I am Buying an Insurance Agency. Need advice ASAP!?

Question

A friend of mine offered to sell me his book of business. In about 12 months, he built a $2M book with over 3000 clients mainly P&C pers lines. To say the least, it will be a problem book that will require lots of work. IE. invalid discounts offered, low limits, bad service, underinsured homes, etc. Service is my strong point and do believe that i can salvage about 50-80% of the business. He is offering it to me at very low risk...Here are the details. 10K down (owner financed for 36 mo 0% interest). I pay him 50% of the renewal commisions every mo for 36 mo with no minimum guarantee on his part and the most i would have to pay is 190K, whichever occurs first. Also, I have to take over his lease which is approx 1K/mo for 5 years. He has non competes from him and his producers. I am too inexperienced to make this decision on my own. Please give me any advice and your thoughts. Thanks.

Answer 1

I know a number of established agents in my area that activly pursue agencies for sale and would pay double what your paying..for a good book.

The fact that your friend is dealing with you and not selling for a better price speaks volumes. If no one want to purchase a book, there is probably a reason why. If there are sub-agents in his office why are they not buying? The terms are reasonable.

Do some furthur research: Any agency undergoing change is going to experience some run-off of existing business. To estimate how much will run off I’d do analysis by first breaking down the book of business:

Personal lines vs. commercial lines and access to both.
Preferred market vs. standard or high risk and again access.
Any life& health, group life, disability: what kind with who and how stable
Consider what types of business you want to write and see how competitive you are in those markets.

Other factors to consider:
Loss histories
Profitability
Retention

After crunching numbers, an analysis of current agency management would be in order.
Since you’re stepping in to replace existing agents, how are you going to do?
Are you replacing the most popular guy in town or an agent who’s been semi-retired for the past 5 years?
Is the book looked after or has it been neglected? High maintenance or on auto-pilot?
Are the principal or sub-agents moving to positions where they will compete against you?
Are you able to fill the shoes or are the shoes too small and you can do better?
Is the agency what your looking to build or are you using the appointments to grow in a different direction?

Any agency undergoing change is going to experience some run-off of existing business. Is current management working with you or against you to keep your business walking out the door? Are CSRs and other key personnel staying? What is their incentive to stay? What is the cost to keep them? Are you on the hook for their health plan, pension, 401K, profit sharing?

Since you're so inexperience, why not work for the agency for a time before purchasing? Six months as a producer would give you time to work in the agency and see first hand how good or bad things are; and teach you to run an agency. Good luck.

Answer 2

First off, the obvious. Whether he is a captive agent or he is independent are you or can you get appointed with all the carriers. If not, you will not get the commission.

Second, a 2M book of business with 3000 clients is only $666 per year per client. That is pretty low with any type of P&C line. One average client with a house and two cars should generate $1500 to $2000 or more per year. Do you have access to his client files? If so, take a look at who he has and what the premium is. Look at the demographics of the client. A younger client will go elsewhere in a flash if you start "correcting" the accounts. The older, more stable, clients might stick around and appreciate your service. If you are unable to look at the files don't even consider it.

Third, an average book will loose 20% right away when an agent leaves so take that 20% off the top before you figure your salvage figures.

Fourth, why is he selling. Does he know he has a rotten book that won't stick around or will cause many problems? That yearly average is worrisome.

Fifth, do the math and be very conservative. You may be able to salvage 50% (of the 80% that stays at the start) but maybe not. See if the figures work out if you only can save 40%. Remember, with that many clients you will not only have the lease and utilities but will also need to hire a CSR to run the office while you are out "fixing" things.

Basic math figures: 80% of 3000 clients is 2400 clients. If you can save 50% of those that is 1200. Multiply by the average $666 per year is $799,200. 10% commission is $79,920 (I'm sure the average commission is higher, but we'll use 10% for demonstration purposes). 50% to him leaves you with $39,960. $12,000 lease plus $3000 utilities leaves you $24,960. A good CSR will run at least $25,000, leaving you in the red.

After checking the files to get more accurate information plus what you know about the commission rate do your own figures.

Answer 3

The last answer was TERRIFIC but I have something else to add - be sure you have a GREAT E&O policy with HIGH limits. Remember it will probably take a year to get through all of the files to see what is going on with them, but you are responsible for all prior errors THE DAY you purchase the book of business. Your clients are not going to care who owns the business, if there is a problem & they are uninsured or underinsured at the time of a loss when they should have been covered, YOU are the one that will be sued, YOU are now the agent & YOU are on the line. Our agency bought a smaller agency with similar problems you are talking about (we heard "rumors" of trouble with clients that left, but never truly found out how bad it was until after the closing & digging in the files). The number of clients was overestimated too. There were plenty of policies that had been cancelled but were still in the client count due to bad accounting practices. The work was enormous. We had to pay the whole department (8-9 CSRs) several weekends of overtime just to review SOME of the files, not all of them & there were only 600 personal lines ones. We had to send out review letters on every single file with a schedule of insurance to see if there were any corrections to be made. When there was a claim it was a mess. The questionnaires said things that didn't match the applications (ie no pools when there was an unfenced one, a mobilehome insured as a stick built home, no claims when the last policy was nonrenewed for claims - all huge things that could be considered misrepresentation & void policies). Luckily we have a great reputation with the carriers & got claims paid that by rights should have been denied because of the prior owner. Other things were caught before any claims happened. There were cars that should have been added but never were & premium paid & ID card given. Now, about 2 yrs later, 3 CSRs still get paid overtime to work on these accounts. There is a dedicated CSR to them but he can't handle the workload. Most of the other CSRs have 300-400 more accounts with less work. 3000 mostly personal P&C clients would be a minimum of 3 personal CSRs & one commercial CSR. I handle over 1000 accounts but I can handle more than most in my department, the average is about 800.
My question would be WHY is he getting out after a year if this is so profitable? What is going on that he is not telling you about? Is he afraid of being sued? Is there an ongoing claim that is iffy?? Is he losing his agency appointments from the companies due to his shoddy work? The agency we bought had been cancelled by quite a few. I think I would ask a lot more questions before you jump into this. AND hire an attorney. You may not be able to look at the files due to privacy laws but get as much information as you possibly can. BE CAREFUL. My agency did this & it cost so much in time & effort to work on these files that I still think the book of business is losing money. Luckily we are big enough to absorb the costs, just starting out you wouldn't be.

Answer 4

That's why the whole banking and credit system is messed up! When you signed on for the credit, they created money they didn't have out of thin air and have been able to charge you interest on money that only exists in their computer, so they have been getting something for nothing and if they did wipe out your debt, they wouldn't lose a dime. Anybody who has paid interest on anything from a bank should at the least get a dividend payment from a bank since the bank couldn't even loan anything without your signature in the first place!! That is disgusting that they would try to destroy your life over something so trivial to them! Anyway, the government backs that system so you do have to deal with it. If your Capital One account is with a collection agency, you have to deal with the collection agency and not Capital One. If you have already acknowledged the debt, then try to make a deal with them for, say 10% of what you owe. With your other debts and not having much income, they will have a hard time collecting much of anything from you and they probably only paid about 5% or less for the debt from Capital One. Also, try to make a deal on your medical bills for a percentage (10-15%, start low) of the cost and attempt to get them to mark the payment "paid in full" on your credit report (they don't have to, but they may if you explain your situation) Even if settling those debts damages your credit score for a short time, your having so many bills and not being able to pay them is going to make your credit score pretty bad anyway and probably for a much longer time. If you take action now, you can be in a good spot again by the time you are in your mid 20s. Just remember that you do have rights and everything is negotiable. I'm not a lawyer, this is just general advice, so if you already do have to go to court and you are able to, it would be good to speak to an attorney about your options.

Answer 5

What's his current LOSS RATIO?? In only 12 months, you have no idea what his retention rate is, either, so that's bad. You might be highballing on that 50% rate.

What are his COMMISSIONS? I'm figuring, probably $200,000 a year. And no contingencies. And if he has producers, they're getting half of that, so you're giving him the OTHER half?? How are you going to come up with operating expenses?? You need either one crackerjack CSR, or two average ones, for this kind of book. How are you going to PAY them?

Which carriers does he have CONTRACTS with?? How hard is it to get your own contracts with them? How happy are the carriers with what they've given him??

I'd pass on this deal. I wouldn't buy that kind of book with no track record for that price.

Answer 6

In the name of all that is good and Holy, get a lawyer. A real lawyer. Your OWN lawyer. Never share a lawyer with anyone when you are on opposing sides (buyer/seller). Do NOT sign up for this without legal help. If the paperwork is not right, this person could (if they were the type) steal your money and leave you with nothing but liability.

Lawyer.

Answer 7

Yes, get a lawyer!

There is a whole host of issues involved.... non-competes are often only enforceable if there is consideration given for the non-compete, for example.....

Answer 8

A. Get an attorney and accountant.
B. If they say "OK", only do it if you've been very successful in this business.