The Ins and Outs of Buying and Selling Insurance Agencies

By | October 30, 2013

Buyer demand for available independent agencies is greater than the supply and it’s been that way for years, according to Rick Bondurant, director of management services for the Independent Insurance Agents of Texas.

“Even the smallest book has a wide range of agency interest,” Bondurant said during a presentation on buying and selling agencies at IIAT’s 2013 annual convention. “There’s certainly strong demand for agencies of any size. If you’re selling that’s certainly good news. If you’re buying it’s a little tougher.”

Bondurant, who directs the agency Matchmaker program for the IIAT, said among other things, potential buyers are looking for increased volume and revenue, economies of scale, geographic and product diversification, access to carriers or the ability to bring higher volume to their carriers, and to raise the level of talent and expertise in their existing agencies.

Other buyers are simply trying to get into the agency business.

“They’re in the financial services business in some other capacity. Some of them are carriers, maybe some of your carriers — they maybe want to get in the agency business,” Bondurant said.

Sellers, on the other hand, may be “ready to cash in their chips … get out the business, retire,” Bondurant said.

Or, they may simply be looking for higher and better use of their talent. Perhaps they started out as a producer, wound up in management and want to go back to selling.

Other agency owners may feel the need to diversify their personal wealth and not have all their eggs tied up in one agency basket, he said.

Transaction Methods

Most internal agency deals are done through a leveraged buyout or an owner-financed buyout, Bondurant said.

In a leveraged buyout, the employees or producers “go out and borrow the money somewhere and buy the agency,” he said. “It’s a one-time acquisition. They go into debt to buy the agency.”

An owner financed transaction can be structured a number of ways, Bondurant said, but basically the owner takes the risk of being paid back in order to perpetuate. In some cases producers might give up “some of their compensation now in order to acquire the agency over time.”

External transactions, where an entity outside of the agency makes the acquisition, usually take the form of a roll up, going concern or a book buy, Bondurant said.

A “roll up is where the larger buyer buys the agency and then either absorbs the agency into their existing operations or … they eliminate a lot of duplications they don’t need,” he said.

In a going concern buy, the external buyer takes the “operation as it is with everybody in place.”

In deals that involve smaller agencies, book buys are common — “where the acquirer is just buying the book of business. They’re not buying people; they’re not buying location or any kind of infrastructure. They’re just buying the book of business,” Bondurant said.

Valuation

There are many ways to determine the value of agency, but historical performance, projected future earnings, risk factors, tangible net worth and working capital are going to be factors in that determination.

The selling agency’s profit margin, the economic environment, quality and retention of agency personnel, technology, errors and omissions control, financial management, the status of the book of business and the agency’s sales and marketing culture also come into play when a potential buyer is evaluating a deal, Bondurant said.

There’s one area where buyers and sellers are bound to disagree, he said. “Sellers always want to express the value of their agency in terms of multiples of revenue. Buyers never want to buy multiples of revenue. … Buyers aren’t buying revenue, they’re buying profit.”

And multiple potential buyers may not view an agency in the same way.

“You can have two different buyers that approach the agency that come up with two different values,” Bondurant said.

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