There are many benefits to SBA loans, and lots of insurance agencies are finding that this is a particularly good time to apply for them. Unfortunately there are some downsides to an SBA loan that borrowers can encounter. One downside we’re hearing about lately is the length of time that SBA loans can take to be funded.
If you’re considering an insurance agency acquisition as part of your business growth strategy, it’s important that you put time into understanding the agency (or book) that you’re considering purchasing. Going through a thorough due diligence process - examining detailed information about the agency operations and finances - will ensure that you understand what you’d be purchasing and whether it would be a good fit for your existing agency.
If you started your agency from scratch, an agency acquisition may be new territory to you. Here are the steps you should expect to go through in doing due diligence on an agency you’re interested in possibly acquiring.
When you’ve learned of an agency that appears to be a good strategic fit for your existing agency, you should utilize all of your available resources and networks to gather as much informal information about it as possible. That would obviously involve doing a deep dive on the internet. You may also want to contact field reps and others who may be familiar with the agency and the owners.
If your non-intrusive search leads you to believe the agency could be a good “target” for acquisition for you, then you’ll want to contact the owner directly to inquire about it. That conversation will probably be fairly high level and general. An agency owner may be fielding multiple inquiries at this point and he/she will be parcelling out information carefully, in order to weed out non-serious inquiries and keep genuinely interested buyers intrigued. If you feel that the agency warrants your interest, based on what you learn from the owner, the next logical step would then be to enter into a due diligence process, which will give you a chance to see behind the curtain and assess the agency more fully.
Before being given access to sensitive and confidential information about the agency business, you'll be asked to sign a Confidentiality or Non Disclosure Agreement and a Non Solicit Agreement. The agreement will state that the information shared will remain between the seller and you, as a prospective buyer. For the most part, this agreement protects the seller. Understand that, at this point in the process, the seller may be engaged with multiple interested buyers, each of whom will sign a confidentiality agreement, so the agreement also keeps your interest in the agency private.
You’ll be given access to the agency’s financials, tax returns, production trend data, contracts and agreements, intellectual property, and any outstanding legal matters, as well as information on employees, agency management system reports, and relevant real estate information. (Use this checklist as a helpful guide, to help you track your progress through due diligence.)
Be sure to review all existing contracts so that you understand how they could impact your future business. Develop a list of key assets owned by the agency, understand whether they’re owned, leased, or still being paid for (you may want to include them in the financial terms of the sale). Take a look at the agency's accounting practices, revenue trends, and account management to get a sense of how the business is operated. Look at previous tax returns and existing debt.
You’ll use this information to assess the financial risk and potential opportunities represented by the agency. This will play a significant role in determining if you're interested in this agency and what price you're willing to offer.
You may want to hire third party representation to support you in this phase, which could include an accountant, attorney, real estate advisor, and/or a broker.
It's also a good idea to bring a lender into the conversation, who can help you understand how much you should expect to bring to the deal, and how to appropriately structure the deal so that it includes your cash/equity, input from the seller, and borrowed funds in appropriate relative amounts.
The due diligence process should provide you with the information you need to make an informed decision about whether to make an offer to buy the agency and what would constitute a reasonable offer. If you choose to submit an offer, you’ll do it in the form of a Letter of Intent which will outline the price, structure of the deal, timeline for closing the deal, and a schedule for the time you'll take to pay the seller and take over the business in full.
It can be challenging to accurately determine the value of the agency, especially since both you and the seller want to feel you're getting a good deal. A proper valuation relies on all of the research and information gained during due diligence, including historical earnings, current cash flow, potential profit and future growth opportunities.
In order to allow for the time that both sides will need to consider this potential purchase/sale, your Letter of Intent will generally include a defined period of exclusivity. This period usually ranges from 30 to 180 days, during which time the seller agrees to restrict any conversation about the agency sale to you alone.
It's wise to include a non compete clause in your offer, which extends for 2-5 years. This protects the value that you, as buyer, will purchase in the form of the agency's book of business/clients. You don't want the seller to be able to reconnect with those clients during a window of time in which you're establishing new relationships and new business with them.
Once you've arrived at an offer price and a structure for financing, it’s wise to estimate the maximum amount you’re willing to pay and negotiate with that amount in mind, leaving emotions out of the conversation.
Remember also that, when you’re negotiating, you’re discussing a business in which the seller probably IS emotionally invested. Be mindful of this and try to avoid saying anything that could offend him/her. Whether you plan to maintain a future business relationship with the seller or not, you want to leave the negotiation table as allies. At the very least, if you do purchase the agency, you're likely to have questions about operating and integrating it that only the seller can answer.
When it comes to structuring financing for an insurance agency acquisition, a good general rule of thumb to keep in mind is:
• 20% of the overall payment should come from cash or equity from the purchaser,
• 20% should come from the seller (if he/she intends to remain involved with the agency post-purchase),
• 60% should be financed through a lender.
If you've got questions about an acquisition or financing one, our Lending Advisors are experienced and knowledgeable. Fill in the form below or use the “Schedule a Consult” button at the top of the page to schedule a 30 minute, no-pressure consultation. If you're considering an acquisition, it's never too early to start a conversation about it with a knowledgable lender!
You can also check out our podcast mini-series on Acquisition and Due Diligence for helpful insights.