When Using a Business Broker to Sell Your Insurance Agency, Always Choose a Specialist
- June 30, 2020
The hot pace of insurance agency sales has not slowed. Consulting firm MarshBerry reported that announced deals increased 10% in 2019, a new record. Agency principals who are ready to sell their businesses can look for buyers on their own or retain a broker to help arrange a sale. There are many consulting firms that help business owners in all industries arrange the sale of their businesses. There are also firms that specialize in selling insurance agencies.
Which should an agency owner choose? For Jon Persky of consulting firm Optimum Performance Solutions, the answer is simple. “If you have a heart problem, you don’t go to a proctologist,” he says. “You go to a cardiologist. If you want to sell an insurance agency, you need to work with an insurance agency specialist.”
Mike Mensch, managing partner at Agency Brokerage Consultants, says selling an agency is unlike selling other kinds of businesses. He differentiates between strategic and non-strategic buyers. “A non-strategic buyer is basically someone that is buying a job, whereas a strategic buyer is one that gains revenue and expense synergies through an acquisition. In the insurance industry, nearly every other agency is a strategic buyer.”
Persky encourages using specialists because of the unique aspects of the insurance industry. It is important for the broker to know the industry and its terminology, knowledge a general business broker might not have. “The advisor should train the seller,” he says, “not the other way around.”
General business brokerages tend to use standard one-size-fits-all contract forms. Persky says these contracts frequently contain provisions that are irrelevant to insurance agencies, such as handling of hazardous waste materials. Conversely, they may not address issues that are vital to agencies, such as the commission splits for agency billed business versus direct billed.
Unique services and relationships give specialists an advantage, Mensch says. For example, most specialists can help sellers determine the value of their agencies. Solid relationships with lenders and an understanding of their underwriting processes are helpful if the buyer will finance the transaction with debt.
However, he says that the majority of deals these days involve the buyer’s own cash: “(O)ver 75% of the deal volume on a dollar basis involves buyers that have private equity backing or are a publicly traded company.” Private equity firms bid up prices because they are paying back only the interest on their money, rather than principal and interest that borrowers must repay. In his opinion, good relationships with a variety of buyers, including private equity firms, can be more important than relationships with lenders.
This leads to one of the primary advantages of using a specialist - knowledge of what will be a good fit. “By knowing the buyers, the advisor will have an idea from the outset as to which might be a good fit for a seller client based on their agency and their desired outcome from a transaction,” says Mensch. Persky says specialists have pipelines of potential buyers who have been pre-vetted for financial strength and operational efficiency. They know who is on the market (“You don’t know the really good agencies are for sale until they’ve already sold,” Persky says) and which buyers would be good fits for them. General business brokers, conversely, tend to send out blast emails to find takers without advance vetting.
Specialists also tend to charge sellers lower commission rates than general business brokers, Persky says. The exact rate will vary by agency size - the rate will be higher for smaller agencies. He explains that the amount of time and work involved does not grow directly with the size of the agency. Also, the sale of a smaller agency may be the first and only time the owner has gone through the process, requiring the advisor to provide more guidance.
Insurance is a specialized industry that requires specialized advisors. Mensch says, “ When you compare the options, there is really no reason to even consider hiring a generalist broker or M&A advisor if you are in the insurance industry.” Persky says he would never advise an agency owner to go with a generalist. Insuring a business or a home requires expert advice. Selling an insurance business is no different.