Traditionally most agency profits are commissions from “house accounts” and contingencies. Most producer-sold accounts are near break even.
The better the “offer”, the more challenging should be the due diligence.
To be effective in the process, buyers need to select the sellers and sellers need to find the right buyer. Culture matters.
For most buyers, inefficient shops are better (because the sellers don’t know they are [or won’t admit they are]) and you can squeeze out the inefficiency immediately. Most shops are more inefficient than they realize – much more.
The agency’s name has limited (if any) value to the buyer and an exaggerated value to the seller; but should still be contractually transferred.
A disaster like Hurricane Katrina creates ambiguity in the market because of loss of community, loss of markets, and concerns of “what if this happens again?” etc. Such ambiguity increases the risk and the opportunity for the buyer and seller.
Large accounts can more easily support a producer than can small accounts. Small accounts will more easily be “stolen” by the writing carriers going direct in the future. Remember Hartford was threatened by agency associations (circa 1978) but their AARP program prospers.
Mega-agencies often don’t want standard (non-elite customers) personal lines or small commercial accounts ($ ____________ minimum premium / revenue). If they acquire these they end up selling them off or moving them into a service center type environment. Usually they won’t pay a producer for these on an on-going basis.
Mega-agencies’ attitudes / business position on small and personal lines accounts creates opportunities for small agencies.
Often times small agencies constitute a great job / career for their owner, but don’t establish an equity / income value into the future sufficient to sustain both the selling producer / owner and the buyer; there's not sufficient "owner income" in addition to the "producer income".
Banks often over-paid for agencies, and then in time became frustrated because they learned the “error of their ways.”
Never say never – some see a swan, others see an ugly duckling. With enough time someone may be looking for what you are selling even if the rest of the market is not interested. Sometimes these buyers will pay a price everyone else thinks is crazy.
Professional buyers (mega-agencies) are aggressively looking, but what remains in many communities is not what they are shopping for.
Most small / mid-size agencies can’t handle “elephant hunter” producers without making them a co-owner. If you hire a great producer be sure you really want one! They can be an extreme challenge.
Producers must pay (out of their commission split) for the value provided by their employing agency (# of carriers, quality of support staff, marketing support, advertising, etc.).
For best results, producers must be compatible with the agency and its culture / values / staffing, market demographics / psychographics, etc.
At the end of a deal, if the buyer is happy and the seller is happy it’s a good deal regardless of what others say.
Always start the transition process with a non-binding letter of intent to clarify everyone's expectations.
In today’s world (2010) acquisitions of Individual Health and Group Benefit “books” are best prefaced with two words – “Caveat Emptor.”
There are “land mines” on the road to tomorrow for acquiring agencies – direct competition from your existing carriers, substantial reductions in commission, a move to premiums quoted net of commissions or full disclosure of commission, economic uncertainty, etc. BEWARE!
These same “land mines” exist for all agencies – this risk is merely on steroids in an acquisition.
The honeymoon period may end quickly for the selling agency and their producers if the cultural aren’t aligned. Remember in this industry we are more INDEPENDENT than we are agents.
Most agency owners wait too long to begin perpetuation planning.
When perpetuation is from one generation to the next DON’T ASSUME that the son / daughter will outlive their mom or dad – have a contingency plan in place for a worst case scenario.
Be absolutely certain you know what you are doing before you acquire another shop. Ignorance discovered in the process is very costly.
Inbreeding creates weaknesses in the offspring whether in pedigree dogs, agency leadership, agency operations, etc. Be sure that “we’ve always done it this way” doesn’t assure that your agency won’t be there in the future to duplicate your past. Send kids away to learn or invite in new blood to teach by example. Diversity matters. Change with the marketplace. Be a leader.
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