Over the past year, I have been approached by 4 people asking my advice on if they should buy an insurance agency or not. I didn’t know I had any thoughts on this subject as I am not in the market to buy one. I soon realized I had plenty of thoughts on the subject though and decided to share them with you. To be clear, I am a captive agent, not a broker. I write primarily through one company, not many. I have been an agent for 14 years. I started my agency from scratch, purchased two agencies along the way, and have over 4000 policies in force.
Buying any company is going to be an adventure. There are knowns and unknowns that need to be thought out. There are facts, numbers, statistics and grey areas that need to be considered.
The first thing that the buyers want to know about is how much money does the business make? It’s a good question. We need to look a little deeper though. I would want to know how long the current agent has owned the agency? If they weren’t the only agent to run this business, how many have there been, and how long were they there? The best case scenario is the agency has only had one agent and it has been built from scratch.
What are the retention numbers? You see, retention is one of the most important numbers to know about an insurance agency. This is the number of policies that will stay in your book every year. A 90% retention rate is the gold standard. What that means is, if the agency has 1000 policies and there are no new policies written into that agency for a year, there will still be 900 in the agency at the end of the year. 80% is not so hot. I would want the agency to have at least 85% and no less than 83%.
If there have been more than one agent running this agency over the years, the clients do not have a chance to feel a strong connection to the business. If there have been multiple agents in a short period of time, the retention is going to be lower. When a new agent shows up it gives them an easy excuse to shop and leave.
The next thing I would look for is what is the mix of business written inside of the agency? Is it heavy on personal lines? Is there commercial business inside or life insurance policies in the mix? This will give you an idea of how “sticky” the business is. The more policies you have per household, the longer they will stay. I don’t know the numbers exactly, but a household with one line of business (auto only for example), will stay an average of 13 months. If you have home and auto insurance, they will stay an average of 33 months. Three lines of insurance are even longer. I would want to know how many monoline policies are in the book of business. This will tell you how stable the book is, and also how many cross-sell opportunities there are.
If there is a mix of commercial line and life insurance, it’s important that the new agent is prepared to service those types of policies. Commercial insurance is more complicated than auto insurance. There is a steeper learning curve to understanding how to service those accounts.
How good is the agent you are replacing? This is a tough question find a definitive answer to but I can give you some direction. Every company has indicators of performance. Agents are bonused on them, rewarded by them and measured by them. I would get to know these measuring sticks depending on the company, and see where this agency falls. An agency who has been rewarded by their company consistently over a period of time is a better value that one that is underperforming in the company’s eyes.
What is the agent you’re are buying from, doing next? Best case scenario? They are moving out of state. I once bought an agency from an agent who was “retiring”. Turns out he didn’t retire. He waited a year for his non compete to expire and came back after my book and pillaged it. It was awful. There was no way I could see this coming. Although, I did ask him to write a letter to his current book, endorsing me as a good agent who is fully capable of taking care of them. He declined to do this for me which looking back, was a red flag. If you get a whiff that they are going to start another agency, or become a broker, beware. Non compete’s generally don’t do what they are supposed to do, even if they are written properly.
Is the agency growing? I would want to see numbers as far back as you can to see if there is a trend. If an agency has been growing year over year, it means that there are some referral networks that are in place and business is regularly coming in. If it’s on a downward trend, you would want to know why.
How is it staffed? Staff is the lifeblood of this business. I would want to know how the agency is staffed and what their expectations are. If they have expectations to sell policies and put business on the books, this is a HUGE plus. If they are there to answer the phones and service the policies only, you have some work to do. There is a common fear, that if an agency is bought and you lose a long time employee, this is bad. It’s not. It can be the best thing to happen. The employees need to know that they are now working for a different company. With different expectations, and maybe even different hours. It would be nice to keep the team in place and transition smoothly but I think that’s the exception not the norm.
These are the things I would look into before making a decision to purchase an insurance agency. Good luck!
