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October 28, 2022   /   K. Lee Graham

These 5 Bank-Endorsed Best Practices Can Help Safeguard Your Investment in A New Book of Business.

Buying an insurance agency can be a great way to accelerate your growth. However, it’s a purchase that is inherently risky. Learn how to make the most of buying a book of business to grow your insurance agency with these bank-recommended best practices.

1.      Research Your Potential Customer

Buying an insurance agency is only worth the investment if you retain most of the new agency’s clients. Retention rates are heavily dependent on client experience, an aspect that should be a top priority during your insurance agency acquisition.

Lay the groundwork for a smooth transition by getting to know your client outside of just their demographic stats. What is the value proposition that brought them to this agency? Are there personal relationships between clients and the owner that you need to be particularly respectful of? The better you understand your clients, the better your chances of delivering a client experience that exceeds their expectations. Happy customers lead to capturing the highest potential gains from the purchase.

Additionally, research the customer base to determine how they fit into your long-term growth strategies. Do you have a highly scalable business model that is ready to roll out? You may want to buy an insurance agency book of business with a similar customer profile to your existing customer. Is your goal to diversify your agency’s customer demographics? Check that the insurance agency book you plan to buy will complement your current base. Be strategic when buying a book of business for customer acquisition to maximize your investment.

2.      Create a Communication Plan to Announce the Acquisition

The announcement of the business purchase is one of the most crucial aspects in determining the success of an acquisition. A comprehensive communication plan can help you make the all-important first impression with your new clients and colleagues.

Plan an acquisition announcement that is clear, direct, and appropriate for every party involved. The way you discuss the transition of the business with existing employees needs to be different than how you share the news with clients. The key to all your communication surrounding the acquisition is to keep it direct and frequent. Transparency throughout the process can help establish trust in new ownership, mitigate fear surrounding a transition, and improve the outlook for everyone involved.

Your communication plan may include the following pieces:

  • Internal Announcement (if applicable)
  • Email Announcement to Existing Clients
  • Email Announcement to New Clients
  • Public Announcement
  • Client Follow Up
  • Personal Client Meetings (if applicable)

With a proactive approach, your announcement plan may help you retain even more value in the book of business after the sale.  Do everything in your power to ensure the announcement is rolled out in a way that builds trust in your growing business.

3.      Understand How the Book of Business Cost was Calculated

How do you know a fair price for a book of business? An appraiser would 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.

Two of the big characteristics we recommend looking at to determine the cost of an insurance agency are:

  • Cash Flow and Expected Earnings

Look at the cash flow of recent years to determine what kind of revenue you’d expect this book to bring to your business. Keep in mind that spending behavior in recent years may have been volatile due to pandemic related disruptions. 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/loss statements to annualize months with data that displays less volatility to get a better picture of typical cash flow.

  • Comparable Sales in Your Area.

Valuations often 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. Does the price accurately reflect the current state of the industry?

Understanding the valuation process gives you greater insight into this company’s true value as it pertains to your business goals. Even if you work with a third-party appraiser, you should understand the factors used to determine the listing price. Ask for specific cost breakdowns when necessary to better analyze if the price is right for your investment goals.

4.      Secure Financing That Keeps Cash Flows Strong

A business acquisition can severely restrict your cash flow if you’re not prepared with the right financing options. We advise against deal structures that leave you with crippling or constricting debt. However, you may be able to secure financing that helps you fund the purchase with loan terms that still allow for your business to grow.

We often recommend SBA loans for insurance agency acquisitions because of the following terms:

  • Extended Repayment Terms

Extended repayment terms spread out payments over a longer period. This results in lower monthly payments, so there’s more cash to reinvest in the business each month while you pay off the debt.

  • Competitive Interest Rates

With interest rates in flux, the cost of borrowing runs the risk of being even more expensive. We often recommend SBA loans to eligible borrowers because the interest is based on WSJ prime, keeping payments realistic based on current economic conditions.

  • Flexible Collateral Requirements

Buying a book of business is not a purchase that includes large amounts of physical collateral. The value is mostly intangible. This can be a barrier to securing a conventional business loan since banks typically require these loans to be fully collateralized.  With SBA loans, you could still be eligible to borrow large amounts (up to $5 million) even if your business model operates without many assets.

These qualities make SBA loans highly sought after for entrepreneurs that need to finance a business acquisition while improving cash flows. Buying a book of business that you could finance with a business-friendly loan like this one can help you maximize the opportunities in the initial investment.

Buying a book of business that you could finance with a business-friendly loan can help you maximize the opportunities in the initial investment.

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5.      Work With the Seller Throughout the Insurance Agency Transition

An involved seller transition puts the seller in a position to advocate on your behalf to their clients. It may increase the purchase price of the book of business, but seller involvement could be well worth the money spent if it means better client retention rates and an improved outlook on your management.

You’ll typically meet with the seller before the acquisition to discuss your company culture, your management style, and your philosophy on client experience. The seller probably has a clear understanding of why you’ll be a good fit for their book of business. Their clients do not.

An involved seller will help walk clients through their transition to your leadership. They’ll get the news from a trusted partner to whom they feel loyalty. The seller increases the value of their book of business by improving retention rates. And you, the buyer, maximize the potential return on your investment.

Buying an insurance agency can be a great way to grow your agency quickly and efficiently if you’re making the most of the investment. These best practices should set you on the path to buying a book that’s worth the return on investment.

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About West Town Bank & Trust: A financing partner should reciprocate the level of trust you’ve built around your practice. With a 100-year+ community banking history, West Town Bank & Trust works with entrepreneurs across the US to grow their businesses with proven financial solutions.

Whether you’re interested in purchasing another book of business, facilitating growth without restricting cash flow, or getting a better interest rate on your existing loan, our team of industry experts is here to help you seize the opportunity. Learn more about solutions for insurance agencies from our Director of Insurance Lending.