Acquisition Question

[ladyofinsurance]

Like many before me, I've enjoyed months and months of trolling and learning various topics and an opportunity has become available that I have not found a good answer to...I'm experienced - about 17 yrs now with success in 2 ind agencies not quite 9 years each p&c and life (limited health), as well as agency management/operations - so long story short it's my turn because like everyone else...
I'm certain I can do it better

There is a BOB for sale - either as an asset purchase or I can do the agency, book, tangible assets etc... very "open" in terms of possibilities at this point. Everything I've been looking for in my next career change fits (I've had an ops plan, biz plan, strategy, and loan docs ready for 2 years until I could find exactly what I was looking for)

It has... the location I am after, book size (small), good mix of 55%pl, 45%cl, the cl is mostly preferred with some small "dad&son" contracting that one of the carriers is very successful in (but retentions could be low or high maintenance)...overall retention has stayed in low 90% range and has been steady for last 3 years with minimal growth (pending retirement and no csr's will do that to ya!)... 30% LR, no staff, carrier appointments will transfer to me easily and are competitive in the area...owner is retiring and moving out of state. No National carriers but large regionals and some state specific ones - I'm confident I can get two direct appointments with a national after closing due to past relationships if I determine I need that.

Sounds too good to be true to me... So I worry that I am MISSING some key fact in this early stage of due diligence. It has not been advertised yet so thanks to a friend-of-friend-of-a-friend situation I'm getting the opportunity ahead of the masses I believe. I'm now second guessing that I should hire an M&A company to assist me so that I'm not blinded by what fits into my little planning package so tidy.

At what point though is the M&A too much for such a small purchase? Are there ones that you can recommend that cater to the smaller acquisitions? We are some where around the 100-150k purchase price (I have not done the letter of intent yet to secure copies of all financials so EBITAD and such I don't have yet to share.) My best guess is that the initial price points were based on the 2x's revenue assumption by the seller.

I have some liquid assets (probably about 50-60k) for investment and would need to finance the rest - but with my credit score, resume, the current book performance as reported thus far I don't think that will be a concern. (pretty sure owner does not want to finance but have not out right asked as of yet). I want to hit this pretty fast since I'm ahead of the listing going on the internet but at the same time...even on a small book I need to do it wisely...

Ok - let me have it... lessons learned from anyone?

 

[b61mack]

Re: Acquisition Question from YES ANOTHER TROLL

It depends on how much he wants, and if he is willing to hold most of the paper. and let you pay it off, with ties to what stays on the books. just my thought.

 

[Josh]

Re: Acquisition Question from YES ANOTHER TROLL

FWIW- Small BOB purchases are an odd game themselves because they can be a lot more work than they're worth. I've seen them go for 1.5X renewals because no one wanted to touch them. It's tough to grow a book like that if you're just a one person shop and don't have a CSR. If you're going to do this, make sure you have enough money to hire one and focus on growing the book or you'll probably end up wishing you had taken a job at Target instead. This can be a lot of stress for not much money.

 

[djs]

Re: Acquisition Question from YES ANOTHER TROLL

Talk to the carriers to make sure you can get the appointments. Shouldn't be a problem, but ask first.

Especially on smaller books, you need a contingency for first renewal after purchase policy loss. There will be some, thats okay, but if it goes over a certain amount, then something else could be going on. Have a plan for this.

Check the average policy/client age. If there is a large influx of clients in the last 18 months, you'll have a problem. If most clients have been at the agency for over 18 months, its usually pretty solid.

Check loss ratios for the last 5 years. Make sure that the agency has been profitable. Its okay if there are some carriers that had a loss for a year here and a year there, but you want overall profitability. If not, you'll end up re-underwriting the book and will have some roll-off as that happens.

Have a transition plan. A lot of these clients are clients because of the agent and will shop when you step in. There are ways to mitigate this, such as having the owner 'participate', even if only in name only.

If a significant portion of the revenue in the agency is driven by a few key commercial clients, make sure they are on board with the transition. Have the current agent introduce you. It hurts when those larger clients walk right after you take over!!!!

Dan

 

[ladyofinsurance]

Re: Acquisition Question from YES ANOTHER TROLL

So far so good - I talked with a M&A person and while they normally represent sellers and larger acquisitions they have agreed to do the LOI, agency valuation and write up the offer for a small fee that is well worth it in my opinion. They also suggested that I don't do any 3rd party financing and draw up initial offer at basically 50% down and then 2-3yrs of payments to owner (with a retention factor) to avoid the financing at a higher rate, keep more cash on hand myself, and allow some spreading of taxable income for the seller.

Appreciate the key account mention as well - so I;ve added that to my list of questions to look for in the financials and bob reports.

Still considering the CSR hire aspect - technically there should be cash flow available for that, and I know that its foolish to assume I can do it all especially with the sales goals I have established for myself... but until I see an actual policy to premium list I'm not convinced that one will be needed especially not full time but perhaps part time.

oddly enough there are two books that appear to be within 20-30k written premium of hitting the conting./profit sharing level (loss ratios and growth both there)... does make me wonder why seller wouldn't have tried to hit them sooner with it being so close but I suppose if they knew they were about to sell there wasn't enough interest?

Have secured an accountant/tax professional to be on hand as well as the M&A gentleman and I guess it's just a waiting game now...I was never any good at waiting...

 

[AgencyEquity]

Re: Acquisition Question from YES ANOTHER TROLL

That is what is great about bringing in a consultant, they can help structure these deals, they know if it makes sense and know the best ways to finance them. However, make sure you hire an experienced consultant who has M&A experience with Insurance Agencies as our business is unlike many others and those who don't understand our business are more than likely to make errors when putting together these deals.

 

[ladyofinsurance]

Re: Acquisition Question from YES ANOTHER TROLL

That's all this group does is insurance agencies and brokerages so I'm feeling better and things are looking like they might line up nicely

 

[Proteam]

Re: Acquisition Question from YES ANOTHER TROLL

Could I ask you how much you spent for the Agency Valuation?

 

[ladyofinsurance]

Re: Acquisition Question from YES ANOTHER TROLL

One said $1750 (but this included the agency valuation and writing up the LOI and the purchase offer/contract) another said 800 just for the valuation. I would imagine that the larger the agency the more the cost would be but in this case it's an llc, no employees and limited financial reports to reveiw... basically a few years worth of expenses to review along with the carrier reports on book of business.

I also came across the PIA new offering about their new "PIA Agency Assist" Program where as a member but this might just me the DC/MD/VA group not sure... it gives each member one hour of free service per year in 7 categories (ie tax, acquisition, human resources, business planning etc...) so I also have an inquiring into that to see what the cost is after that initial hour - if you are a member of any pia or iia group they may offer a similar benefit.