10 minute readPerhaps you've been hoping to run your own insurance agency, but you'd prefer not to have to start one from scratch. Fortunately, there’s an option: Buy an established agency.
However, there are pros and cons you should weigh carefully. Read on for a deeper dive into buying an insurance agency. Remember, it’s an investment. Like all investments, you must consider the risks and potential rewards.
Is buying an agency from a family member a sound investment?
Buying an established independent insurance agency from a family member is a common approach. An independent insurance agency is able to sell insurance from multiple companies. One consideration, then, is the current list of insurance companies the agency does business with.
There are three different ways to view the value of an insurance agency:
- First, you’re essentially purchasing an existing stream of cash flow since there are contracts and clients already in place.
- Second, if there are employees, their skills and knowledge are an important factor. But not every employee may be a good fit.
- Third, the agency’s customer list(s) and so-called “goodwill” are considered intangible assets but valuable ones.
Buying an agency from a family member can simplify the steps, since you’re already acquainted with the current owner and know their motivations for selling it. While you probably trust this person, do your own due diligence to get an accurate picture of the agency’s health. Remember, the agency may represent a person’s life work and so they usually will value it more than a buyer would.
Why buying an agency from a family member can be a good investment
- You already have a relationship with the owner and know if your personalities will mesh: When you buy an agency from a family member, you know the type of person they are, especially their values and work ethic. It’s also easier to determine their motives for selling the business.
- There’s a bigger risk when you buy from someone you haven’t met or worked with. That’s because you must assess their personality, confirm their motivation for selling and ascertain the health of the agency.
- You have an easier time accessing information to research the agency: A family member who is aware of your sincere interest will be more transparent about the insurance contracts they have and what their clients are like. Having this knowledge from the start can save you a lot of effort in your research.
- It’s easier to verify you’re buying an already-profitable agency: Choosing to buy an agency from a family member most likely means you already know their agency is profitable. Buying an established business is less risky and can make it easier to get financing.
Yet, it’s important to assess the agency’s health. It’s like when someone sells a car. Do they typically put a lot of money into repairs prior to the sale? There may be some necessary investment that has been put off for some time that will need to be made.
Understand what you’re getting into when buying an agency from a family member. Have other people or agencies approached the owner(s) to buy? Be sure to do an arm’s-length assessment of the purchase. In other words, based on the agency’s performance, would you still be interested in buying it if your family member weren’t selling it to you? Will you enjoy running an insurance agency on a day-to-day basis?
Buying an established agency: pros and cons
While there are obvious benefits to buying an insurance agency from someone you know, there are also some drawbacks. Make the right decision for you. Understand the pros and cons of buying an established agency before you choose to move forward.
Pros of buying an established independent insurance agency:
- You’re inheriting an established entity and structure: When you purchase an existing agency, you don’t have to build it from the ground up. You can save the time and effort of scouting out an office space or getting a loan. Having an experienced staff is more important than ever, given the competition for talent. Also, already having established relationships with insurance companies is a big advantage versus a startup agency.
- You’re inheriting a client list: Buying an existing agency brings the huge benefit of an established list of clients. Instead of spending months or even years building your clientele, you’ve already bought into a business with paying customers. That smooths out cash flows and means more predictable operating results.
- You can focus on doing what you love: Buying an established independent insurance agency can lower your stress level so you can focus right away on the type of work you aspire to do. And if you don’t have to build an agency, you can spend more time on updating your firm’s capabilities and improving the customer’s experience.
Cons of buying an established independent insurance agency:
- The agency may not match up to your desired target market or style: One of the greatest potential drawbacks to buying an established agency is that it already has a market or style that might not mesh with your own. What does the office look like? Where’s it located? Is it more focused on business or personal insurance? You may have to spend time changing certain practices to meet your vision.
- Clients may be aging out: If you want to buy an existing agency, understand the demographics of its clientele. Often when an agency’s owner is approaching retirement age, many of the clients are, too. This could pose a huge risk to the agency's next owner, because they could lose a large group of clients and corresponding revenue right off the bat.
- Dealing with legacy issues: Implementing change can be very challenging. It can take a lot of time and money to deal with an agency’s operations and personnel, and this may not be readily apparent when you purchase the agency. Will any family members still be involved? Will any agency workers resent the transition? Were promises made about promotions, pay and benefits?
- Is there a balanced client mix: With any investment, diversification is important so you don’t have all your eggs in one basket. Are there a few large accounts that generate most of the agency’s revenues? Does one insurance company account for a high percentage of the agency’s premium income? If the owner departs, does he or she have key relationships with large clients?
Buying an established agency certainly has numerous benefits, but it’s not without its risks.
How to buy an agency’s book of business
Looking to buy an independent agency’s existing book of business rather than the entire agency itself? It can be a lengthy and involved process. In assessing a book of business (a group of customers and their policies), you’ll want to analyze client retention and the overall rate of customer renewal. Also examine past claims activity, or loss ratio. Is it a solid book of business that turns a profit?
Another important step when buying a book of business is agreeing on the seller’s asking price. Consider if the price is worth it, given the book’s cash flow. If there are employees, are there “non-piracy” agreements in place so that when the agency is sold, employees can’t leave and take customers?
Most agency acquisitions occur through the purchase of the assets — client list, equipment, goodwill, etc. This is to avoid the liability of a customer (or former customer) bringing a lawsuit for a prior mistake.
It’s important for the buyer to know about potential liability, or errors and omissions (E&O), risk. The buyer should coordinate the agency’s E&O insurance coverage, depending on whether it’s an asset or stock acquisition. If it’s a stock sale, the purchaser should insist that the seller have what is known as E&O tail coverage to handle a liability claim against the agency that occurred prior to the sale.
If you’re the buyer, make sure your lawyer and accountant are familiar with insurance agency transactions. For example, tax rules outline how much of the sale can be deducted each year based on the amortization of non-tangible assets like goodwill.
This area is complicated, so it’s best to deal with these matters up front before agreeing to a purchase price.
Buying an independent agency vs. a captive agency
Buying an independent agency has unique advantages over a captive agency (which can offer just one insurance company’s policies). Owning an independent agency allows you to select which markets you want to match your clients to. Since you're not bound to a single insurance company, you have a greater chance of protecting your client's interests.
Buying an independent agency also gives you more freedom to grow your customer accounts. Captive agencies have a limited set of products to offer, and the owners may face more limitations on the ability to make decisions. As an independent agency owner, you have flexibility to choose how to create and grow your business.
Buying independent agencies is a growing trend
Well-managed independent agencies are very attractive investments. The ability to leverage technology and earn additional revenue through increased sales has led to a lot of merger-and-acquisition activity.
Also, some independent agents maintain their independence by joining with other independent agents through “cluster” agencies or becoming part of a franchise model. Cloud computing allows both small and large agencies to offer clients 24/7 services. For example, customers can update information or start the claims process via a website or app.
With such a high demand for independent agencies, it’s become a seller’s market. Prices are high, and the supply of strong agencies is low. Getting expert advice on the purchase or sale of an agency is critical to avoid unintended consequences. You certainly want a smooth transition for clients and staff. Fortunately, there are resources and tools to assist if you’re looking to buy an agency of your own.
What is the Big “I”?
The Big “I” is a national trade federation made up of more than 50 independent state associations and the national association. Its mission is to support independent agents and brokers through membership benefits and resources such educational tools, informative publications, networking and more. The Big “I” can help independent agencies (and those looking to acquire them) to thrive.
How can the Big “I” help with agency acquisition?
The Big “I” is an invaluable resource for those looking into agency acquisition. It provides plenty of tools to help you learn about the insurance industry and current market trends. It provides research about the options for selling and purchasing independent agencies.
Networking is another strategic benefit to becoming a Big “I” member. You get to connect with other agents, insurance company reps and insurance agency consultants. The Big “I” can help you design a blueprint that gets you where you want to go.
Since financing is an important consideration, the Big “I” has a relationship with InsurBanc. Founded by and for independent agents, InsurBanc focuses on agency financing and has experts to help you. Whatever your business problem or inquiry may be, the Big “I” has solutions.
How to sign up for a Big “I” membership in your state
Signing up for a Big “I” membership in your state is easy. Just fill out the online form to get started. Pricing varies by state, agency size and revenue. If you have questions, the Big “I” is standing by to answer them and assist you in every way possible