Adding other agencies can be a good way
to grow, if the homework is done right
By Phil Zinkewicz
"One of the things we look for when considering an acquisition is whether a target agency is profitable or, if not profitable, can it be turned around."
--Greg Pope, owner, Pope Insurance Agency
and president, allMass Group
The property/casualty insurance industry has experienced a considerable amount of consolidation in recent years. For agents and brokers, mergers and acquisitions probably peaked about two years ago, according to Greg Pope of the North Attleboro, Massachusetts-based Pope Insurance Agency. But that doesn't mean that agencies are no longer looking to consolidate.
"Two years ago, agency mergers and acquisitions really took off," says Pope, who is also president of allMass Group, the largest network of independent agents in Massachusetts. "Now things have slowed down a bit, but that's not because agencies are not looking for that good buy. Rather, I think it's because there is less to choose from and agencies are being very picky," he says.
The Pope agency itself has made three acquisitions in the last three years and, according to Pope, they're still looking for more. "One of the things we look for when considering an acquisition is whether a target agency is profitable or, if not profitable, can it be turned around," he explains. "We want to look at the type of companies the agency has been dealing with and whether we can pick up commissions. In addition, we want an agency that is in close proximity to our base office, so that there is no disruption to the agency's existing clients."
Pope says that naturally it is important to talk to executives of the agency to be acquired and to the companies it represents, but the "people factor" is extremely important as well. "We want to know what's going on with the existing employees. We don't want to buy an agency when the employees are unhappy and ready to leave."
Pope believes firmly that it is extremely important in acquisitions scenarios for the buyer to employ the services of an independent consultant, preferably a law firm. One of the law firms that Pope has used and that specializes in agency mergers and acquisitions is the Boston-based Morrison, Mahoney and Miller. David Bakst heads up the law firm's corporate division that deals with agent and broker acquisitions.
"There are six keys to an agency's success," he says. "Those areas are the ability to run the agency as a business, ample markets, up-to-date computer systems, capable producers, quality support staff and a written marketing plan that helps the agency distinguish itself from its competitors. An acquisition or merger can strengthen an agency in all six areas," says Bakst.
"In terms of growing one's business, most sophisticated agents know that there are two ways to go about it," he says. "One way is just to go out and produce new business. If an agency has quality producers and can do that, there's no need for a merger or acquisition. The problem is, however, that it is often difficult to find, employ and nurture good producers. Really good producers tend to gravitate towards larger agencies with good backing and good markets. Here then the answer may be to merge with or acquire an agency that is just the right fit."
Bakst explains that an acquisition can add customers and staff or just more business if the agency simply buys the book. He says that many agencies already have enough staff, automation and office space to easily accommodate new business. "Salaries, rent and computers are the biggest fixed costs. The more business you can push through the agency without adding costs, the more profitable an agency will be."
Bakst notes that one measure of an agency's performance is revenue per employee. "There are a few agencies that produce $130,000 of revenue per employee, but they're rare. Well-run agencies should have $85,000 to $115,000 in revenue per employee. An acquisition usually brings new markets to the agency and profit opportunities. Some insurers will pay a 2% to 5% bonus for moving business to them. Furthermore, a deal usually brings in one or more new producers, who are the 'life blood' of an agency," Bakst points out.
The attorney adds, however, that an acquisition is not the only choice for agency growth. "A merger can provide all of the same benefits. In a merger, since the management of both agencies stays in place, it's important for the principals to have complementary skills. For instance, one may be a super salesperson with few business skills, while the other may be a top-notch business manager but have few sales skills. Merging these skills can be a catalyst for continued growth," he says.
Bakst works as a consultant representing both sellers and buyers of agencies. "Sellers often know to whom they want to sell when they come to me. And sellers are one-time propositions. Buyers, on the other hand, often buy more than once. For buyers, the trick is how to identify potential sellers. Because there are relatively few business brokers selling agencies, Bakst recommends "meeting and greeting" other local agents and maybe even helping a competitor write a piece of business.
"Solo owners who are in their 50s and 60s and have little backup are the best prospects," he says. "When that individual is ready to sell, he or she will turn to an agency with which the agency has an established relationship. Company field people are good sources because they know which owners are looking to sell, either because they are looking to retire, just tired of the business or even going under."
Bakst says buying a distressed business is not necessarily bad. "Bankruptcy doesn't mean a book is bad. The book can be valuable if it can be turned around."
When buying or merging, Bakst says that there are always dangers of which to be aware. "In a merger, it's imperative to draft a written agreement that, like an employment contract, spells out duties and says that partners must work full time. Otherwise, you could get stuck with a no-show partner and, under the law, you can't kick out a minority stockholder easily. The agreement should state that all commissions are to be paid to the agency so that a partner can't simply pocket insurance commissions. The agreement must provide for the death or disability of a principal and include a non-compete clause.
"In terms of buying," continues Bakst, "get legal and accounting advice and negotiate the fine points even before signing a letter of intent to buy. While a letter of intent is non-binding, it's less expensive to work things out before putting them in writing, and the letter makes it more difficult to negotiate changes. The buy-sell agreement should be specific, and define exactly what 'renewals' mean."
Bakst says it is also important to consult with a CPA to avoid tax traps. "For instance, the owner of a corporation that has not elected Subchapter S status and who sells just the assets of the business faces double taxation." He also points out that professional advice is particularly important for sellers because, typically, the seller has never sold an agency before, but the buyer probably has bought other agencies. "Buyers are usually more sophisticated than sellers. They know a little more," he says.
Additional advice comes from Bob Anderson of the Berkshire Group in Sidbury, Massachusetts. Anderson does valuations of agencies that are either bought or sold and has worked with Bakst on some accounts. "When valuing an agency, you have to look at a great many things. You have to examine, of course, an agency's financials, its book of business and whether that business is stable," says Anderson.
"You look at the agency's top 10 accounts and how much of the agency's total business they represent. You have to look at an agency's loss ratios and profit-sharing arrangements. All these things and more must be taken into consideration." *