Bill Aspinwall is a Principal of Tegner-Miller Insurance Brokers in Santa Monica, California, which has acquired as many as 10 agencies over the last 23 years.
A look at independent agency acquisition strategies
By Susan Hodges
In today's saturated markets and white-knuckle economy, agency principals are hunting high and low for affordable ways to grow. And buying other agencies is still one of the best ways to do it.
Bill Aspinwall is a Principal of Tegner-Miller Insurance Brokers in Santa Monica, California, which has acquired as many as 10 agencies over the last 23 years.
Bill Aspinwall has played his cards right. In 24 years, he has grown his agency from two people and $220,000 in annual revenues to 41 employees and close to $5 million in yearly income--much of it by acquiring other agencies.
It's not that Aspinwall pays scant attention to old business and is always looking for new. It's more that opportunities present themselves, and Aspinwall takes action. Since many agencies want to acquire, but hesitate due to one stumbling block or another, Aspinwall's successes are worth talking about.
In today's saturated markets and white-knuckle economy, agency principals are hunting high and low for affordable ways to grow. And buying other agencies is still one of the best ways to do it. Repeal of the Glass-Steagall Act has prompted banks to begin buying some of the larger agencies at big prices. But smaller agencies with big potential are still out there and can be had at prices and terms that benefit both parties. Translation: You don't need a boatload of cash to buy someone else's book of business.
Since 1980, Aspinwall's agency, Tegner-Miller Insurance Brokers in Santa Monica, California (a Rough Notes cover agency in June '02), has purchased eight to 10 agencies and several more chunks of business. Many of those deals have been done on a renewal basis. "If you do a fixed-price deal, all the pressure is on the acquiring agency to make sure those customers renew to pay for it," explains Aspinwall. "If you buy the agency on renewals, the pressure is on the selling agency [to get as high a price as possible] by making sure every customer renews."
Aspinwall and his three co-principals stay away from big purchases. Instead, they focus on small local agencies whose owners are ready to make a change. "We've been in this community since 1902, so a lot of agents come to us," he says. No matter who comes to whom, though, Aspinwall and his co-principals sit down with prospective sellers and ask for a wish list. "That way we get some insight into their wants and expectations," he says.
Often, small agencies don't have a perpetuation plan in place, but they have good-quality books of business. And while an owner may wish to retire, he or she also usually wants to ensure that the agency's customers are well served after the owner leaves the picture.
Aspinwall wants the same thing. "We want [the sellers] to stay with us for at least one year so they can be here through the renewal cycle," he says. The former owner's continued visibility assures existing customers that their "new" agency has a connection to the old one, making renewals that much easier to obtain.
Meanwhile, the agency owner who sells on a renewal basis receives a check each month or each quarter for business renewed during that period. Paying on the installment plan, so to speak, spares the acquiring agency a major dent in its capital and provides the seller with recurring revenue, usually for a minimum of one year. "But if the price isn't reasonable, we won't make the acquisition," qualifies Aspinwall.
Jeff Peterson is President and CEO of Unland Companies in Pekin, Illinois, where acquisitions account for 25% of the agency's growth.
Jeff Peterson would emphatically agree. "The key is that you don't pay an arm and a leg," says Peterson, president and CEO of Unland Companies, a multi-line agency in Pekin, Illinois (Rough Notes cover agency, December '01). Since its opening in 1941, Unland Companies has acquired six agencies, most at below-market prices. The trend started in 1988, when Cigna called Unland and asked if the agency would consider purchasing a small farm agency nearby. "We went to him, and I think we paid him $28,000," recalls Peterson. That sale spurred Peterson to hunt for more bargains. "Sometimes it pays to wait," he says. "It can also be just a matter of looking around for agents who are older than I am."
Waiting paid off in 1996, when Peterson purchased an agency that had been bought just three years earlier by a real estate developer. "This developer had thought he could make some money in insurance but three years later, he was looking for someone to buy it," says Peterson. "He approached another agent about buying it. This agent wasn't able to buy the agency, but he referred the agency to us--for a fee. We bought the agency, paying only for business renewed in the first year."
Acquisitions account for 25% of Unland Companies' growth, and Peterson is always looking for a new purchase. "I don't advertise that I'm looking to buy, but I do get the word out," he says. He and his producers attend agency meetings and tell other agents that Unland will always consider a purchase. And yes, he has done some of his smaller deals on a cocktail napkin. Says Peterson, "You have to understand, this is central Illinois."
As well as paying a discounted price, Peterson makes a point to buy agencies less than half the size of his own. One exception was Unland Companies' acquisition of the Shock Agency in 1989. "We were a commercial lines-oriented agency and we needed someone with knowledge of benefits and individual life and health policies," says Peterson. "Bill Shock's agency was oriented to benefits and personal lines, and he came to us. We bought the agency."
But why buy smaller agencies if larger ones are available and affordable? "Because if you don't have the infrastructure of such a large deal worked out, you can get into big trouble," warns Bill Aspinwall. The California agent has also limited himself to purchasing agencies smaller than their own, with one exception. And in that case, doing the larger deals sorely taxed both parties by taking more time and effort than either supposed.
Charlie Reynolds is Executive Vice President of William Rigg Co. in Fort Worth, Texas. "We acquire as a way to add depth to our organization and provide our clients with added expertise," says Reynolds.
The Rigg Group in Fort Worth, Texas, (Rough Notes Agency of Month, February '01) looks to acquire people rather than agencies. "We go after sources of expertise, not necessarily revenue streams," says Charlie Reynolds, executive vice president of William Rigg Co., a subsidiary of the Rigg Group. Reynolds and his company look to hire people who can add value to Rigg Group clients. Although the company also buys agencies, "sometimes there's no reason to acquire," says Reynolds.
In other words, if Reynolds can hire talent away from another agency, so much the better. But when an agency has a good book of business in a specific market that Rigg Group wants to pursue, Rigg may try to buy the entire agency. "We acquire as a way to add depth to our organization and provide our clients with added expertise," says Reynolds.
The Rigg Group doesn't usually buy agencies "at low prices," says Reynolds; but at the same time, it won't buy at inflated values either. "There are no bargains now," he observes. When an opportunity arises, though, Rigg Group doesn't use a set formula to calculate an offering price. "Each agency is different, so the price varies according to assets, size of accounts, staff, and our underwriters' appetites for their business," says Reynolds. "We don't pay any attention to consultants' formulas," he adds. "We look at what an acquisition can do for us, not what it should do for the industry."
Brown & Brown, Inc., a publicly owned national broker based in Daytona, Florida, with annual revenues of $456 million, also looks at what an acquisition can do for the company, but it uses a fairly strict pricing formula. "We generally always pay six times operating profit," says Cory Walker, chief financial officer. "If an agency makes a 25% operating profit, they'll get six times that amount, which translates into one-and-a-half times revenue." It's not that Brown & Brown pays more for agencies than anyone else, Walker points out. It's more that agents don't ask enough for their businesses. "We pay the same thing we paid 10 years ago," he says.
Yet Brown & Brown does attract what Walker calls high-energy, entrepreneurial agencies that are well run and know how to make a profit. In 2002, Brown & Brown purchased 32 agencies that produce $62 million in annualized revenues. In 2001, Brown & Brown bought
26 agencies with $148 million in revenues. Since 1993, the company has acquired 118 agencies producing $302 million in revenues annually. How do they do it?
Acquisitions are a company-wide effort to attract the best agencies. The company doesn't even have a centralized acquisition group. Instead, B&B agency principals, who are called profit-center managers, are responsible for bringing in other agencies. "The best acquisitions are the ones that can fold into existing operations," says Walker. In other words, a profit-center manager brings the new agency into his or her agency. By doing so, the manager is responsible for the success of the newly acquired agency.
Nevertheless, some agents lump B&B together with banks that buy agencies for top dollar and then, after the acquisition, try to dictate what expenses need to be cut in order to increase profitability. "That is not at all what we do," says Walker. "We don't try to sit here in Daytona and tell people across the country how to run their businesses. We are very decentralized, and the local management team must determine how to most efficiently operate and grow their own agency. However, we do give them comparison information from other agencies within our system, and they take that data, along with discussions with our other profit center managers, and use that information to become more profitable."
In other words, if agency principals/profit-center managers decide to cut staff to become more efficient and boost profits, they do so of their own accord. Or they may decide that their costs don't need to be cut but the sales efforts need to be more aggressive. And at year's end, B&B pays agency bonuses based on a set formula, a percentage of operating profits, which agents know in advance.
Until accounting rules made the process considerably more complex, B&B paid for many of its acquisitions with stock. "Now," says Walker, "most of our acquisitions are completed by purchasing the agency assets for cash. With over 30% of our company being owned by the people in our agencies, we all know the value of making the right acquisitions."
Thus, the path to agency acquisition is not set in stone, but neither is it the product of black magic. It is, as Bill Aspinwall says, a way to spread agency administration and do more things. And often, one of those things is making more profit. *
The author
Susan Hodges, a former contributor to Professional Agent magazine, writes about insurance and other business topics from Silver Spring, Maryland. She can be reached at hodgeswrites@aol.com.