ACG - Agency Consulting Group

The PIPELINE

A national monthly newsletter for agency principals dedicated to agency management topic

MOTIVATIONS BEHIND AGENCY AQUISITIONS

We have been helping insurance agencies grow and prosper for over four decades. As you can imagine a part of that includes the acquisition, merger and sometimes the sale of agencies.

Enough agents know us that we will get calls from agents needing perpetuation and succession to help them find the right matches. We also get calls – a lot of them – from agents desirous of growing through

acquisition.

Many of them go like this:

ACG: “How can I help you?"

Agent: “I would like to acquire an agency to provide the growth I need.”

ACG: “Why do you need to grow like that?”

Agent: “I want to grow (pick one):

To make more money.”,

Because my carriers are pressuring me for growth that I cannot provide without acquisition.”,

I have the people and structure to grow but can’t add revenue fast enough to support them.”,

I don’t have enough carriers and more premium would give me more access to companies.”,

I have space in my building and this would be a great way of supporting my rent.”,

I’m shrinking and my carriers will terminate me if I don’t grow.”,

I need to find someone to perpetuate my business and I’d like to acquire that person AND a book of business to support him/her.”,

I am good at selling insurance and I’d like to acquire someone who could manage my operation.”,

I am a good manager and I’d like to acquire an agency with owners and/or producers who can generate future growth and become eventual perpetuators for my agency.”,

I have the money or the resources needed to fund an acquisition.”

All of these are reasons that we hear constantly from people calling us to acquire agencies. Some reasons are

better than others. Some agents fool themselves about why they want to buy other agencies. But only the last

reason is a FOOL’S JOURNEY and should be avoided.

Atlantic City and Las Vegas were built because people felt that they were good enough at poker or

blackjack to gamble on the chance that they would win at the tables. The casinos can profile the exact type of guest and know how much that guest brings with them to spend. The operative word is spend. While I’m not suggesting that these games are rigged, they ARE engineered to pay the house a small percentage of the amount being bet on a long term basis even if every rule were followed for the game. That percentage increases

dramatically if the rules are abated in favor of hunches.

Whether you enter a casino with a few hundred or a few thousand dollars or enter the acquisition market with a few hundred thousand dollars, it’s the same “sucker bet” if you figure that you can buy an agency and make

money as the result.

Even good poker and blackjack players rely on some degree of luck to make money at gambling. There are enough bad players to make this lucrative for the professional gambler. However, I’ve never once had an agent call me and say, “Al, I have a half a million dollars to spend. Let’s take a spin on an agency!”

The most profound losers are the agents who would be taken advantage of regularly by sellers and by business brokers, the rubes with money in their pockets who have no idea how to operate an insurance business. They

happen to have a license or have been in another realm of the business (carrier employees are perfect examples) and feel they can cash in on a “cash cow” by buying an agency.

I ask them two questions:

Why would an agent, who has a dozen buyers and perpetuators available for the asking, want to buy from you?

Why not buy a paint and wallpaper store or auto parts store instead of an insurance agency?

I get a lot of stuttering when I ask Question 1. “But I have ready cash or capitol!” is usually the first answer. Of course, money is much more readily available than most buyers would like to think. If a seller is reading this and is only interested in cash, there are dozens of buyers available at any moment – for a stable and profitable agency. Of course the “rube” is welcomed by agencies that are unprofitable now (either loss ratio profit or operating profit) and on the downward slide toward unprofitable status.

Everyone tells me that they are in the insurance business or they aren’t in the industry but they hear it’s a money-maker as the answer to Question 2. But that’s not true.

There is a vast difference between being an insurance agent, being an insurance professional and being a business owner in the insurance business!

Most small insurance agents are good insurance professionals who have enough clients that they may need one or more “helpers” to administer their clients. They know little about planning, IT, HR, management reporting and building a profit base and valued asset in their business. They make a living as an insurance agent.

Many insurance professionals have either worked in an agency or for a Company and feel that the agency owner spends his time either worrying about his key client renewals or playing golf. Unfortunately, in too many cases, that assessment is accurate. However, the true agency owner is concerned with building a strong staff, having a computer system that gives him accurate financials and accurate business information, building a set of procedures and having them managed well enough to assure prompt, accurate handling of every client, and planning for growth.

The new agent with a million dollars rattling around in his pocket is not thinking about this last paragraph. He’s thinking about a built-in staff who would take care of the shop that he intends to buy while he is out with clients or on the golf course.

I’ve actually had several key insurance company executives call me to acquire agencies because they are retiring from the carrier and are ready to live the high life!

Acquisition is a wonderful way of building a business through leverage of your money if you are fully aware of the risks and rewards both of the acquisition process and of the target agency you seek. Bad loss ratio, inability to grow your own business, threats from carriers are HORRIBLE reasons to buy an agency and more often than not, spell disaster. Filling staff time with business, buying competent staff needed for your existing business, buying your perpetuation, growing into new territories or consolidating existing geography or specialties are GREAT reasons for acquisition and there is a diligent, disciplined way of dropping an agency into your domain every year or two. Call me and I’ll explain it to you.

Don’t consider buying an agency if all you have is a source of funds. And BUYER BEWARE!! The “rube” and his cash will quickly be parted by many business brokers and sellers of distressed agencies. Do your Due

Diligence on every potential deal that become available, whether as a buyer or seller. Call me and I’ll help you define the due diligence that needs to be done 1- (800) 779 - 2430.