Looking to sell your insurance agency? Or perhaps you’d like to expand your footprint by acquiring another one. When it comes to insurance industry M&A, much of the preparation is the same as any business, but there are nuances. Whether you’re a prospective buyer or seller, check out these tips from a seasoned M&A attorney.
Seller Strategies for Insurance Industry M&A
When it comes to M&A success, timing is everything! What steps should insurance agency owners take one to three years in advance of a sale to maximize valuation and make their agency more attractive to buyers?
- Diversify – while your insurance agency may specialize in personal or commercial lines, it’s prudent to showcase experience in multiple offerings. If it’s possible to expand or broaden your client base, seek to diversify, adding strength to your business.
- Build your team – often in an acquisition, a buyer will want to keep existing employees in place. Empower your team to step into leadership roles that relieve you of all those burdens and also allow them to bring value to new owners post-closing. Solid advice: build the business to run without you.
- Formalize your team – do you have signed employment contracts and employee handbooks? Non-competes are mostly a thing of the past, but a reasonable non-solicitation agreement will help preserve relationships and your business.
- Strengthen your processes – proactive policy renewals? Claims reporting? Compliance? Establishing and documenting your business processes will do you a world of good when it’s time to sell. While strong client relationships can take you far, buyers will pay a premium for turnkey operations.
- Organize your books and financials – again, documentation is key when it comes to accounting. Maximize your asking price when you truly understand your EBITDA, beyond just the “value you bring.” Make it make sense with a data room that organizes important legal and financial documents a seller will need.
- Get carriers on board – carrier agreement may include approval requirements like right of first refusal for sales. Look into these well in advance of a potential sale, perhaps even before valuation, to ensure you have a greenlight if desired.
Buyer Strategies for Insurance Industry M&A
You know your industry. Have collegial relationships with another insurance agency with an owner set to retire. Made the handshake agreements. You’ve done the due diligence. Now it’s time to put pen to paper and get a Letter of Intent (LOI) together. What should you consider including in a LOI or purchase agreement?
- What’s being sold – is it just a book of business or an entire operation? Be clear on what you want to acquire. A book of business typically includes a client database and anticipated renewals, while an acquisition of an entire operation often encompasses brand reputation, a website, phone number and more. Buyers should also evaluate carrier agreements early in the process, as certain carrier consents or approvals are typically required as a condition to closing.
- Indemnification clause – while you may prize the relationship you’ve built with a seller, you also want to protect your acquisition from going sideways. What if there are unexpected tax issues post-closing? Or perhaps the book of business was misrepresented. All this and more can be covered by representations and warranties, along with indemnification provisions that allocate risk and establish who is responsible if issues arise after closing.
- Transition services and restrictive covenants – a successful insurance agency acquisition often depends on continuity. Buyers may want the seller to remain involved for a transition period to help retain client relationships, maintain carrier connections and ensure a smooth operational handoff. Buyers should also consider reasonable restrictive covenants, applicable both to the seller and key employees or producers who transition to the buyer’s organization, helping preserve client relationships and protect the value of the acquired business.
- Earnouts – earnouts are a popular technique to reduce your upfront payment requirements while incentivizing the seller to meet post-transition performance targets. They also make sense amidst uncertainty in the market or to help resolve valuation gaps. Be sure to leverage an M&A attorney to clearly construct this aspect of your agreement to avoid unclear provisions and any disputes.
Most of these LOI elements are similar for an acquisition in any industry, however, a current trend impacting the insurance industry is the silver tsunami. With baby boomer insurance agency owners looking to retire en masse, many with no succession plans, insurance networks and private equity-backed “roll-ups” have seized the opportunity to aggressively buy and consolidate small agencies. This enables them to scale quickly, establishing a national name built on the strong reputations of local agencies. Perhaps you are one of these conglomerates or you’re an agency owner wanting to expand. When considering your buying strategy, it’s wise to know your buying competition.
Support for your insurance industry M&A opportunities
Successful M&A happens with proper preparation, notably picking the right advisors. Just as there are similarities for a deal in any industry, there are certainly nuances to consider as well. Whether you’re a buyer or seller in the insurance industry, our M&A team is here for you.
