You’ve agreed to purchase another agency. Now you have to consider questions such as:
- Which employees to retain
- What to do with the agency’s office
However, a larger issue looms over the others: How to retain all those accounts you’ve just bought, and whether the incumbent carriers will help you keep them.
The process can be challenging even when buyer and seller represent the same carriers, and those carriers do not object to combining the books. More obstacles can arise when the buyer does not have some of the seller’s carriers.
An important initial step is to inform the selling agency’s carriers before the acquisition closes, according to industry consultant Jon Persky of Optimum Performance Solutions. “If it is a carrier of any size with the seller, the seller and the buyer absolutely should go to that carrier prior to the sale to get their blessing.” This is especially important when the buyer is hoping a carrier will appoint them after the sale. Persky has seen multiple situations where the seller was confident of getting an appointment and learned after closing that it would not be forthcoming.
The processes and paperwork will vary among carriers. If both agencies represent a particular carrier, making the change may be as simple as both agencies completing a form required by the carrier. Many carriers will accept broker of record letter signed by both parties. Persky says that some carriers may request a copy of the asset purchase agreement, but they will often accept a bill of sale.
The process may be even simpler when it comes to rolling books with a wholesale broker or a carrier that both agencies access through an agency network. These book rolls tend to go smoothly.
Even when a carrier has no objections to combining a book, the process for completing it can be lengthy, especially for direct-billed accounts. Persky has seen it take several months before the direct bill commission deposits begin arriving in the buying agency’s bank accounts, rather than those of the seller. The parties should arrange for the buyer to be able to view the seller’s bank accounts during the interval and for the seller to transfer the funds.
In some situations, a carrier’s blessing may come with a catch. “I’ve actually seen some cases where the carrier … has required the buyer to re-underwrite the book of business,” Persky says. “If the seller has a sketchy book of business (with a lot of loss activity,) the carrier could say to the buyer, ‘you have to re-underwrite and re-submit all these clients.’”
When one or more of the seller’s carriers refuse to appoint the buyer, the acquisition can be derailed. The letter of intent signed by the two parties should permit the buyer to walk away from the deal if specific carriers refuse to appoint them. Persky has seen deals fall apart over this provision, while other deals result in a reduced purchase price. The latter is typically accomplished by way of a retention clause that reduces the maximum payout if policy retention is less than expected.
With the seller’s small books of business with some carriers, the buyer may want to consider giving that business to one of its own larger carriers. “Number one, it helps to eliminate those small carriers that you only have a handful of policies with,” Persky says. “Number two, it gives you greater volume with those carriers … and potentially enhances contingency income opportunities.”
The buyer may have other reasons for moving the business to other carriers:
- They may not want a particular carrier the seller has because of pricing, service, underwriting appetite, or coverage availability
- Consolidating books with fewer carriers may be more efficient
- They may want to build on their “preferred” status with some carriers
- Their carriers may offer technology advantages that the seller’s carriers do not
Acquisitions are as unique as the agencies involved, and no two book rolls will be identical. Clear expectation setting and transparency with carriers will not eliminate all potential problems, but it will make those problems easier to handle to everyone’s satisfaction.
