Carey Wallace, Agency Focus
The price that your agency commands depend on several factors, including what is most important to both the buyer and the seller, the synergies that exist between agencies owned by a potential buyer and seller agency, and the risk level that both parties are willing to assume in the agency sale. Both a buyer and seller should carefully weigh all these areas to successfully negotiate the price of the agency. Both parties need to weigh the potential revenue opportunities and challenges, expected changes to expenses, risks and opportunities involved with both the carrier and customer relationships, and the potential profitability of the combined entity. This will provide a solid understanding of the price that is reasonable and able “cash flow”. In an agency acquisition, “cash flow” means that revenue should cover 1.25x the expenses to achieve the expected profitability. Too often, when buyers and sellers do not take the time to explore these areas carefully, agency sales do not perform as expected, creating a situation where agencies ultimately sell for a discount or a premium that is unrealistic. We are going to focus on the most common synergies in an independent insurance agency sale transaction between two retail agencies.
Do both agencies have a similar type of customer base? How do their average customers compare? Are they similar? Will they have the same expectations or different expectations? This can include average size policy, demographics, as well as customer and agency behaviors. Do both agencies have a similar philosophy in the limits and coverages that they recommend? Does the overall philosophy on customer engagement align? This can include claims engagement, billing and payment behaviors, customer education and outreach, audits, and remarketing accounts to name a few. The more aligned two agencies are, the easier a transition will be for their customers and their staff. In some cases, a difference in philosophy between two agencies can create an area of opportunity as well.
Book of Business
Many agencies are looking to expand into new geographic areas, lines of businesses, or niches. A great way to do that is through acquisition. A careful inspection of cross-selling opportunities is recommended. This is done by evaluating the number of monoline accounts, or accounts that offer opportunities to expand your core expertise such as cyber, benefits, or worker’s compensation for example. In addition, the risk due to personal relationships with key customers or specialized expertise required in accounts must be considered when estimating both the ongoing business and the resources that will be needed to continue to service accounts.
Another key reason that an agency may be an attractive acquisition is its carrier relationships. This may be a huge win, or a potential downside based on the carrier makeup and fit with a potential buyer. In some cases, the combination of the two agencies may put the combined agency in a position to enter new markets and earn contingencies with a carrier that they have would not be able to achieve on their own. In other cases, they may find that some carriers are unwilling to work with the new agency and a book roll will be required to retain that business. It is important to carefully examine the carrier relationships, the ability to be appointed by any new carriers, and how the combined carrier will impact the overall carrier strategy.
In some cases, multiple locations may be maintained after an acquisition, and in others, two agencies will combine into one. Several factors including the agency’s reputation and brand awareness in their community, the proximity of the agencies, and the negotiated terms between agencies can all play a factor when deciding how to maintain locations after an acquisition. In the cases, when only one location remains, there will be a cost-saving related to renting, utilities, equipment leases, insurance, etc. For those agencies that choose to maintain two locations, there still may be potential cost savings related to the compensation of the exiting owner. In either case, the decisions on how the agencies will integrate and operate on an ongoing basis will determine what impact it may have on staffing, employee benefits, agency systems, marketing, and other costs as the two agency cultures are merged. Building a combined pro forma that outlines all these potential changes will inform the price and the options to fund the transaction.
Performance and culture
The fair market valuation highlights several areas of performance such as growth, retention, loss ratio, and profitability and all of these will greatly impact the decision on the best price to offer. An agency that has strong policies and procedures in place, employee contracts with all key employees, and a firm handle on their metrics is well-positioned to negotiate on the sale of their agency. For those agencies, whose books and information are in order, utilize systems that are the same or compatible, and that operate a paperless agency the transition is expected to be much more seamless, and therefore ongoing performance can be expected to be greater. You can expect that an agency that has strong performance metrics and operates efficiently will sell for a higher price than one that has weaker numbers or lacks the ability to provide metrics as expected performance becomes much more uncertain.
As agencies move through the due diligence process, they can expect to be offered a premium or a discount for their agency based on synergies or challenges that exist in each specific situation. In all cases, agencies that know their numbers can access data and information easily to identify synergies and inform these areas will be much better positioned than those that cannot. Much like the sale of a house, the more work that is needed or areas of question the lower the offer. Having the ability to provide accurate and complete information throughout the due diligence process and highlighting the areas of synergies and strengths of your agency will put you in a strong position with prospective buyers.