Go Independent: 4 Best Practices to Safeguard Your Investment When Buying an Agency

Are you ready to go independent and start your own business? Buying an insurance agency can be a great way to establish your own business, but it's important to safeguard your investment. Follow these four best business development practices to ensure your success when buying an agency.

Create a Communication Plan to Announce the Acquisition

An effective communication plan is essential when announcing a business acquisition. It should include details such as who will be receiving the announcement and how they will receive it. The plan should also address what information will be included in the announcement, such as the purpose of the acquisition, the transition timeline, contact information for key personnel and any other pertinent details:  

• Internal Announcement: Depending on the size of the agency and the scope of the transaction, an internal announcement may be necessary to explain the transition to existing employees. This should include details about the sale, how it will affect their job security and how their roles may change with new ownership.
• Email Announcements to Existing Clients: Clients should be made aware of the sale as soon as possible. An email announcement should explain why the sale is occurring and what it means for them. It should also provide contact information for the new owners and reassure them that their policies and services will remain the same.
• Email Announcements to New Clients: In addition to existing clients, email announcements should be sent to any new clients acquired during the sale. The announcement should explain why the agency was purchased and what this means for their future business relationship.
• Public Announcement: Depending on the scope of the transaction, a public announcement may be necessary. This could involve press releases, social media campaigns, blog posts or advertising campaigns. Public announcements should be clear and concise in order to effectively convey the message of the acquisition.
• Client Follow Up: After the initial announcement is sent out, follow up with clients to ensure they received the message and understand what it means for them. This could include phone calls, emails or in-person meetings if appropriate.
• Personal Client Meetings: If appropriate, consider meeting with clients in person to explain the sale and answer any questions they may have. This will help build trust between you and your clients and ensure they understand the transition process.

Understand the Value of the Book of Business

An appraiser will typically look at key factors like earnings, profit margins, retention rates and an industry's economic outlook to determine how much an insurance agency for sale is worth. To accurately determine the cost of an insurance agency, it's important to look at both cash flow and expected earnings, as well as comparable sales in your area. 

Cash flow is important for determining what kind of revenue you'd expect this book to bring to your business. Yearly statements may contain outlier data that skews, positively or negatively, the revenue statements for the business. You may want to ask the seller for monthly breakdowns of profit and loss statements and annualize months with less volatility to get a better picture of typical cash flow. 

Valuations also account for recent industry performance and expectations using a standard multiple. Compare the price of the agency you're interested in with recent sales in your area, or similar locations. This can give you a better idea if the price accurately reflects the current state of the industry. 

Secure Financing That Keeps Cash Flows Strong

When it comes to financing an insurance agency acquisition, it's important to ensure that the deal structure does not leave you with crippling or constricting debt. Small Business Administration (SBA) loans can be a great option as they come with extended repayment terms, competitive interest rates, and flexible collateral requirements. Extended repayment terms result in lower monthly payments while the interest rate is based on the Wall Street Journal prime rate, keeping payments realistic based on current economic conditions. Furthermore, SBA loans are flexible with collateral requirements as the value of a book of business is mostly intangible. 

Work With the Seller Throughout the Insurance Agency Transition

Working with the seller to create an environment of trust and transparency is key when buying a book of business. Setting a timeline and expectations in advance can help ensure that the seller remains involved and helpful throughout the transition. The seller should continue to be available to the clients during and after the sale. They can advocate on your behalf, answer questions, and ensure that clients feel comfortable with the new leadership. The seller should also stay engaged with any existing vendors and assist with the transition of vendor relationships. 

For a successful transition, it's important to develop an action plan before, during, and after the sale of the agency. The action plan should include both you and the seller, detailing how each of you will take responsibility for different aspects of the transition. 

The seller should also be prepared to provide assistance with paperwork and compliance issues such as licensing and other legal requirements. Establishing communication protocols early in the process will ensure that all documents are completed quickly and accurately.

In conclusion, working with the seller throughout the insurance agency transition can help to maximize the return on your investment by ensuring that clients feel comfortable with the new leadership and vendor relationships are successfully transitioned. This will result in improved retention rates and a more profitable book of business.

Affordable American Insurance has been driving success for independent agencies since 2004. Our unique network provides a business model for a captive insurance agency to transition to the independent world; or a platform for an existing independent agency to increase revenue, and grow your business bigger, faster, and more efficiently. Learn more here.