We will often get several calls each week from agents, other insurance professionals or entrepreneurs from other disciplines who have figured out that the power of renewals can earn them exponentially more money over time by buying and consolidating insurance agencies. These investors achieve or have access to sufficient capital to afford the purchase of one or more agencies.
They either don’t know or don’t have access to sufficient agency owners to make offers or realize that they don’t have the expertise to properly price an asset that may put several million dollars at risk. So, they call a business broker (or an insurance agency consultant) who supposedly knows the ins and outs of agency acquisition.
Here are a few leading questions that will tell you whether or not you FIT the mold of an agency buyer.
Question 1 (and the most important question to pose to yourself) is what makes you different enough that an agent who has ten or twenty offers available to him will find your opportunity most attractive to him?
If you can’t answer this principal question, please don’t start this process – and don’t call your friendly agency consultant to help you figure out if you have this principal ingredient for a successful acquisition. By the way, if your answer involves your “shining personality” that can win over an agent who doesn’t already know you – or if you’re answer involves offering enough financial incentive to sway an owner’s decision, you are either fooling yourself or you’re one of those wonderful types of buyer referred to by the infamous P.T. Barnum (“There’s one born every minute”) who cause the professionals in the business to shake our heads when they buy a business for far more than its cash flow value.
Some of us introduce ourselves to these buyers after the sale because we know that the money will run out and they will need our services within a relatively short period of time (probably to sell the agency to satisfy the debt that they can’t manage if an economic downturn of any magnitude occurs).
Answer 1 A – Buy a business only because you are already an expert in the lines of business in which they excel. If you’ve been an agent specializing in personal lines, don’t be tempted to buy your way into commercial lines simply because it becomes available. That would be like a successful car salesman buying an auto service shop. Yes, you know cars, but not the ins-and-outs of running a successful repair shop. And, having knowledgeable staff only opens you up to being held hostage when your staff knows more about the business than the new owners.
This leaves the door open for someone who has been in an agency for decades to purchase the agency for whom they work (or another agency that does similar types of business). It is also the access for agents to acquire other, similar, agencies to take advantage of economies of scale, for human assets that may be difficult to get otherwise and for the use of your existing specialty target markets or to get access to the target agency’s target markets and programs.
Answer 1 B – If you know the insurance business from another perspective, don’t pursue an agency acquisition without a partner who IS an insurance agency specialist. This means that company underwriters, marketers, regional managers, claims people and, especially, executives who retire at a young age with plenty of cash expecting to buy a few agencies who will become their personal “cash cows”. Remember, cash cows are often led to slaughter… The best interest of insurance company executives is to partner with a smart progressive agent who will use their capital to buy human assets to increase sales and/or use the company-knowledgeable partners to create new program or market opportunities.
Question 2: If you don’t have ten to twenty years or more of experience within insurance agencies and dealing with risk assessment for clients and risk placement with insurance underwriters, what gives you the background to buy an insurance agency any more than purchasing a power plant to generate and sell electric or gas power to a community, because you have used the output of that power company for many years?
I won’t count the number of insurance company executives who believe that their knowledge of rate setting as actuaries or dealings with the political and social networking with the Company’s agents gives them sufficient knowledge of the retail side of the insurance industry to buy one or more agencies. Many see other industry related financial managers involved in building insurance agency networks with the intention of building a large valued book of business and eventually selling it. This can actually work under unique circumstances:
- You can’t care about future of the clients of or the employees of the agencies that you purchase beyond retaining them long enough to reflect the revenue growth you need to evolve financial pro formas sufficient to attract a buyer within five to ten years. The economies of scale that permit you to attract the attention of sellers (usually with offers far more attractive than those rendered by internal or external buyers who would operate the agency as a source of their primary income for the rest of their careers) will require consolidation and use of local, regional or international service providers who can provide substantially beneficial cash flow opportunities.
- You can’t enjoy the beneficial financial benefits of acquisition for consolidation unless you feed the organization with additional acquisitions at least annually. You will need full time Operations and Financial Managers to control the budget and meet cash flow projections and a steady flow of agencies to acquire. Otherwise, the deterioration of books of business due to the change in service levels may overcome the growth of revenues being acquired.
The best acquisitions are made by existing agencies seeking to expand their geographic footprint and spread their risk to protect their carriers (and contingencies), acquire talented human resources who will eventually become their successors and extend their specialty target markets. These are the best reasons to acquire agencies. Partners can be acquired for skills, capital, customer or carrier relationships that will bring new talent to agencies with skills that will further increase the value of the organizations.
The worst reasons to acquire is to sponsor value growth. Unless you have the ingredients to sustain the growth through organic sales or a steady stream of further acquisitions, any change in the economy will change your projections radically. Where one form of acquisition is healthy and synergistic, the other is more like pure gambling with great returns if the gamble pays off but with risks beyond normal tolerance for people who are insurance knowledgeable but not sufficiently wealthy to tolerate losses on those risks.
Call Al Diamond, President, Agency Consulting Group, Inc. at 856 779 2430 (al@agencyconsulting.com) to discuss your strategy for acquisition and growth.