Advice on purchasing a small agency in California

[bartman]

I have a friend, in California, who has become ill and can no longer operate his agency and I have offered to purchase the agency from his family. This is a very small agency (I'm guessing under 100k as I have not seen all of the financials) I have a lot of questions and was wondering if anyone has experience with this? Here are a few things I need to know:

How do I valuate the business?
How difficult is it to convert over those policies to me?
When I have done Broker of Record letters in the past I frequently don't get paid until the policy renews which is sometimes months away. How do I figure that into the valuation?
Should I try to get a loan for this purchase or pay off the family over time?
What other issues can you think of that I have not?

Thanks

[d's insurance store]

Start by checking out the mix of current business...personal lines vs. commercial. Then you look at the client mix...you're probably looking at an agency business model that is reflective of the principal...meaning you should look long and hard at the potential retention after the owner is out of the picture. Just how loyal will the client list be to a new face or phone number.

Often these kinds of deals just go for quick cash...often two to three times commissions, depending on circumstances. If an agency of this size is being absorbed by a large agency, a business loan is used with payments made out of cash flow...but if the owner's family is receptive to payments over time, perhaps you can come to some kind of arrangement that accounts for potential loss of clients and revenues as the payment are being made.

There are consultants who can be hired to help, but in a deal this small, I suspect that you and the family should be able to come to what is considered fair to both sides as a sales agreement.

[Thomas Kelly]

I have been an owner of an Agency for 35 years and sold the agency. I believe I can help you with your questions. I believe the starting points are:
1. What is the mix of business, mostly personal, amount of Workers Comp, etc.
2. I would recommend a purchase based upon a mutitude of factors and senerio's.
3. Financial analysis:
a. How far have you gone in terms of the overall analysis? Personnel, Financial, size of accounts, etc.

Suggest you give me a call and we can discuss at length for I have purchased more than one agency and seem the good the bad and the ugly. If you would like call me at 831-818-6455 and I can help you through it if you would like. Sincerely, Tom Kelly

[Thomas Kelly]

PS-I am a Broker in Norhern Califonria.

[bartman]

Thanks for the advice. I think I need to do some homework and find out more about the book of business.

[jackwehoca]

Wow!!! 2 or 3 times commissions seems pretty high, unless you have an amortization schedule which factors in retention; smaller agencies tend to survive through personal contacts who may rapidly disappear at renewal time if you are sitting down behind the CEO desk. Loyalty to the broker/owner is stronger than to the agency itself.

[FFA]

Here in the Mid West, 2 - 3 x commissions seems about right. Will the current owner be on hand for a peroid of time to do intros to the book? Seems to be the right formula, prior owner hangs around and calls the renewals, explaining he is retiring and introduces the new owner.

[mhutch69]

I agree with many of the above posts. You need to analyze exactly what the agency consists of with respects to the book of business and policies in force. The commercial versus personal, the commission rates etc.

If you own an agency, you should compare the markets the book is with versus your markets. i.e. higher rates of commission?

Also, the multiples of gross revenues or commissions is an antiquated method of valuing an insurance agency.

I use a multiple of net profit excluding owner expenses. IF there is not a net profit, tell the family you will pay them a portion of the commissions AS the policies pay you the commissions. You will assume the revenues immediately and can pay them a percentage.

Also, is this agency located near enough to your office to merge? I would merge if possible. That revenue level does not support much overhead.

Good luck.

[ksagent]

2 to 3 x commission is not something I have not seen since Brooke started buying agencies. Of course, their pyramid collapsed. Am I that out of touch with the valuation of agenies? If so, I might have an agency for sale.

Ks Agent

[d's insurance store]

The formula for 'multiple of commission' is generally used in small agency structures, where the owner/principal/agent/producer is often the same person and support is provided with one or two or maybe 3 employees, who in this kind of agency are usually relatives.

These agencies are also referred to as 'mom & pop' businesses, and often have been around for decades, offer full line coverage, have a few direct appointments and perhaps relationships with MGA's to fill in the rest. There's likely to be a Life and Health component as well. Business was attained over the years because of personal relationships within the geographic area with the owner and the population, augmented with referral business and organic growth when children of insureds grew up into adulthood and bought their insurance from 'Pop' becuase that's who handled the parents insurance needs. Warren Buffet has called such insurance agency owners 'Rotary Bob's'...the agency owner active in the community and shaking hands at Service Organizations trying to establish rapport and get an opportunity to quote at the next renewal.

When it's time to pack it in, or the owner suffers a health issue or just dies, then the agency has some value, but it's diminished because of the personality driven nature of the agency. When a potential buyer comes in, generally payment is just made to acquire and merge the accounts into a larger agency structure.

This differs from a larger agency, where there is enough revenue to warrent perhaps a corporate structure, where the owner draws a salary, the employees are paid, expenses are paid and the agency, as a business entity also generates a profit after these bills are paid. This profit then becomes the basis of valuation for such an agency, in a more traditional business sale transaction.

One is not better than the other, and there's still room for both...but the days of the tiny stand alone agency are most likely numbered as insurance buying trends change with the times.