existing subscribers/clients, lines of business, number of years with the company, commission volume and annual fees
  • Gather and consider and strategic partnerships, contracts and subscriber services specifically related to the subscribers.
  • Get meeting minutes for board meetings and committees available over past 10 years. Review these. You may be surprised how revealing they are. They’ll prepare you for a full evaluation of the agency.
  • Get the stock certificate book and stock register
  • Obtain inventory of any real estate ownership, leases, etc.

What Due Diligence Is Necessary on the Financial Side?

  • Provide and acquire all financial statements for past 3 years and year so far
  • Curate capital expenditure plans (budget, cash flow, liquidity, revenues streams, general ledger etc.)
  • Know the working capital requirements to support this business. Failing to do so could lead to a huge mistake.
  • Review and evaluate whether the fiduciary and premium accounts are balanced with assets equal to or exceeding liability
  • Review accounts receivable and collectability
  • Get a summary of all insurance contracts
  • Acquire copies of federal and state tax returns or the past 5 years and payroll over the past 3

What Are My Legal Due Diligence Obligations?

  • Acquire copies of bylaws, letters of incorporation, etc.
  • Establish current shareholders along with voting agreement, officers, directors, etc.
  • Get a list of all stockholders
  • Establish good standing in the current markets
  • Review any patents, copyrights or intellectual licenses
  • Evaluate any pending litigations, arbitrations or judgments.

What Must I Review Related to Technology Infrastructure?

It’s essential that you understand the IT systems within the company. Are they outdated and must be replaced? Can they be integrated with your own? What are the costs involved to do so?

How does this impact the value of the agency?

What Must I Consider Regarding the Insurance Products Themselves?

How will the products and lines of business complement your own? Are any in direct competition? How will you address this?

Are you confident that you either have the understanding and in-house skill to manage these different products? Or does the company being acquired have reliable knowledge and skill of value to you?

How are the products performing? What are the loss ratios? Are all of the products viable? Or will you be consolidating,

What Responsibilities Do I Have in Human Resources & Employee Benefits?

As a business leader, you know that some people within an organization are not easily replaced. The quality and morale of the people within the agency matters. You also know that there may be dead weight that needs to be let go.

Get a copy of the organizational chart along with:

  • How long they’ve been with the company
  • Expertise
  • Salary
  • Job Title
  • Status
  • Independent contracts
  • Etc

Evaluate the human resources, compensation and benefits packages that you’re inheriting with the agency.

What Do I Need to Know About Executive Compensation & Performance

As you know, the executive compensation structure can be complicated. Make sure you understand it along with that executive’s contribution to the organization. You or your top execs will be working closely with these individuals.

Know what you are working with.

When in Doubt Get Expert Assistance with Agency Due Diligence

Don’t make a multi-million dollar mistake. Do your agency due diligence. Don’t try to navigate the complexities of due diligence alone. I would be happy to learn more about your own agency and/or the one you plan to acquire. Knowledge is power. I can help you acquire and analyze what you need to know.

Together we can make the right decisions. Call to schedule a consultation.

 

When Not to Buy an Insurance Agency

So, you’re thinking about the possibilities of owning an insurance agency. Before you make the final decision gather as much information on the prospective purchase and leave nothing to chance. Take advantage of due diligence and hire a professional – it’s a lawful discovery process for collecting information about a company and its owner. Determining the worthiness of the insurance agency is vital to your future business obligations.

Generally, the first thing that catches your eye is the price – it’s affordable. If the asking price is lower than you anticipated, proceed with caution. There may be underlying conditions responsible for the low market price. You need to know how the price was established. If an independent appraiser generated the report, ask for a copy of the report, along with the supporting documents. Be sure an industry expert and a legal representative review all of the information.

Why is the Business for Sale?

It’s important to find out why the agency is for sale. If the agency is well established, the owner may be interested in retiring and looking to fund another business in a new location. There’s another option. Since most independent agencies are owner dependent business models, the owner may have passed away, and the family is looking to dissolve the organization.

Take the time to evaluate both situations, be sure there are no hidden costs or risks of acquiring outstanding legal actions or creditor debts. Starting a business is tough – starting one with a sizable deficit is a good reason not to make an offer to purchase.

Industry Branding and Reputation

All businesses go through rough phases. Surviving agencies have a clear trail of growth aligned with profit accomplished by building a solid reputation. If the agency has failed to satisfy its clientele for whatever reason – it’s reputation may be tarnished.

It’s not impossible to turn things around financially, and marketing campaigns can help to recover from a bad reputation or poor management. Although it may not be easy, promoting and introducing the new management can be effective – time-consuming and costly. Can you afford it? If not – this is not the agency to buy.

Location, Location, Location

Are there business obligations tied to a lease or property? Ask your legal advisor to check the terms and conditions. If the previous agency closed, liabilities could be expensive. Make it a point to meet the landlord and walk the premises. Be aware of the potential obligations – past due rent or property damages.

Get a survey of the real estate and the surrounding environments. A great business in the wrong neighborhood is just a recipe for disaster. Even if it passes all of the checkpoints, you need a location that attracts your customer, whether it’s located in a dense residential area or in the middle of bustling commerce. If it doesn’t match the business plan and your core values – it may not be the agency to buy.

Deal Negotiations

There’s a difference in the cost of buying an insurance agency operating from a physical structure with staff and daily obligations, compared to buying the book of business. The newly purchased agency needs to have the resources for continuing operations during and after the purchase transaction. The lending sources should be in place and the available cash on hand.

If you are working with specialized lenders, they have their own set of requirements. Take advantage of the industry contacts and shared resources for completing the transaction process in a reasonable time. Even more valuable to a buyer is their knowledge of the agency being purchased. The information allows you to make the right investment based on good business practices, making the decision to buy or not to buy with no regrets.

The good news, by working with an experienced industry professional they will help search for a qualified purchase. Keep in mind; the business analysis allows you to see beneath the surface revealing potential conflicts. The results of the findings can predict and decrypt the possibilities of future profits or loss. No matter how much you want to buy this insurance agency, if the numbers don’t fit – don’t buy it.

How to Gauge the Health of an Agency Before Buying

Internal and external economic factors contribute to the health of most organizations. Other elements playing a major role in the insurance market include commerce risks. When you consider all of the possible components affecting the well-being of an insurance agency – it still comes down to profit.

Look at the last three years’ business statements; balance sheets, income statements, cash flow statement, and the tax returns. Each of the documents tells the story of how the agency manages its business financially. They also reveal problems the company has faced over the past year.

Start with the income statements and taxes – the gross sales and the agency’s net earnings.  Was the increase in sales growth due to an increase in sales volume or higher priced products?  Were there changes in product demand volumes, did the agency expand services or product types or was it a market cycle?

Now take a step back and do your due diligence. Ask yourself, what were the variances between the past three years and what caused the shifts?  You’re looking for market comparisons, competitive challenges, and the market segment share.

Historical Performance

Past years’ performance and financial reports are the best tools for gauging the health of an insurance agency.  The information provides itemized insight of the business and helps to determine if the future projections are possible.

What’s the agency’s book value (fair market value) and how likely are you to reach your future forecasts?  The agency’s book value contains a client list, files, and prospect relationships. These are considered assets linked to generating future sales.  Keep in mind, a certain percent of these assets are not guarantees of business.

Overall the agency’s health is substantiated by the income and market performance.  Check out the office and personnel – a good working environment is essential to an organization’s health. The formula for building a solid trade reputation is comprised without the retention of agency personnel, up-to-date technology, and a developed marketing culture.

Risks Factors

Every business has some risk. How you manage the uncertainty makes the difference between prosperity and constant struggle. Cash flow is without doubt, a significant aggravate affecting the agency’s growth and net worth – in most cases, there’s a solution.

One area of risk is uncollected receivables. It will stunt the growth and generate the need for costly funding that cuts into the profit margins. Financial reports should convey indicators of turnover rates, credit policies and terms of aging receivables. If the agency finds itself short of cash – traditionally, it means the agency’s money is tied up in receivables and inventory.

Working Capital

Working capital is the amount of available cash to operate the agency and meet the day-to-day business obligations. Professionally, the term refers to current assets minus current liabilities. Sufficient capital keeps the doors open and the business flowing. How much working capital does a company need on its balance sheet?

Using this formula, a healthy company with a positive working capital can pay off its current liabilities and still have remaining current assets. A prospective agency for purchase has a constant rate at all sales levels over the past three years.

Earnings & Net Worth

The company’s ratios of gross profit to net sales provide a good comparison of the agency’s health in the market segment.  The proportion of net income to net worth gives you an idea of the return on investment. Make sure the profit calculations are reported before and after taxes. Next, look at the agency’s expenses as they are now – you already know these can change under new management.

Buying an insurance agency involves a lot of review and analysis. Take the time to look at the infrastructure and its financial health – the more diligent you are, the more likely you are to see a profit.

Conclusion         

Determining the agency’s business profitability is critical. Many times, owners place an emotional value on the business – let’s face it – you can’t bank emotion or use it for collateral.  Stick to the old fashion method of profit principles. Work with a professional on this purchase – they know the industry and the agency’s position in the current market.

What Exactly is a Merger?

merger

Mergers are business tools used for joining resources to develop a larger share of the market by offering consolidated services or expansions into new territories. Given that the insurance industry has several types of products, it’s normal for an independent agent to join forces with another agent or agency. At the end of the transaction, a single entity owns the assets, liabilities and the company obligations contained within the merger agreement.

Mergers and Acquisitions (M & A) is a term used interchangeably. They share similar activities associated with this business transaction. But, the course of a merger action has its own attributes in creating the remaining entity. Small businesses with limited resources often, face challenges linked to growing their market share. Merging with another agency is a strategy to scale up operations, share liabilities and improve profitability.

Types of Merger

Mergers can take place between Limited Liabilities Partnerships (LLC), domestic and foreign entities or individuals and Corporations. The merger style you choose depends on the plan and method of sharing resources and experiences for both parties to increase the revenues and profits.

  • Horizontal merger — two entities (competitors) selling similar products, join forces to strengthen the company’s presence in the market by eliminating a competitor. This strategy has proven to work well for combining an existing market share, offering operational efficiency to the new entity.
  • Vertical merger — two companies with different products that complement each other — unite services. The approach reduces the operational costs, diversifies the product and service implementing a product market expansion by adding another form of insurance coverage.
  • Conglomeration — two or more businesses that have nothing in common with the business market or positioned in different geographic locations. The business units come together to form a single entity. The tactic gains a competitive edge in the designated markets.

Regulations

Managing the merger besides the due diligence guidelines are industry regulations along with the enforcement of legal protocols. Meeting with an industry professional before moving forward is recommended. They will prepare and educate you on every step. The other party has just as much at stake in this merger when merging companies are the same size in customer base or operation scale. Don’t be surprised, when they engage due diligence of their own.

You need to understand the obligations of this transaction, contingent liabilities, litigation risks and the proper handling of intellectual property. Working with professional intermediaries and business consultants, saves you time, money and frustration in finding the right entity, collecting the due diligence verifications and the confidence of signing on the dotted line.

Besides your advisor team, there’s another overseer in this merger process. The U.S. Government has established statues under the Antitrust laws referred to as competition laws. Since we live in an open market economy, this law protects the consumers and ensures good business practices on fair competition.

Structuring the Deal

At the end of the merge the two business entities will form a single enterprise. The surviving company takes title to all the assets, liabilities and rights as the other entity no longer exist. Constructing the right structure requires a team to review the financial terms, legal aspects and secure the surviving entity’s claim. Sometimes, the surviving company creates a subsidiary (triangle structure) as a protection against the other entity’s liabilities.

Most mergers proceed in a similar form although some have specific conditions and objectives linked to assets or rights depending on the parties involved in the transaction.

  • One of those conditions is the change of control consent. This in one advantage for small business mergers, since they have fewer shareholders needing to agree with the business transaction.
  • If stocks are involved, under state laws, opposing stockholders of the merging entity have the power to exercise an appraisal right to receive “fair value”.

Once the structure has been defined, the new entity has legal issues to resolve as part of the due diligence process.

Conclusion

Merging two businesses is exciting, and the process can get complicated. The future of the business is riding on a smooth transaction, keeping the brand accountable and customer satisfaction intact. Negotiating a good deal results from preparation and planning with the guidance of an experienced industry advisor.

3 Things to Know When Buying an Insurance Agency

Whether you’re just starting out or looking to expand an existing insurance agency – you need to talk with an industry professional. Aside from having the desire, drive and passion, you need to understand the risks, financial obligations and the time commitment involved with this investment.

There are several benefits to buying an insurance agency that’s established. There are a few precautions, which is where due diligence plays a critical role in the transfer of ownership.

 

An experienced insurance broker will walk you through the entire process with a list of conditions and deterrents.  More important, because they are active in the industry, they know the neighborhood chatter and will give you a detailed overview of the health and the market share of the agency.

Know the Target Buy

The entity’s size, mix of insurance products and the market demographics are keys to buying the right agency. Be honest about the reason you’re looking to buy.  Share the information with the business advisor, whether it’s an infusion of capital for growth, an under-producing investment with high yield potentials or an established and steady revenue producer. The more they know the better equipped they are to find the right agency, besides all the financial aspects and legalities for choosing between a captive carrier agency or an independent agent.

If you’re experienced in the industry, your own instinct will play a critical role when measured against these considerations. Whether you thought about rolling this agency into another business unit or buying it out completely, you need to know it’s risk level. Think about buying an agency in the community where you are established. It gives you some leverage as a known source, making the transition of ownership easier for the business operations and the customer market.

Due Diligence

Due diligence for buying an insurance agency encompasses aspects of the agency’s past and current business history. It serves as a vital business function of determining the worthiness of the agency. It’s done by collecting information about an entity or an independent agent as a lawful discovery process. It contributes to developing the final terms and conditions of the transaction agreement.

Let your business advisor take the lead on the due diligence. Assessing the value of an agency is difficult, but necessary.  It starts with a review of the seller’s financials and several years of the agency’s pro forma and tax returns. They’re looking to reveal the strength and condition of internal operations and the agency’s economic health. Each of these statements tell a story about the agency you are looking to buy.

  • How they managed money (profit and loss statements)
  • Management and industry practices (disputes)
  • Earned respect in the trade

Today, the competition between face to face and online marketing continues to ramp-up. Can the agency you’re buying shift with the changing tides of technology? As a business investment—is it profitable?

Financing the Deal

Finding the right funding to fit the transaction and the future growth of the business is essential to closing this deal. It’s important for the buyer to know their own financial limitations. This information helps in choosing the form of funding that works best.

A buyer’s first thoughts are to secure a traditional commercial loan or SBA financing based on the agency’s worth and the buyer’s financial circumstances. A financial advisor can share information on special lending products with customized terms and conditions that work for the buyer and the seller. They also have knowledge of the alternative methods — some with high interest associated with high risk or asset-based loans tied to business advances (collateral).

Always consult with an industry professional who specializes in agency financing. Take advantage of their connections, industry knowledge and proven methods of putting all the pieces together for a successful transaction.

  • They know the local agencies available for sale.
  • They work with recognized funding companies.

Conclusion

This is about developing the business and protecting your interests. Getting professional guidance will help buy the right agency and determine the best financial options for the transaction. Remember, industry professionals stay up-to-date on the market changes, industry regulations and the legal exchange of disclosures as part of the process.

4 Tips for Managing Debt

managing debt

Managing debt for any business is an essential part of growing it. Creating a thriving business with sufficient cash flow that becomes an asset is critical to controlling the company’s debt. The biggest challenge for most owners is managing the debt so that it works for the business rather than against it.

As a critical component to the business, owners need to participate in the business strategically and operationally. Eager to increase the bottom-line profits, independent insurance agencies focus on growing sales. Internally good management practices impact the business with a positive cash flow for managing debt. Externally, business approaches aligned with the insurance industry guidelines help to differentiate your company from the competition.

Tip #1 Know Your Cash Flow

In today’s market tracking the cash flow reveals the financial health of the business. Knowing the daily cash flow and whether or not it’s capable of supporting the business over the next six months is a progressive course of action. The information allows you to manage the potential debt today, while planning for tomorrow’s possibilities.

There’s another aspect of management associated with debt and cash flow – it’s knowing exactly where your money is being spent.  Unseen spending is a distraction that reduces profitability. Poor planning or decisions based on “what if or maybe “will always trigger debt.

As a service company selling the insurance policy and accumulating receivables is only part of a profitable transaction. Remember, receivables are paper records, not accessible cash- yet.

  • Sales and profit margins, generate cash.
  • Management executes payables and expenses.

Tip #2 Financial Reconciliation

Not all business owners have an interest in accounting, although they should. Some look at the bank balances without considering the actual cash balance. The bank balance reports debt paid. There is no accountability of transactions waiting to be cleared. It’s important to understand, bank balances are reconciled, cash balances are managed.

  • Not all debt is negative. It’s poor debt management that prompts the trouble.
  • Distinguishing good debt from bad debt is an acquired skill.

Debt management includes making sure business plans, expenses and operational functions are working together at-all-times. It allows the owner to focus on growing the business forward with fewer distractions. Follow-up with routine cash analysis to verify sufficient daily cash balances and you prevent catastrophes from happening along the way.

Tip #3 Cash Profit Solutions

Bottom-line, business growth or profits won’t happen without cash or debt. The consistent cash infusion from receivables or financial funding fuels the daily operations, maintaining staff, inventory and taxes. After all the expenses have been deducted from the incoming revenue, what’s left is profit – setting the foundation for building a solid future.

When cash gets tight, the response is usually to cut costs or increase sales. These are viable solutions to managing debt with two consequences. Cutting costs should not affect performance related to product quality or customer service.  Second, increased profits need to offset the added business expenses linked to more sales.

  • Successful companies survive with profits and have learned the art of consciously leveraging debt.

Tip #4 Capital Resources

When it comes to business, the classic rule of thumb is to have a relationship with a financier before you need it.  The relationship should be with an industry expert – they comprehend the business environment and the industry challenges.  They also become an advocate for your business, helping you to develop business practices that work in your favor.

To grow the business, you need cash. And to get the cash, you need a clear trail of managing debt. It’s a vicious circle, but it’s a challenge that you can overcome with the right partner.

Consider securing a short-term loan or debt consolidation. Choose between revolving credit lines or equity loans with negotiable interest rates. Depending on the size of the debt, a long-term loan may work, allowing the business to amortize the expense over a specified term.

  • As a business expense, this is a tax deduction.

Conclusion

No business operates without debt. Flourishing businesses manage debt and use it as a stepping stone to build the next generation of business. Learning to manage business debt, increases the potential for future profits, ownership equity and access to working capital.

What Does Your Buying Process Look Like?

buying process

Annual revenues generated in the insurance industry are over 100 billion dollars annually. The expected growth from now to 2023 is approximately three percent each year. The key indicators confirm a healthy economy, making it a good time to expand your business through an acquisition. The possibilities are readily available – so are the risks and challenges of the buying process.

Acquiring another insurance agency makes sense, strategically. You gain access to another region or market segment with an established following and revenue. At the same time, you eliminate a competitor and expand your own brand recognition.

Sounds simple doesn’t it? The process of buying an existing business comes with financial demands. You need to plan for a seamless transition between the two entities. The plan’s purpose is to identify any potential problems before you encounter them. The benefit of having a plan is to save time, frustration and money based on solid facts for making good business decisions.

Before the buying process begins, you need to select an expert broker in mergers and acquisitions of insurance agencies. They do the initial fact-finding of identifying agencies with a strong sales history. They also look at existing assets like patents or copyrights that compliment your company’s skills and talent.

Model Profile

Getting the team assembled includes engaging a broker, legal advisor and business assessor to figure out how much you can afford to buy. Next, define a profile of the agency you want to buy. Will it be the complete package defined by size, personnel, revenue, location and services? Or are you interested in only in the book of business without the infrastructure? The more information you have helps to narrow down the choices.

The full package includes the history of the potential agency and its owner’s connection to the business, staff and clients. These are features that could affect the future growth for you. Keep in mind, when you buy an existing company you purchase its history.

Buying the book of business contains customer information and data that’s broken into business categories and market segments. In either case, there may be unknown situations carrying a tremendous liability. An expert team assures a complete assessment to uncover and disclose.

Financial Deals

You already know, buying an existing agency is going to be expensive. You need to calculate the cost and develop the financial terms that work best for you. By working with an industry financial broker all of these tasks can be accomplished.

In most acquisitions, the seller wants a percent of cash up front with payment arrangements over time plus interest. Another form of an acquisition is to acquire at least 51 percent of ownership of its paid-up share capital. Share capital is the amount of issued capital paid by the shareholders.

You’ll find most funding companies are happy to coordinate the transaction with an existing company that has a known revenue history and provides instant growth for the buyer’s company.

Calculating a Worthy Price

Remember the old saying — buyer beware- sellers will always express the business value in terms of emotional attachment. Buying a business is like buying real estate, buyers are interested in profits. Seller’s revenues are evidence of production and not a true value of the company’s market assessment or its net worth.

Do your due diligence to make sure the value of the agency’s historical performance, risk factors, tangible net worth and working capital are authenticated. Look at the agency’s profit margins, retention of staff, errors and omission reports, sales defined by market segments, financial management and its book status.

Get It in Writing

You found the existing agency, you met with the bankers, determined a true value price and negotiated the offer. It’s time to get the details in writing with all the terms and conditions. Before signing on the dotted line, be sure your business attorney has reviewed the sales agreement and that you understand the commitment you are about to purchase.

Conclusion

Acquisitions can accumulate a significant financial debt. Managed well, it can generate more revenue and profits for the company. This investment has the potential of increasing the value of the company, magnifying the returns in terms of equity.