Situation: A majority partner wants to sell the agency; the rest of the partners don’t. What to do?
Gaylon Brown and his partners had that problem last year. When he received a marketing email from Carmel, Ind.-based Oak Street Funding he thought he might have found a solution.
Brown is CEO and managing partner at TexCap-Concord Insurance Services LP in Dallas, Texas. Oak Street Funding “is a bank for insurance agents,” according to founder and CEO Rick Dennen.
Brown had never heard of Oak Street when the received that email, but he was in a situation where TexCap’s majority partner wanted to sell.
“The remainder of us did not want to do that,” Brown said. “We wanted to perpetuate it, and it was very important to us to perpetuate it, for our employees and for ourselves.”
So Brown decided to follow his hunch. He contacted Oak Street and explained his problem: that he and his partners — there are six partners involved in the agency overall — wanted to buy the agency but they didn’t have the cash outright and had some debt from previous acquisitions.
“We had a little bit of debt,” Brown said, “and then we were looking, obviously, at debt to buy out this majority partner.”
Dennen said the situation Brown and his partners were in was exactly the kind that Oak Street was set up to handle. Focused exclusively on the insurance industry, Oak Street provides funding for agencies, brokerages, managing general agencies, managing general underwriters, reinsurance brokers and the like.
“We’ve been in business now over 10 years and have originated over $350 million in loans to agents in 47 states, in life and health, P&C, and even annuities. We’ve done loans from $10,000 to $10 million and are looking to continue to expand that box,” he said.
Going into a transaction Oak Street tries to make sure “that there’s really good alignment between the buyer and the seller and Oak Street,” Dennen said.
In TexCap’s case, the seller was amenable to the idea of the partners buying him out and the agency seemed solid, with a history of strong performance.
So, Dennen said, they entered into a “consultative type discussion” to understand the purpose of the funds, understand the organization and its ownership, the type of policies they have and how long agency had been in existence.
Finally, Dennen said, it had to be determined if there was “a realistic opportunity to put together to put together a deal that makes sense for everybody.”
TexCap-Concord was established in 2005, has grown to have 43 employees and brings in “somewhere in the neighborhood of $6 1/2 million in revenue,” Brown said.
“We’re very much a generalist agency. We have some specialties. We’ve got some pro¬gram business in the state of Texas,” Brown said. “We’re involved in large commercial and have a select commercial unit, we have a rather sizable personal lines unit, and we also are involved in benefits.”
Brown said Oak Street’s in-depth knowledge of the insurance industry was a major factor in the decision to try and structure a deal through them.
“They were really able to talk our language, and understand how an independent insurance agency works, from a cash-flow standpoint, from an operational standpoint, from an EBITDA standpoint and everything else,” Brown said.
“They were very knowledgeable, there was no problem in trying to bring them up to date on how we operated, and that was a very positive thing for us. It was just a matter of putting the data together, the vision plan that we had and where we wanted to go, and they jumped on board with us. It was very satisfying and has been a very profitable deal for both of us so far,” he said.
In the course of its investigation into TexCap, Oak Street was very thorough, Brown said. “They asked a lot of questions. We spent a lot of time together, a lot of time face-to-face together. It was also a relationship situation where I think their trust in us, and our trust in them was a real overriding point.”
In analyzing TexCap’s books, or those of any other agency’s books in the course of due diligence, Oak Street analyzes the information “on an actuarial basis, it’s pretty consistent with realistic market valuations and things like that. What we lend is not dependent on what a buyer and seller agree to pay,” Dennen said.
He described the transaction as “a mini-securitization. We’ve been able to build a piece of software that is based around that premise that we can analyze various books of business on an actuarial basis and structure a senior secured instrument around it.”
Brown approached Oak Street in August 2012 and the deal was completed in November of that year. Since then, TexCap has seen phenomenal growth, with “eight straight months of record-breaking amounts,” Brown said.
The agency has been able to exceed what is required of it from the covenants with Oak Street and plans on continuing that practice.
“It’s been a really, really good relationship. We’re seriously considering the idea of perhaps more acquisitions and things like that, and they’re very open to that,” Brown said.