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 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.
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.