What to Consider Before an Acquisition

The decision to undergo an agency acquisition can be a tremendous task that requires much thought and careful planning. Our team has compiled a short list of items to think through before committing to such a transaction.
Among agents seeking an acquisition, there are varying reasons for their decision. What would your primary motivator be? Some of the primary reasons agents choose to undergo an acquisition is geographic location expansion, revenue growth can be achieved faster than organic growth, carrier diversification, and operational expertise or efficiencies gained from economies of scale. Make sure you understand your primary motivation so that you can tailor your selection of an acquisition target for those agencies that meet your objectives.
As you look to do an agency acquisition, you should also think about whether you want to target a strong, growing agency, or if one that's declining or stagnant is more your desire. For an agency that is growing there is an increased likelihood that you will pay more. Although the idea of paying a higher price may at first glance seem unappealing, it may be worth it if the agency is already operating efficiently. This may be a good option if you have little experience in acquiring another book. Although you may pay less for a troubled or stagnant agency, the time that will need to be invested early on will be greater to get it to a point of financial stability or growth. This may be an acquisition for someone who has successfully acquired other agencies and is familiar with the process. Don't just focus on the revenue side of the business. Examine the expenses of the agency. What are the primary costs for the agency? Some of the larger expense items may be salaries and benefits, rent, and marketing. If the agency is operating at a low efficiency level with high overhead, determine if there are any cost savings that could be made or staffing or process changes made to improve efficiency.
Before entering an acquisition, you may also want to consider the quality of the book and if it meets your objectives for the target. Are you looking for an agency that has many of the same carriers you do so you can build scale with each carrier? Or is there a key carrier relationship that you don't have that you could obtain with the acquisition. Focus on retention rates, loss rates, E&O claims and what is the concentration of the agency's current customers. Read more on this topic in Questions to ask your seller.
In regards to location, the economy of the geographic area of the agency can be a major deciding factor for determining if the target is a good fit for your goals. Is the area where the agency is currently located growing or is it stagnant? If the economy of the location is growing, you may want to keep the agency where it is, but if the area seems to be stagnant it may be wise to fold that office to another a few miles away. Drive by and foot traffic for an insurance agency can sometimes play a large part in its success.
Be sure to think through the transition risk with an acquisition. Will you as the new owner be able to retain the customers associated with the acquired agency? Is retention dependent on key employees remaining with you after the acquisition? Consider the relationships with the carriers and ensure that existing carriers will consent to transferring the book post acquisition. Are there any new carriers that you need to contract with in order to transfer the full book and will you be able to obtain those contracts? For those carriers that won't contract with you, consider whether you carve that out of the acquisition or if you will be able to move those customers into new policies with existing carriers.
In order to make your acquisition successful, go into the acquisition process carefully and ensure that the targets you are looking at meet your goals and objectives.