Mistake 2: Buyers don’t get to know the customer base prior to taking over. Obtain a list of customers that includes details about the products they purchase, revenue, producer, and length of time with the agency. Then talk with some of the largest customers to learn about their experiences with and feelings about the agency. In the best case scenarios, we’ve seen buyers accompany agents on appointments to get a first-hand view/account of what customers are like as well their relationships with the agency. Additionally, conducting a general web search of the agency, competition, and region can help highlight if there are issues that customers might not be forthright in sharing directly, but rather in discussion forums, blogs, web sites, directories, and on social sites.
Mistake 3: Buyers neglect developing a plan to transition customers. No buyer acquires an agency expecting customer retention to take a sharp dive after the deal is completed. To keep happy customers, it’s critical to develop a transition plan that introduces new owners to customers and addresses any questions or concerns they might have – this will take time. All the more reason to craft either a succession plan or exit strategy for the seller ensuring that they maintain a vested interest in a smooth transition.
Mistake 4: Buyers don’t have a real picture of agency operations. Only having a 20,000 foot view of how the agency operates is dangerous. Buyers should have tangible insight into operations so there are no surprises about how the agency truly functions. Buyers should visit all of the agency’s locations several times during the due diligence and make sure they understand the operations, including the carriers, agency software, accounting systems, human resources and customer service.
Mistake 5: Buyers don’t dig deeply enough into financials. Because insurance agency owners are usually sales people first and foremost, they tend to focus on commission statements and reports and rely on them to get a picture of the agency’s financial viability. But a complete and thorough review of all financial aspects of the agency is essential. It’s advisable to have an accountant assist with this process. Buyers should analyze audited financials and tax returns for at least the past three years along with budgets (actual vs. budget), contracts, commission statements and retention reports to identify trends.
Mistake 6: Buyers don’t know how much capital they really need. Buyers can be saddled with a huge cash flow burden if they underestimate how much money they need to operate the agency or miss a liability in the due diligence process, especially in the first few months after
the purchase. They look at finances from a monthly or yearly perspective, but fail to map out a plan to transition in those first few months when things may not quite be normal. For example, some buyers are surprised to learn — after the fact — that the Purchase Sale Agreement allows the seller to get all the commissions earned up to the time of sale. This oversight can lead to a shortage of funds and throw off future projections. Buyers are also negligent in negotiating some vested interest with the selling party. It is critical that the seller stay engaged enough to make a smooth transition without loss of any agency revenue.
Mistake 7: Buyers don’t carefully review all significant contracts. Just as reviewing financials calls on accounting expertise, thorough contract reviews may need the attention of attorneys. Buyers should communicate with each carrier to make sure contracts and rates will remain the same or can be merged with existing contracts for same or better rates. Likewise, all employee-related contracts, including non-compete and non-solicitation agreements, should be reviewed and evaluated to determine if they will remain enforceable or if new ones need to be drafted and executed. And as part of the financial examination, leases, vendor relationships and agreements and all other contracts need a close look.
Mistake 8: Buyers fail to realize sellers’ true motives for selling. As sad and disappointing as it may be, not everyone is honest. Some sellers may not be forthright in sharing the core reasons why they are selling their agency. Sure, they may give you a number of factors that are contributing to their decision, but they may not wholeheartedly tell you if they’re in financial trouble, are disgruntled with their carrier, sales are declining, their market is shrinking or other reasons that can result in a lower profit for them. They may even have plans of moving to another location to start over rather than getting out of the agency business altogether. This is the time to be direct and downright nosey. Buyers need to know the full truth so they can make the right decision based on facts.
ABOUT THE AUTHOR
Kathy Yeary is the executive director of customer service and human resources at Oak Street Funding. Kathy has over 21 years of insurance and financial industry experience. Prior to joining Oak Street, she served as the Vice President – Asset Management at a specialty finance company and in several financial and operating capacities at Conseco and GTE. Kathy holds a Bachelor of Science Degree in Business Administration from the University of North Carolina, Wilmington.