Whether you’re a seasoned producer with an itch to do things your way or the next generation in a family-owned business, acquiring an insurance agency through a purchase or perpetuation could well be in your future.

Four in 10 independent agencies anticipate some form of ownership change within the next five years, according to the 2022 Agency Universe Study. One-sixth (17%) of principals are age 66 and older.

On top of that, agency growth and profitability have improved markedly in the last few years. In fact, Reagan Consulting’s most recent Growth & Profitability Survey re-corded the highest agency growth results in the survey’s 15-year history. It’s no wonder there are more agencies now than when the pandemic started. It all bodes well for budding agency owners.

Yet, buying a firm isn’t something you do every day. Aside from purchasing a home, it’s the single largest investment most agents will make. If they haven’t done their due diligence, even smart agents can do some not-so-smart things when buying a firm. They may not fully understand how agencies are valued, how to negotiate a buy-sell agreement or the best way to finance a purchase.

Here are five areas first-time buyers and existing principals need to research when eyeing an acquisition or merger:

1) Due Diligence and Pricing

Too often, prospective buyers don’t focus enough on an agency’s financials and book of business. It’s generally well worth the cost of retaining an outside expert to help you determine the value of a firm. You’ll also benefit from talking to a certified public accountant (CPA), attorney or lender that’s handled these types of transactions before. 

Ensure your go-to experts are familiar with independent agency transactions. Agencies have unique cash flow, reporting and financing challenges. Work with professionals who understand how income is generated and reported, and how agencies are priced. 

Determine all the income sources for the firm you’d like to acquire, notes Scott Freiday, senior vice president and division director of InsurBanc. “Not all agencies do a good job of managing and tracking premium and commission income,” he says. “As a buyer, you should expect to see up-to-date financial data and reports.”

At the same time, “You’ll want to kick the tires of the agency to be sure everything is in working order,” Freiday says. “If the agency has an antiquated agency management system, an old telephone system or computers, or doesn’t have a strong customer service team, it’s an indication that the firm may not be worth as much as the seller says.”

Remember, as the buyer, your job is to determine a fair price for the firm “as is”—not what the seller thinks it’s potentially worth.

Complicating the issue: Agency sale prices have soared in the last decade, fueled by private-equity (PE) firms and other competitive and economic forces. That can make it tougher for smaller players to get into the game. 

That’s why Donovan Dunn, president of Roger Keith & Sons Insurance in Brockton, Massachusetts, is selective. Dunn has bought eight nearby agencies in the last 12 years but “walked away from two or three opportunities because the price didn’t work for me,” he says. “The seller was able to get a higher multiple from a PE source. [PE firms] usually outbid me. Some of the lower-revenue agencies fly below the PE radar, so we can pay a reasonable price for those.”

2) Financing Options

There are several ways to finance a sale, Freiday says. Sometimes the seller is looking for all cash at closing. Or the seller may be willing to provide a note to the buyer—either for the full amount, or a percentage with the remainder in cash or a bank loan. Many times, it’s a combination of bank, cash and seller financing.

Often, the buyer doesn’t have the cash to buy the agency outright, so there is a seller-financed arrangement. Sometimes, a seller is seeking a staged exit, meaning they will sell part of the firm now and the rest later. Perhaps the seller isn’t ready to retire and wants to stay on for a few years. “Just be clear about the seller’s intentions, especially if they’re holding the note,” Freiday says.

Dunn says he prefers to offer the seller a 100% cash deal, which he finances via InsurBanc. “The sellers are happier to have the full amount in their pocket up front,” he says. “That has given me an advantage.”

In the case of an internal sale or partner buyout, the agency itself might hold a note. However, some bank financing may be necessary to avoid putting too much stress on the balance sheet. Often, an industry lender can provide better agency financing solutions than local banks, which may steer you to higher-priced or Small Business Administration-backed products. 

Finally, make sure your family is comfortable with the financing arrangement, Freiday stresses. “It’s a decision that will impact their lives, too,” he says. “If you’re married, your spouse may need to sign as a guarantor. Or, maybe you need to adjust your personal lifestyle to afford the agency.”

3) Post-Sale Roles of Buyer and Seller

Prior to the sale, it’s important to define the post-sale roles of the buyer and seller. For example, will the seller have an advisory role? Perhaps the seller has agreed to mentor the buyer, who is transitioning into a management role.

As the new owner of an agency, you might appreciate the counsel of an experienced owner who knows the ropes. On the other hand, you might find yourself butting heads with someone who is used to doing things their way. Set expectations and boundaries so you can maintain a healthy working relationship—if that is the arrangement you’ve decided on. 

Sometimes, Dunn offers a “retention component” to incentivize selling principals to keep large commercial accounts on the books after a deal. He doesn’t like so-called “earn-outs,” or cash payments for retaining business. 

“I put them on payroll if they are staying on,” Dunn explains. “We agree to an initial annual salary and maybe after a year or two they go to more part-time, and then they retire. It’s easier to do if they’re on payroll.” 

Dunn bought a firm where the principal wasn’t quite ready to retire, “but wanted to shunt off the responsibility of running the agency,” he recalls. “We did a management relationship. We did a revenue split, where he continued to work and manage his customer base, and I took on the duties of running the agency and the infrastructure.” 

The deal called for a review in three years, where Dunn had the right of first refusal to buy the agency. “I wound up buying, and it worked out great,” he says. 

4) Carrier Appointments

Let’s say 25% of the business in the seller’s agency is with a certain carrier, but you don’t have an appointment with that carrier. Unless the carrier is accepting new appointments, you could have a problem. Make sure all the seller’s appointments will transition to the buyer.

At the same time, you may be bringing new appointments to the agency. How you align books of business, determine which markets to pursue or let go, and position yourself for future growth are important points to think about when assessing a buying opportunity.

“Sometimes you take on carriers you don’t really need,” Dunn says. “Sometimes you get a carrier you want.” After one purchase, he had to wean off three carriers with the seller. Two were B-rated, and his firm’s bylaws don’t permit them. The other duplicated products his other carriers already provided.

5) Culture 

Ultimately, there is more than money involved in an agency merger. For example, will you change the name of the firm? If there are several locations, will you consolidate? How involved in the community will you be? Many agencies are very supportive of local civic organizations, sports teams and charities. Do you plan to continue to have that kind of presence? 

Also, be mindful of how the sale itself and your management style will impact the agency’s staff and business culture. Do you want to reorganize the firm? Hire a new producer? Plan meetings with staff early on to clearly define their roles and jobs. Open communication will be key to a smooth transition and retaining the people you need.

As you contemplate agency ownership, take the time to do your homework and talk with people who have experience evaluating firms. An agent-focused lender can help you review a firm’s cash flow and financials. It can suggest financing options you may not have considered. It also can advise you on the loan-to-value threshold you’ll need to meet and what you can realistically afford. 

There are many things to think about when buying an agency, but it’s best to do your homework and eliminate as many sticking points as possible before the deal.

Easing Into the New Normal

Other than notifying customers of the deal, agency principal Donovan Dunn avoids “rigid changes” in the first 90 to 180 days after he makes a purchase. He prefers to keep the name of the firms he’s purchased for an initial three to six-month period and then begin to co-brand with his firm. 

“It’s important to keep that prior agency name instead of just throwing my shingle up there,” Dunn says. “I think that’s when you would see a lot of disruption.” A recent example of signage: Finnerty Insurance Agency / Roger Keith & Sons.

He tries to be respectful of the acquired firm’s staff. “They can walk out my door and get a job at another agency right away, so I don’t want to lose them,” he says. “We don’t want to frustrate them. We don’t want disruption.” 

“Unless something really needs to be done, we want to see how they work,” Dunn continues. “In some cases, we’re not making any changes to their workflow. They’re learning new carriers and a new agency management system.”

“Most of my struggles have been post-purchase,” Dunn admits. “Some of it can be culture-based, certainly. There can be a challenge in getting acquired agencies’ employees on board with your policies and procedures—teaching them our new management system or acceptable limits of coverage. From an administrative standpoint we have struggled quite a bit with every agency purchase. It takes a while to integrate them right.”

In particular, he says, technology has been a challenge. Merging customer data is complex, and running two management systems simultaneously gets expensive after a while.

When Dunn initially talks with the staff of a firm he’s bought, he tells them, “We can learn as much from you guys as you hopefully can learn from us.”

And: “We always call it a ‘merger’ versus a ‘sale,’” he says.

2 Key Lessons

Independent agency owner Donovan Dunn learned two important lessons in buying other firms over the last decade.

First, “don’t bite off more than you can chew,” he says. “The worst experience we had over the last decade was when we acquired multiple agencies at once. The agency staff and I just didn’t have the bandwidth.”

 Now, he says, “We really take our time and make sure we are transitioning the agency at a reasonable pace.”

Second, “make sure to develop relationships with the acquired agencies’ key accounts,” Dunn adds. “The principals are selling because they are leaving the business. They won’t be there forever, so if you don’t have a personal connection, accounts are more apt to leave once the principal is gone.”

Jay Morris is senior associate at insurance marketing-communications firm Aartrijk.