Buying an Insurance Agency - Please Advise!

[KIA]

Hey All,

So I'm having some issues figuring out the best way to implement this potential purchase and would love your advice! This will be kind of a long read, so I've labeled the sections.

Background

I currently own an insurance agency with 4 total people. We are a mostly ethnic agency and ~80%+ of our client base is Russian speaking. Everyone who works with me speaks great English, but do have slight Russian accents (except myself) and the name of our agency is ethnic Russian. My office is very up to date technologically and can handle pretty much everything electronically. We have clients all over the state.

There is an opportunity to buy another agency about 40 minutes away from my current office. It has good carriers, great loss ratios, manageable size, etc. The clientele are typical Americans.

The current owner lives about 1.5 hours away from her own office. She's willing to work for ~6 months to help ease the transition, and after that said she would be potentially willing to work from home. She is the only employee. Her office is not really up to date aesthetically or technologically and will require some work with integration. Their website is horrendous.

Ideally I'm trying to buy this for the book of business and carriers appointments. I don't really care about keeping the location open other than retention.

Problems

I'm not sure how to best integrate/absorb or run this new agency. I can't commit my personal time more than once a week to be at the new location and manage there, and I don't *think* I can just roll it into my agency because people will be scared off by the ethnic name and accents.

I'm worried about retention issues due to the general transition, potentially closing that location, and because of the fact that I think my agency name and accents of my CSRs would scare them away if the other agency just got absorbed.

Potential Solutions

1. I'd love to just roll the agency into my own.

Have her work here while she transitions her clients to us (closer to her house too) and then if she proves to be good let her work from home, servicing the book and/or hire a CSR to take her place. I'll be able to supervise and train/integrate.

The problem with this solution, is that involves changing the name of her agency to mine, as mentioned above I think this will cause additional retention issues in addition to the normal transitory ones.

2. Keep her agency open and operational.

The issue with this (besides additional costs of running a new location) is that it's pretty far from me. I won't really be able to be around to manage it and make sure she's doing her job of easing the transition or of supervising/training new hires. Her office is also kind of..basic. I'd have to integrate the office structure/processes into my systems. I'd be able to get her in line technologically and running on my systems pretty easily, but she'd have to be trained. Not sure how much motivation she'll have if she's only working 6 months.

3. Keep her agency name/entity but have it operate out of the same location as mine.

The problem with this idea is implementation. She'd need to have a different telephone (cell/land) so only that one rang when her agency's number is dialed. Problems if she's sick or on vacation. New RMV stamps, envelopes, forms, paperwork, etc. Not just a money issue too, but also organizational. If people came to her "new office" they'll find an office with my sign on it and walk in to hear a bunch of people speaking Russian. She will probably get pretty sick of sitting in an office and hearing Russian all day and so would any English only speaking employees. I'd have to hire another to keep her company.

4. Your ideas?


Purchase info

Roughly $1.5M agency with $240k in revenues. The three primary carriers, making up about $1.2M, have historical loss ratios of ~ 55%, 40%, and 20%.

I am thinking about making two offers.

One would be significantly lower and have no retention clause. If she proves to be a diligent worker and seems to want to be active from home after her 6 month transition, I would offer her a commission based position based on her current book for her have an incentive to keep up retention.

The other would be higher, but with a 2-year, 90% retention clause. Meaning, I'm willing to take a 10% hit, but anything beyond thought will be deducted from my offer by an equal percentage.


TL;DR First time agency buyer, have my own already. Looking for ideas on the best way to integrate/absorb the agency or run a second location.


Request

Any advice whatsoever on my purchase structure, on implementation, on your experiences, anything at all you can give me I'd love to hear it. Thanks so much!

 

[hesse]

Have you verified with her carriers that they will appoint your agency if you purchase?

 

[KIA]

In process with that aspect. Two of their carriers won't be a problem for sure. The other I'll be speaking with today.

 

[insurance1822]

1.) Are the loss ratio's historically that good?

2.) Have you looked at 1-3-5 year retention? You'll want to make sure the book isn't shrinking at an increasing rate.

3.) 1.25-1.5x is the reasonable up front lump sum payment (although really..some would pay more..) If it's tied to retention that's a good thing if the agent is up for it.

4.) Beware you don't get backdoored by a large agency who will write a check with no contingencies. Do you have the ability to finance that purchase? You'll need at least 5% down, however you should be able to assign commissions as collateral if you don't have the liquid amount. If banks require the seller to hold a portion of the note (15%..) that may be less attractive then a massive agency paying cash.

5.) Why's she selling? How well do you know her?

6.) I don't have enough experience on the retention of an IA acquisition, but I think you'll lose more then 10%

 

[KIA]

1.) Are the loss ratio's historically that good?

2.) Have you looked at 1-3-5 year retention? You'll want to make sure the book isn't shrinking at an increasing rate.

3.) 1.25-1.5x is the reasonable up front lump sum payment (although really..some would pay more..) If it's tied to retention that's a good thing if the agent is up for it.

4.) Beware you don't get backdoored by a large agency who will write a check with no contingencies. Do you have the ability to finance that purchase? You'll need at least 5% down, however you should be able to assign commissions as collateral if you don't have the liquid amount. If banks require the seller to hold a portion of the note (15%..) that may be less attractive then a massive agency paying cash.

5.) Why's she selling? How well do you know her?

6.) I don't have enough experience on the retention of an IA acquisition, but I think you'll lose more then 10%

1. Yes.

2. Retention is holding steady, but growth has slowed because it's a 1-woman operation.

3. Yeah around here, for loss ratio's like that it's more along the lines of 2-3x.

4. There is already an offer from a agency closer to hers, with no contingencies. I think my offer will be close, but she'd be happier with the option to work from home.

5. I don't know her at all. She's selling because the 3 other (non-insurance) partners want to sell, and because she's currently driving 1.5hrs each way from home.

6. I'll definitely lose more than 10%. Probably close to 30% and that's if I do everything right. But I'm willing to take the 10% hit, and anything above that, deduct from the purchase price. But that's just an idea at this stage, still trying to figure out how much I really think this place is worth, especially with all the implementation issues.

Thanks for the input!

 

[insurance1822]

Who are her carriers? 3x is pretty high. But that being said (even if you over pay...) it's still an AWESOME boost to your income. I hope you can get the deal.

Important Question - How did you find out about this? If she has a 1.5MM book she's obviously not stupid, so why would she sell? Why wouldn't she just buy out her partners? You gotta think about anything else going on here. Now maybe it's nothing sinister. Maybe it's health issues? Is she part of a cluster/aggregator? If not...maybe she's losing contracts?

 

[KIA]

I wouldn't go as high as 3x. I'm thinking between 2.25x and 2.5x.

I found out through a broker. There are a handful of brokers out there that deal specifically with agents acquisitions. I have reached out before letting them know I am looking, and this opportunity came from that.

I will, of course, do the due diligence with the carriers. I already have one of them, so I have that info and just get an additional agent code. The 2nd, my offer will be contingent upon getting a contract with. And the 3rd, I'd like to roll into one of my existing carriers. As I said, the offer will be contingent on confirmation of all data.

She isn't part of a cluster or anything like that.

I'll have to find out more in depth, and see more years of tax records, but as far as I can tell, she's getting older, drivers 1.5h each way to work, and isn't making all that much since she has to split the profits 4 ways.

 

[shawnmwalker]

Hummmm,

The investors are not Ins Peeps. they thought the Profit margin would be greater. Could be a messy sell with that many cooks in the kitchen.

MA...... I would check and double check this one. 2.25-2.5 is too high. With LRs like that she should be getting bonuses. Look into that. Are there more than three carriers correct.

 

[insurance1822]

^ look who came out of the woodwork?

 

[robtmccarthy]

I wouldn't go as high as 3x. I'm thinking between 2.25x and 2.5x.

I found out through a broker. There are a handful of brokers out there that deal specifically with agents acquisitions. I have reached out before letting them know I am looking, and this opportunity came from that.

I will, of course, do the due diligence with the carriers. I already have one of them, so I have that info and just get an additional agent code. The 2nd, my offer will be contingent upon getting a contract with. And the 3rd, I'd like to roll into one of my existing carriers. As I said, the offer will be contingent on confirmation of all data.

She isn't part of a cluster or anything like that.

I'll have to find out more in depth, and see more years of tax records, but as far as I can tell, she's getting older, drivers 1.5h each way to work, and isn't making all that much since she has to split the profits 4 ways.

I am no expert but I purchased a small agency last year. You would be surprised how easy it can be to integrate another agency into you own. If the current owner is the sole employee and they are technologically challenged the office could be in shambles. *that's how the agency we bought was* We were actually able to grow the small agency and cross sell. Yes we lost a few customers but were able to win more business from the client base that far exceeded any retention loss. IF you think the numbers make sense pull the trigger and get the deal done. If you don't someone else will.