Are you considering buying an insurance agency? With so many things to review before making a final purchasing decision, how do you know where to start? While the process of evaluating an insurance agency is an arduous task, there are some big ticket items to bring your attention to first. The first critical factor is:
The ultimate goal of an insurance agency, and any business for that matter, is to make money. Ask yourself the question, “Will this be profitable for me?” Not such an easy question to answer – until you break it down into more specific, measurable factors. The main ways to determine the value of an agency are historical performance, projected future earnings, tangible net worth, net working capital, and the risk factors involved. One tricky metric that sellers always want to push is the raw revenue number. As a buyer, it doesn’t matter if an agency is making $100,000 a year or $100 million a year. At the end of the day, if their profit margins aren’t good, they won’t be making money. You want profit, not revenue.
Location, Location, Location
We hear it so often it almost sounds cliché. But it still holds true. The location of your agency will ultimately determine not only your current, but also your potential clients. An agency may have a good number of current clients, but how much room is there for growth? If there aren’t a lot of potential clients in the area, you will be limited to the amount of income you can make. It doesn’t matter how good your sales people are if there’s no one to sell to. Beyond potential clients, you also need to consider the market’s price sensitivity. Insurance is a very price sensitive industry, and certain areas are worse than others. Finally, the legislative environment needs to be considered. If insurance laws change a lot in a particular area, you may want to steer clear of it.
This is often overlooked when making an insurance agency purchase decision. You should spend some time in the office of the agency you are reviewing and talk with the staff there. Try to figure out how they interact with one another. If possible, sit in on some phone calls or even sales visits to get a feel for the way the employees treat clients. Also sit in on meetings and informal forums if they’re available. If you don’t like the culture, you may have to replace many of the representatives to better fit your ideals. This is a huge investment of both time and money. You have to find and train new hires and keep a constant stream of communication going to mend a poor culture.
Purchasing an insurance agency is never an easy decision. The demand for them far outweighs the supply, driving prices up and creating higher competition. By understanding an agencies financial records using the proper metrics, doing some research on the local market, and ensuring the company culture is the right fit, you will be well on your way to a successful purchase.