You’re ready to make an insurance agency acquisition. Or to build such a business from the ground up. Which direction should you take?
Consider looking into the purchase of a Freeway Insurance franchise or another existing agency. Here’s why.
Why Buy an Existing Insurance Business?
You would likely give yourself a head start by buying an ongoing concern. That’s true as long as you buy into a successful company with strong brand recognition and acceptance, and a loyal customer base.
Advantages Over Starting Fresh
Insurance products are sold on trust, price, and brand awareness. You’re missing at least two of those points if you start a company from the ground up. No one knows you, your company name, or, likely, the products you’re selling.
Furthermore, as the new kid on the block, you probably can’t offer the best rates for coverage. So what do you have?
If you buy an existing insurance agency with a great reputation, you’ve made a name for yourself from the moment you launch your agency. In a sense, your reputation is already made. You’ve also bought an insurance book of business in the form of the policyholders you already have on day one.
You might also have a talented and motivated workforce that can show you how it’s done. Those agents already have their own book of business, which can help you maintain cash flow in the early stages of your purchase.
All of those are advantages you don’t get if you’re starting your agency business from scratch.
Current Market Opportunities
Those existing relationships that were already established by the former agency owner — and by agents who might still be associated with your new company — are very valuable. If you sell a customer a renters insurance policy when they’re 22, you might be able to offer them homeowners coverage when they’re 30. A simple auto insurance plan might lead to a six-figure life insurance policy a decade later.
The point is, your existing policyholders provide you with an excellent starting point for additional sales and commissions while you’re also seeking new customers. You won’t have this step-ahead opportunity if you launch a new business from the ground up with no customers in place.
Insurance Agency Evaluation and Valuation
What do you look for when seeking to purchase an ongoing agency? And what do you look out for? Is the agency worth its asking price? How do you know? These are questions you must be able to answer before you sign any purchase paperwork.
Understanding Agency Valuation Methods
You’ll want to take a good, long look at the agency books before committing to a purchase. One method of insurance agency valuation is by ascertaining its Earnings Before Interest, Taxes, Depreciation, and Amortization, or EBITDA.
Closely examine the insurance agency’s book of business. How healthy does it look? Do they have long-term policyholders to whom you might cross-sell and upsell? You’ll also take a look at the competitive picture. Is the agency a leader in its marketing footprint, or is it struggling to survive against giants?
Let your financial advisors crunch the numbers and help you determine whether the agency’s asking price is defensible. If not, don’t be afraid to counteroffer or walk away.
Hidden Value and Red Flags
One of the most significant “hidden values” is you. If you have the skill, motivation, and leadership abilities to boost sales and revenue dramatically, you could soon find yourself with a company that has greater value than it had when you assumed ownership.
Your territory is another important consideration, especially if you’re buying a franchise. Take a close look at your marketplace, the competition, and your prospective customer base. This can either be a major advantage — or an obstacle you’ll have to overcome.
Another red flag is the quality of your policyholders. Do you have a good base of recent sales, or does it look like the agency’s best days are behind it? Who are your super salespeople? Will they stay with the company once you assume ownership? If there will be a flurry of resignations and retirements when the company changes hands, you’ll have to figure out how to proceed.
Of course, if you’re buying a franchise, you might start as a solo employee and build your workforce as you go. In this way, you won’t have to rely on inherited employees and hope for the best.
Due Diligence Checklist
Once you’ve decided to proceed with the purchase, your due diligence timeline should take 30 to 90 days. Don’t be rushed. Make sure the seller is giving you enough time to conduct proper due diligence. Here’s what should be on your checklist.
The Financial Picture
Let your accountant and other financial advisors loose on the company books to gain a true assessment of the health of the company. Do agency finances match your expectations and what you’ve agreed to pay? Look at the previously mentioned EBITDA report. Gauge its cash flow. Know all of its debt responsibility and long-term opportunities that might generate new revenue.
Legal Considerations
Make sure your legal team is aware of any litigation, either ongoing or potentially on the horizon. Is there any conflict with the IRS or other taxing bodies? Do any activities or relationships pose issues that should be further investigated?
Operational Realities
How does the agency conduct business on a day-to-day basis? Are they technologically advanced? What’s the state of employee morale? What do you think of those workers? Find out who’s likely to remain after the sale and who might be going — either voluntarily or through your own desires.
Stakeholder Overview
In this case, the concern is for current customers and insurance product carriers. What’s the state of your customer retention? And do you have the insurance products you want to sell them? Find out the health of both your policyholder relationships and those with your brands. Both are critical to your ongoing success with the new company.
Types of Acquisition Structures
When it’s said that you’ll be buying an insurance agency, what will you actually be purchasing? It’s not as simple as it might seem. Here are three possible purchase models.
Stock Purchase
Another way to think of this type of sale is ‘lock, stock, and barrel’. You’ll be buying the entire company, including its assets and liabilities. You’ll buy out most or all of the partners and investors. You might assume the lease or even purchase the building if it’s owned by the agency.
Asset Purchase
With this type of sale, you get to pick and choose. Maybe you’ll principally pick up the name, logo, and insurance agency book of business. With this purchase model, you likely won’t assume their debt or lease. This might be easier than with many other forms of business because there’s no physical inventory to buy or store, and you can get started with a minimum of office space, equipment, and gear.
Franchise Agreement
If you think buying an existing business is a head start over starting as a business owner from scratch, purchasing a fast-growing franchise can put you way over the top. But that’s only true if the insurance franchisor has a long track record of success, a great reputation, and access to the brands and product lines your policyholders want.
Best of all, you can often start an insurance agency franchise from your kitchen table, and with not much more than a laptop, phone, website, and business cards. And if you’ve chosen the right franchisor, you’ll have top-tier training and ongoing support from a nationally known company that knows what it’s doing.
FAQs
How Much Money Do I Need to Buy an Insurance Agency?
That depends on multiple factors, including the size and location of the agency and the strength of its assets. In general, you could spend anywhere from under $100,000 to several million dollars. It could well be less if you buy a franchise of a successful insurance company, such as Freeway Insurance. A Freeway franchise might cost you a franchise fee of $25,000 (or less if you’re a military vet in good standing). You’ll also need startup and ongoing capital to keep your young business afloat until it begins to turn a profit. As a franchisee, you’ll also pay royalties to Freeway on the policies you sell.
Can I Buy an Agency Without Insurance Experience?
Yes. But you’ll have to decide if that will be your best move. Will you have talented and experienced sales and operational people to fall back on? If you become a franchisee, can you count on your franchisor to provide the in-depth training and ongoing support you’ll need to run your business? Are you a quick learner? Under the right circumstances, you might well be able to thrive even with little or no insurance experience under your belt.
How Long Does the Acquisition Process Typically Take?
It can vary greatly depending on the size and complexity of the transaction, but the process might typically take 30 to 90 days. That’s after you have your insurance agency financing lined up.
Should I Buy a Smaller Agency or Partner With a Larger One?
That depends on multiple factors, including your financing capabilities and the opportunity at hand. Can you afford to buy a larger concern? Do you have partners or investors lined up to help with the financing and the ongoing capital needs of a larger agency? Do you need a working partner who’s more experienced in the insurance industry rather than going solo? Which has the better profit margins? Consult with your advisors and consider all ramifications before making a move in either direction.
