If you’re interested in rapidly expanding your health insurance business, one of the easiest and fastest ways to do that is to buy an existing block of business. Of course, if you are new to the industry yourself, buying (or buying into) an existing agency may require a substantial financial commitment. However, if you have the resources, making an acquisition can be a good growth strategy.
Research Is Important
There are many things to consider as you look at potential agencies, or business blocks, which might be available in the marketplace. Among the key questions to ask are the following:
- Why is the business for sale?
Is the agent retiring after a long career? Is the agent selling after being in the business only a short time? Was the agency successful? Did it provide an ongoing, sustainable income for the selling agent? Ask about the seller’s source for new customers. Ask, “what worked and what didn’t” for him or her. What sales reports are available? What agency records are part of the sale?
- Is the business you’re buying a good fit with your current business?
If you have current customers, how will they be integrated with the block of business you are acquiring? Do your current clients and the customers being acquired share similar demographics? Are they in the same service area? Or, will the new block get you into a different market niche or a different service area?
- If you buy the business of another agent, will his or her existing customers stay with you? What’s the current client profile?
This is sort of an extension of the prior question. It’s important to look at the “history” each customer has with the selling agent. How long was each a customer? Did each have a single policy or multiple policies?
- How old is the business, and how has it performed?
Kick the tires, and find out as much as you can about the past performance of the block. Ask about current and “lost” customers, profitability, territory, average customer tenure, etc. Ask if any customers came about through a prior block acquisition or sale. Does the agency have renewal rights to its book of business? What rights are transferable if the agency is sold? Don’t risk acquiring a block that has no real value in the event of an agency sale.
- What sort of license(s) and carrier appointments does the agency have?
If you’re a health and life agent and you’re acquiring a health and/or life block, it’s likely you’re covered from a license point of view (unless the business you’re acquiring includes customers in a state where you’re not licensed). Ask questions to find out if the block includes customers beyond your current service area, or for coverage you’re not licensed to sell. Are you appointed with the carriers that are included in the block? If not, how complicated will it be to earn an appointment? What’s the process and what’s the timeline?
- What should you expect to pay?
A Midwestern field marketing organization (FMO) reported last year that the cost for a book of business is usually one and one-half to two and one-half times the agent’s/agency’s annualized gross commission. For example, if you are interested in acquiring a book of business producing $100,000 in income annually, you might expect to pay between $150,000 and $250,000.
In considering what you might offer, it’s important to know the products that delivered the annual commission. Was it primarily health? Health and life? Health, life, and annuity? What territory (or territories) are included? Getting a formal appraisal may be worthwhile, depending on the answers to these questions and ones listed above.
- What are your purchase options?
Typically, there are three avenues you can take when purchasing a block or book of insurance business:
- Lump-sum Buyout: This can benefit the seller, because it gives him or her cash up-front; however, the potential seller downside is a lower valuation. The risks to the buyer are higher because of the large cash outlay up-front.
- Purchase Over Time: This usually results in a mid-range valuation, but it poses some risks for the buyer because the purchase occurs over a specified period – perhaps three, four, five, or 10 years. The term may vary based on the type of business being acquired – i.e., an IFP business, a group insurance block, a Medicare Advantage agency, etc. For the latter, it’s important to keep in mind that existing customers are only going to continue for a period of five to, perhaps, 15 years. The seller may prefer this arrangement because funds are guaranteed for a specified period.
- As Earned: This sale arrangement offers the highest valuation for the seller, but the potential downside is the money is not guaranteed. If you buy the business and it doesn’t make any money, you don’t have the pay. If you do grow the business, and maintain it, you will pay more.
Funding sources vary. Check out this article by Fundera from NerdWallet, or this Business News Daily advice. Information is also available through the Small Business Administration website. There are lenders that specialize in helping agents acquire blocks of business. Some lenders require a minimum of 10% down. Look for a lender that works for your circumstances.