Acquiring an agency or book of business can be an exciting and stressful time for an agency owner. Entering into this growth plan with strategic thought can offer great success in enhancing revenues and overall portfolio size. Consider the following tips for a successful acquisition:
- Run your agency like you plan on selling it tomorrow. Whether you are buying or selling, a well-run, financially sound agency with historic profitability will have the best opportunity to obtain the most favorable terms. Lenders put heavy emphasis on the borrower’s experience running his or her own agency to predict the success of an acquisition.
Run your agency like you plan on selling it tomorrow. #acquisitiontips Click To Tweet
- There are often many questions regarding valuation methods to determine purchase price of an agency. Many times the price is determined as a multiple of revenue as a good starting point; however, more factors should be considered. Buyers should understand and be prepared to discuss the EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) valuation. When evaluating a potential agency acquisition, review elements such as the historic performance of the agency, projected future net income and potential issues that could positively or adversely impact the ability of the agency to meet projections.
Buyers should understand & be prepared to discuss the EBITDA valuation #acquisitiontips Click To Tweet
- It’s important for agency owners considering an acquisition to understand the agency they are acquiring. Does the business model fit within your current framework? How does the seller want to be involved? Is it a good book of business? Agency principals should fully understand all elements of the existing organization and the impact of merging the acquired entity.
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- Understand what a lender will be analyzing in order to make financing decisions. Lenders piece together a story based on tax returns (personal and business), existing debt, credit reports, management experience, profit and loss reports, and insurance carrier production and performance reports. Know your story before seeking financing to help the lender understand your operation. This includes identifying the market opportunity moving forward, discussing any issues up front and disclosing any actions you’ve taken to mitigate issues.
Typical insurance agency acquisition deals are cash flow based. The recurring revenues from the book of business are viewed by a lender as the asset. Understanding your agency’s cash flow and what is currently driving revenue is a critical piece in understanding the business’ health. Lenders will also want to review any potential concerns regarding future cash flow, understand your current debt and review your business plan for future growth.Read expert tips for a successful insurance agency acquisition right here! Click To Tweet