Buying an Independent Insurance Agency (9)
The competition for buying an independent insurance agency is perhaps the highest among any industry for small business acquisitions. It is even more challenging if you are an agent that does not currently own an agency (i.e. not a strategic acquirer). My firm works regularly with agents across the country on the valuation, sale and acquisition of insurance agencies and we see first hand what it takes to make deals happen. After speaking with hundreds of agency buyers, I decided to compile a list of general "rules" to follow.
Know what you can afford
A client once told me "a good agent dreams big", which is a great philosophy. When it comes to buying an agency, you also need to be realistic. Generally, my rule of thumb is that a buyer needs 20-25% of any potential purchase available in cash to cover the down payment and operating capital to run the business. That means someone with $200k in cash might be able to acquire an $800k to $1M agency. In addition to the down payment, you'll need to be able to borrow 50%+ of the purchase price from a third party to meet the seller's down payment requirement. While some transactions still include a significant amount of seller financing, it has become less common with the increased buyer competition and availability of third party financing over the last decade.
Line up the money
Most acquisitions have three parties involved: the seller, the buyer and the financier. All three need to be satisfied with the terms for a deal to happen. Some times the seller is the financier, other times it may be an investor, but often a third party lender is involved. There are only a handful of lenders that finance the purchase of insurance agencies. Some are asset-based lenders (such as commercial banks), others are cash flow lenders (such as SBA lenders) and others still are commission-based lenders (such as Oak Street Funding). Each one has different underwriting and deal structure guidelines. Based on those guidelines, one lender may work for one particular deal but not for another. It is important to understand how each lender determines what they will loan, what is required of a borrower, and the structure that is permissible for the transaction. Many buyers miss great opportunities because they have to hunt down financing while others have already done so and move forward expeditiously with an offer. Additionally, many deals go awry because prospective buyers do not understand the lender requirements and unknowingly make offers that they can not complete.