How much does it cost to buy an insurance agency
Whether you’re thinking of entering the insurance industry or own an agency, buying existing business books is one of the fastest ways to grow and increase your competitive advantage.
but, like any important decision in life, you probably have questions. are you ready? can you cover the start-up costs? What are the advantages and disadvantages of buying another agency?
We’ll guide you through the process and help you decide if it’s the right decision for you.
Benefits of buying an insurance agency
As we mentioned, one of the main benefits of buying an insurance agency is that it gives your book of business an immediate boost.
But buying an agency offers more benefits than simply growing your portfolio.
Here are some reasons to consider buying an insurance agency:
- remove a competitor
- add insurance products you don’t sell yet
- acquire experienced employees
- grow and diversify your clientele
- expand your business
- Can I afford it?
- Can I manage more businesses/additional employees?
- Will carriers allow acquisition?
- Do I have a plan to integrate the new business into my agency?
Any of these reasons could work as motivation to add another business to your own agency.
pro tip: When considering buying or not buying an insurance agency, keep one or two clear goals in mind. write them down and think of some specific ways you can measure them. Believe it or not, those two simple steps can go a long way in helping you get where you want to be.
decide if you are ready to buy
If you’re just starting out, you may first need to obtain an insurance producer’s license. You will need a license if you plan to sell insurance products.
However, most states will allow you to purchase an agency without a producer’s license if you only plan to handle the administrative work.
Once you have your license, or if you already have an existing agency, it’s time to find out if you can afford another agency and run a new book of business.
Here are some questions to ask yourself to see if you’re ready.
The cost of an existing business varies widely based on size, agency sales, and cash flow. you can spend as little as $50,000 or more than $1 million.
However, you will find that there are many options available in the $50,000 to $300,000 range.
pro tip: You don’t have to have the full amount to buy an agency, but you should budget for a 25 to 30 percent down payment.
Alternatively, it costs between $5,000 and $50,000 to start a new agency from scratch; the main difference is that you will have to add new accounts one by one.
how to buy an established agency
Once you’ve decided buying an insurance agency is right for you, it’s time to do your research. While this part isn’t as much fun as meeting your new policyholders or setting up shop, doing your due diligence will ultimately help you get back on your feet even faster.
1. understand the requirements
Acquiring an insurance agency is more manageable than acquiring an insurance company in terms of regulatory requirements.
an insurance company, such as state farm or geico, writes policies and pays claims. in other words, they assume all the risk of their policies.
On the contrary, an insurance agent is a company or person authorized to sell policies. An insurance agency is a business made up of multiple agents.
However, there are states that require you to notify them of an acquisition, and some have the authority to approve or disapprove an agency’s acquisition.
be sure to check the specific regulations of your state where you make the purchase.
2. research the market and the type of insurance
When making an acquisition, choose a business that will continue to grow after your purchase.
Research the local market environment and look for products or types of customers that are in demand. Do you live somewhere with many young families? perhaps an agency that sells life insurance is the best option for you. Or do you live in a more urban area with a lot of construction? A company that specializes in workers’ compensation could be a strong competitor.
not sure? We’ll break it down for you:
can sell insurance to individuals, such as auto, home and health insurance, some of the most profitable products in the industry.
Alternatively, you can sell business insurance (or business insurance) products, such as workers’ compensation insurance, general liability insurance, and cyber liability insurance.
pro tip: If you currently have an agency, it’s best to stick with the same type of insurance (individual or commercial) since you already have experience and connections to build. however, you can expand your product range or increase the number of policyholders you work with by selling in new areas.
3. find an agency
Once you’ve narrowed down the type of agency you want to buy, it’s time to look for businesses for sale.
There are several helpful resources online for finding agencies. Browse websites like bizbuysell, agencyequity, and agency classifieds to see what’s available.
You can also contact your local community and see if any agents are planning to retire soon.
4. perform due diligence
Once you find an agency that fits your initial criteria, it’s time to take a look under the hood.
First, find out the seller’s motivation.
Are they retiring? leave the area? Or is the business just not profitable?
review the financials to make sure the business is healthy and growing.
Next, verify that the agency has all the licenses required by the state for an insurance agency or brokerage.
The agency must also carry the appropriate lines according to their licenses. In other words, a licensed health and life insurance agency may not sell property/casualty products without additional authorization.
Finally, before making a valuation, verify that the insurance companies allow the acquisition.
ask both your provider and theirs, and get written confirmation before exchanging money.
pro tip: Aside from finances, it’s worth seeing if your target agency has a similar company culture, especially if you’re looking to bring on new staff members.
5. decide the purchase price
Finding out the market value of your acquisition is where some of the hard work happens, and there’s no one right way to decide on a target price.
Most sellers price their agencies as a multiple of total revenue.
For example, let’s say an agency generates $200,000 in annual revenue and the seller is offering the business for $400,000. the sale price is a multiple of two, based on income.
Revenue multipliers vary based on your office location. Researching other sales prices in your area will give you an estimate of the average multiplier used in your area.
Not only should you look at the price multiplier, but also how new business will affect your profitability.
Here’s how to do it:
- calculate your current profit margin
- add new income
- add additional cost estimates (including employee salaries, office space, and marketing)
- insert all these new calculations into the equation
- calculate a new estimate of the profit margin (i.e. post-acquisition)
pro tip: the formula to calculate the profit margin is:
multiply by 100 to get a percentage.
If your profit margin goes up, that’s a sign the agency has a good price for you. however, if your new profit margin decreases or stays the same, then the listing price may be too high.
6. make an offer
once you have calculated the price, now comes the fun part: contact the seller and make an offer. There may be some negotiation involved, so we recommend determining your ideal price range beforehand (remember, start at the low end!).
If you and the seller agree, congratulations! you’re ready to buy an insurance agency.
Be sure to review state requirements and complete all necessary steps to transfer ownership to you.
Tips for acquiring an agency successfully
Buying an insurance agency is an exciting step and is a great way to increase the size of your portfolio.
Here are some tips to keep in mind:
- buy for the right reasons. Make sure you start the process with clear business goals (and ways to measure them). Before looking for agencies to target, ask yourself if there are better (and cheaper) strategies you can use to achieve those goals.
- buy from retired, not failed agents. When onboarding a new agency’s book of business, you want it to be healthy and give you room to grow. Stay away from insurance agency owners who are selling a business with declining revenues or a declining number of policyholders.
- research your new members. If you’re diversifying your clientele, make sure you understand the needs of your new policyholders. you should be prepared to make changes to your sales process if necessary.
- create a business plan for the integration. For acquisitions that involve the addition of new employees, take the time to prepare a well-thought-out integration plan. the smoother the transition process, the better your new team will perform.
and finally, be realistic. You may not have a 100 percent customer retention rate when acquiring an independent insurance agency, but it’s still one of the fastest ways to grow. As long as your new accounts (and employees) still feel taken care of, you’ll be successful.