Should You Buy an Insurance Agency?

Last time I gave you eight reasons to consider purchasing another insurance agency or book of business.  In this post I’d like to discuss a few things to make sure you consider before embarking on a purchase. 

1. Can you afford it?  While most agencies are purchased with some sort of owner financing, a down payment of 25-50% is usually required.  Have you saved up the necessary cash?  If you haven’t, be very careful about borrowing the down payment!  Too much leverage is usually the thing that kills an acquisition.  It can also kill the acquirer.  Be careful!
    
2. Can you manage it?  This is a question to take very seriously.  When you acquire a large chunk of business you need to be able to service it well enough to keep it.  That means additional employees, office space, equipment and complexity.  Do you have the expertise on board to handle that?  If not it can bankrupt you!
    
3. Will the carriers allow it?  Don’t just assume the insurance companies (yours or theirs) will go along.  Check the loss ratios carefully.  ASK the insurance companies before pulling the trigger.  Get it in writing or you may be very busy moving business!
    
4. Do you have a plan for integrating it into your agency?  Have you thought about what you’ll tell customers?  What changes to policies will be necessary to fit into your agency minimums, carriers, etc.?  Will the new employees, and the culture they are used to, mesh with yours?  Do you share a common automation system or will you have to adapt one? 
    
5. Can you make money on it?  This is a very big question.  What is the historical retention rate and what is yours?  Can you keep the business on the books long enough to pay the seller off?  How much business will be left, given the retention rate you can expect, when it’s paid for?  Is that enough for the risk?
    
6. Related to #5, is this the best investment you can make with your free cash in terms of overall rate of return or would you be better off buying your customers one at a time with marketing and sales (see my blog posts on What’s A Customer Worth for more information)? 

Obviously, this is not a comprehensive list of issues to consider.  But they are important.  And they serve to make the point that you should enter into any purchase transaction very carefully and with a great deal of thought.  Next time we’ll consider some ways to structure a deal that can work for small, growing agencies.