Whether you’re thinking about entering the insurance industry or you’re an agency owner, purchasing existing books of business is one of the fastest ways to grow and increase your competitive advantage.
But, like any major in decision in life, you probably have questions. Are you ready? Can you cover the upfront costs? What are the advantages and disadvantages of buying another agency?
We’ll walk you through the process and help you decide if it’s the right decision for you.
Benefits of Buying an Insurance Agency
As we mentioned, one of the main benefits of purchasing an insurance agency is that it gives your book of business an immediate boost.
But purchasing an agency offers more benefits than just growing your portfolio.
Here are a few reasons to consider buying an insurance agency:
- Remove a competitor
- Add insurance products that you don’t already sell
- Acquire experienced employees
- Grow and diversify your clientele
- Scale up your business
Any of these reasons could work as motivation to add another business to your own agency.
Pro tip: When considering whether or not to purchase an insurance agency, keep one or two clear goals in mind. Write them down, and come up with some specific ways you can measure them. Believe it or not, those two simple steps can play a huge role in helping you get to where you want to be.
Deciding if You’re Ready to Buy
If you’re just starting out, you may need to first get an insurance producer license. You’ll need a license if you plan to sell insurance products.
However, most states will let you acquire an agency without a producer license if you plan only to handle administrative work.
Once you have your license, or if you already have an existing agency, it’s time to figure out if you can afford another agency and handle a new book of business.
Here are some questions to ask yourself to see if you’re ready.
- Can I afford it?
- Can I manage more business/additional employees?
- Will the carriers allow the acquisition?
- Do I have a plan to integrate the new business into my agency?
The cost of an existing business varies widely depending on size, agency sales, and cash flow. You can spend as low as $50,000 or more than $1 million.
However, you’ll find there are plenty of options available in the $50,000 to $300,000 range.
Pro tip: You don’t need to have the total amount to buy an agency, but you should budget for a 25 to 30 percent down payment.
Alternatively, it costs between $5,000 to $50,000 to start a new agency from scratch—the main difference being you’ll have to bring on new accounts one by one.
How to Buy an Established Agency
Once you’ve decided buying an insurance agency is right for you, it’s time to research. While this part isn’t as fun as actually meeting your new insureds or setting up shop, doing your due diligence will ultimately help you break even faster.
1. Understand the Requirements
Acquiring an insurance agency is more manageable than acquiring an insurance company in terms of regulatory requirements.
An insurance company, like State Farm or Geico, writes policies and pays claims. In other words, they shoulder all the risk from their policies.
Nevertheless, there are states that require you to notify them of an acquisition, and some actually have the authority to approve, or not approve, an agency acquisition.
Make sure you review your state’s specific regulations where you’re making the purchase.
2. Research the Market and Type of Insurance
When making an acquisition, choose a business that will continue to grow after your purchase.
Research the local market environment and look for products or customer types that are in demand. Do you live somewhere with a lot of young families? Perhaps an agency selling life insurance is the best route to go for you. Or do you live in a more urban area with a lot of construction? A firm that specializes in workers’ comp could be a strong contender.
Not sure? We’ll break it down for you:
You can sell insurance to individuals, such as auto, home and health insurance—some of the most profitable products in the industry.
Alternatively, you can sell business insurance (or commercial insurance) products, such as workers’ compensation insurance, general liability, and cyber liability insurance.
Pro tip: If you currently have an agency, it’s best to stick with the same type of insurance—individual or commercial—since you already have experience and connections to build on. You can, however, expand your product range or grow the number of insureds you work with by selling to new areas.
3. Find an Agency
Once you’ve narrowed down the type of agency you want to buy, it’s time to research businesses for sale.
You can also get in touch with your local community and see if any agents are planning to retire soon.
4. Perform Due Diligence
Once you find an agency that fits your initial criteria, it’s time to take a look under the hood.
First, figure out the seller’s motivation.
Are they retiring? Leaving the area? Or is the business just not profitable?
Look through the financials to make sure the business is healthy and growing.
Next, check that the agency has all licenses required by the state for an insurance agency or brokerage.
The agency should also carry the appropriate lines based on its licenses. In other words, an agency licensed for health and life insurance cannot sell property/casualty products without additional authorization.
Finally, before doing a valuation, check to see that the insurance carriers will allow the acquisition.
Ask both your carrier and theirs, and get a confirmation in writing before you exchange any money.
Pro tip: Besides financials, it’s worthwhile to see if your target agency has a similar company culture, especially if you’re looking to bring on new staff members.
5. Decide on a Purchase Price
Figuring out the market value of your acquisition is where some of the hard work happens, and there’s no one right way to decide on a target price.
Most sellers price their agencies as a multiple of total revenue.
For example, let’s say an agency brings in $200,000 of annual revenue, and the seller lists the business for $400,000. The asking price has a multiple of two, based on revenue.
Revenue multipliers vary based on your office location. Researching other selling prices in your area will give you an estimate of the average multiplier used in your area.
Not only should you look at the pricing multiplier, but also take a look at how new business will affect your profitability.
Here’s how to do that:
- Calculate your current profit margin
- Add up new revenue
- Add up estimates for additional costs (including employee salaries, office space, and marketing)
- Insert all of these new calculations into the equation
- Calculate new (i.e. post-acquisition) profit margin estimate
Pro tip: The formula for calculating profit margin is:
Gross Profit Margin = Revenue — Costs/Revenue
Multiple by 100 to get a percentage.
If your profit margin increases, that’s a sign the agency is priced well for you. However, if your new profit margin decreases or stays the same, then the listing price might be too high.
6. Make an Offer
Once you’ve done your price calculations, now comes the fun part—contact the seller and make an offer. There may be some negotiation involved, so we recommend figuring out your ideal price range beforehand (remember, start on the lower end!).
If you and the seller agree, congratulations! You’re ready to buy an insurance agency.
Don’t forget to revisit those state requirements and complete all the steps needed to transfer ownership to you.
Tips for Successfully Acquiring an Agency
Buying an insurance agency is an exciting step, and it’s an excellent way to enhance your portfolio size.
Here are some tips to keep in mind:
- Buy for the right reasons. Make sure you begin the process with clear business goals (and ways to measure them). Before you look for target agencies, ask yourself whether there are better (and cheaper) strategies you can use to accomplish those goals.
- Buy from retired—not failed—agents. When bringing on a new agency’s book of business, you want it to be healthy and give you room to grow. Steer clear of insurance agency owners selling a business with declining revenues or a shrinking number of insureds.
- Research your new insureds. If you’re diversifying your clientele, make sure you understand the needs of your new insureds. You should be prepared to make changes to your sales process if necessary.
- Create a business plan for the integration. For acquisitions that involve bringing on new employees, take time to prepare a thoughtful integration plan. The smoother the transition process, the better your new team will perform.
And finally, stay realistic. You may not have a 100 percent customer retention rate when acquiring an independent insurance agency, but it’s still one of the fastest ways to grow. As long as your new accounts (and employees) still feel taken care of, you’ll be successful.