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How Insurance Agency Buyers Can Avoid Ruining a Deal



It’s taken a lot of searching, networking and dead ends, but the principal of an independent insurance agency has finally found another agency to buy. It has everything he’s looking for - good mix of business, an excellent reputation, a decent social media presence, and a principal who is ready to step away from the grind of running a business. Discussions are progressing well, and it looks like they’re on the verge of serious conversations about numbers.

And then one phone call ruins everything. The seller tells the potential buyer to get lost.

Deals between agencies can and do get derailed when a buyer’s conduct becomes inappropriate or even offensive. “This is no different than in any negotiation,” says Sam Patterson, CEO of The Springtree Group, a mergers and acquisitions specialist in Dallas. “Both sides need to be shown respect and mutual consideration if they expect a deal to be consummated.”

Both buyer and seller should moderate their expectations at the outset, Patterson says. The agency has been the seller’s life for years, possibly even decades; he will naturally see it as exceptional and worth an above-market price. The buyer, in turn, may approach the negotiation “thinking they will be able to participate in a fire sale.” Neither attitude is an ingredient for success. “Moderation and mutual understanding usually win the day.”

Complicating things is the fact that often the conversations are not done in person. Marc Greene, founder of agency broker General Insurance Brokerage in Sarasota, Florida, points out that “a seller can only decide if the buyer is a good fit based on a conference call and subsequent discussions, as many times the buyer and seller don’t meet until the deal is under contract.”

Greene advises buyers to take a cautious but steady approach, starting with a meet-and-greet that segways into a conversation about the selling agency’s background or book of business. Patterson’s firm kicks off the process with joint “chemistry calls.”

This may be where unrealistic expectations become apparent. “Personalities often collide!” Green says. Patterson adds, “The seller and the buyer need to show preparedness and flexibility.”.

The buyer’s financial position - cash on hand, outstanding debt, and credit rating - can make or break the sale. Patterson calls them “absolutely critical factors,” any one of which can kill the deal. “The inability to secure financing is the number one cause of broken transactions,” he says, “and all three of these topics are part of the financing conversation.”

Greene says the buyer’s finances can stop the negotiations before they really get going. “Nobody wants to share information with a buyer that is unable to close a transaction.” His firm prequalifies buyers to determine the right loans and lenders for them.

A buyer’s financial reputation trumps what their peers may have to say about them. Patterson believes that most public references can be and are staged. Greene also passes up references. “We have the buyer interface with our lender partners to determine if they can close the transaction. We will get feedback immediately.” Getting that feedback ensures that no one is wasting their time.

A good website and social media presence are important, though it may be more important to the buyer that the seller is active online. “If the seller lacks a digital presence, the marketability of the operation is hampered,” Patterson says.

As discussions move on to topics like book composition and carrier relationships, Patterson warns buyers not to let their revenues sag. Keeping and reporting clean financials is critical. He also counsels keeping an open mind about different payment vehicles. “(They) sometimes can be more lucrative to the seller than an all-cash position.”

Acting with integrity and respect are always essential. “Arrogance or talking down to either side is a transaction killer,” Patterson says. One side or the other renegotiating after there has been agreement on particulars can also stop the process. “Both buyers and sellers need to understand this is a sales and financial process and it will benefit them to conduct themselves in that manner.”

Negotiations may be short-lived otherwise. “We have had buyers over the last eight years that have shown their true colors,” Greene says. “We do our best to move to another buyer quickly!” Prospective buyers who lack professional conduct can develop a reputation that may hurt their chances of being considered for future agencies.

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