How to Buy an Insurance Agency
So you’re thinking about buying an insurance agency, but you aren’t sure how to approach it. Whether it’s your first time entering the industry or you’ve already owned an agency, purchasing a business can feel quite daunting. After all, it’s a big decision that can change the course of your life and career.
If you’re serious about becoming an agency owner, you need to be prepared both mentally and financially. In this article, we’ll guide you through the process of acquiring an insurance agency so that you can make an informed decision.
Why should you buy an insurance agency?
When it comes to business ownership opportunities, very few think of insurance agencies. Yet, it’s one of the most profitable business acquisitions out there. if you play your cards right, an insurance agency has the potential to give you a steady income and eventually fund your retirement. If you want to accelerate your career growth, buying the right insurance agency will help you achieve just that.
Running a people-based business is not easy, but the rewards are more than worth it. When you purchase an insurance agency, you give your portfolio an immediate boost. You eliminate a competitor and acquire an experienced team of employees.
Couple that with the potential to diversify your clientele, and you’re looking at a recipe for success. There are plenty of other reasons why buying an insurance agency can benefit you, but these are just some examples to get your mind working.
How do you buy the right agency?
If you’re a first-time agency buyer, your first goal should be to obtain an insurance producer license. This will allow you to sell and negotiate insurance products. Many states allow you to acquire an insurance agency without a license, but you can only do administrative tasks and not sell any type of insurance.
Once you have obtained the license, the next step is to ask yourself a series of questions. This will help you determine if you’re financially and emotionally ready to acquire a new business.
1. Can you afford it?
You need to know your financial status before you even think of buying an insurance agency. Many first-time buyers make the mistake of going all-in on acquiring a business without considering their budget. Are you able to secure financing? Or will you agree to an owner-financing agreement and pay for the agency over time?
Having a purchase plan is an absolute must. Evaluate your options make sure you have the necessary funds to secure the purchase.
2. Can you manage the agency?
As we’ve previously mentioned, an insurance agency is a people-based business. You need skills to develop strong ties with your clients and have the dedication to provide for their insurance needs. Not only that, but you also have to manage your employees, the equipment, and the office space itself.
Purchasing an insurance agency requires a lot of resources. You need to dedicate your time, money, and energy to building a successful business. Do you have the expertise to do this? If not, then re-valuate your choices on whether you should own an agency or work for someone else.
3. Is the business profitable?
This is the most important consideration when buying an insurance agency. The last thing you want is to make a wrong decision and suffer financial repercussions for the remainder of your career. Take a look at the agency and see how it’s performing. What’s the projected profit margin and its historical retention rate?
Are you capable of sustaining the business long enough to pay off the seller? Like with most business acquisitions, there will always be risks involved. The key is to identify those risks and determine whether it’s worth buying the agency or not.
4. What are the owner’s reasons for selling the agency?
When buying an insurance agency, you need to do your due diligence and understand the seller’s reason for selling the business. Buying a failed agency is not a wise investment opportunity as it will severely hamper your growth. You want to acquire an agency that’s well-established with increasing revenues to make sure the business reaches its full potential.
Learn about the state of the agency to determine if you can attain the livelihood you envision from it. Is the seller retiring and is moving on to other ventures? Or are they looking for an exit due to the dwindling number of insureds?
Steps on acquiring an insurance agency
Now that you have a firm decision of becoming an agency owner, it’s time to start the buying process. While it may take a while to find the right seller, being patient will give you time to find the right opportunities. Follow this step-by-step process on acquiring an insurance agency.
Step 1: Research the market
When looking for insurance agencies, you want to choose one that offers great growth potential. Research the demographics of the agency’s location and familiarize yourself with the types of customers you’ll be dealing with. When you know which insurance products are in-demand, you’ll be able to position yourself ahead of the competitors.
Understanding the market and how it fluctuates will give you a clear view of whether the agency is going to give you consistent profits. If you plan on operating the agency as is, then you need to make sure you’re comfortable with the products the business is selling.
Whether it be commercial or individual, selling insurance products you have experience with can help with strengthening customer relationships.
Step 2: Know how the agency is valued
Once you’ve found the ideal agency, the next step is to determine how it is valued. There are many avenues to this, and sellers will often overvalue their business due to emotional attachment. While there are reliable valuation methods out there, the best way to determine the agency’s worth is through a merger and acquisition consultant (M&A).
M&A consultants work with both the buyer and the seller to determine the agency’s fair market value using tried-and-tested valuation techniques. When a seller hires an M&A advisor, it shows they mean serious business and are looking to attract the top buyers available.
This is good news for you as a potential buyer because you get an accurate picture of the agency’s true worth. If you want to determine the agency’s value on your own, you can do so by using the formula:
- Gross Profit Margin = Revenue — Costs/Revenue
If the profit margin goes up, it’s a good sign the agency is fairly priced. If not, then the listing price may be too high.
Step 3: Make an offer
After doing the price calculations, you’re now ready to make an offer. Remember, the goal here is to not just negotiate with the seller. You want to present yourself as a qualified buyer so the seller can take your offer seriously.
Ask intelligent questions about the insurance agency before you set your price. It helps to understand the seller’s intentions on selling the business and why you’re interested in acquiring it as this helps both parties to reach common ground.
If the owner is firm with their deal structure and negotiations aren’t taking place, then it’s time to move on. Don’t hesitate to look for other opportunities, especially if you know you’re making a fair offer for their business.
Step 4: Secure financing for the insurance agency
Once you and the seller have agreed with the sale price, the next step is to figure out how you’ll pay for the business. If you don’t plan on buying the agency in cash, you should secure financing well before the deal is closed. This way, you won’t have to scramble for last-minute searches.
If you have ties with banks and credit unions, they may be able to give you a great deal on a business loan. Oftentimes these institutions will reward good payers with low-interest rates and higher loan amounts. Make sure you’re ready for approval before closing the detail to ensure a smooth buying process.
Step 5: Have a plan after the deal is closed
You want to have a proper game plan in place after the deal is closed and the key is handed over. The transition period is where the seller will slowly integrate the buyer through the agency’s processes so they can get familiar with the operations.
Most of the time, the seller will stick around for a few weeks to a couple of months to show you the ropes. Of course, this will depend on your agreements and what your goals are for your newly acquired agency. You’ll have your hands full for the first few weeks of business like getting familiar with carriers, redirecting commissions to your bank, and other fine details.
Once the transition period is complete, you’re now ready to hit the ground running. Congratulations! You’re now a proud owner of an insurance agency. All that work has finally paid off and you’ve hit a new milestone in your career.
In summary
The process of buying an insurance agency is quite complex and there are plenty of things to consider. But once you approach it with a concrete plan, you’ll be able to acquire a business that will open up new opportunities and take your career to new heights.
Use this article as a guide to find the right insurance agency and to maximize your investment.
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