Buying an Insurance Agency with an SBA Loan

Why agencies are financeable, and what makes them different

Insurance agencies have predictable renewal revenue, low capital needs and high margins, which makes them attractive to buyers and to many lenders. What they don’t have is hard assets. Almost everything you’re paying for is the expectation that clients will keep renewing. An SBA 7(a) loan can finance that kind of intangible value, including client lists and goodwill, provided the financial due diligence supports it.

The general acquisition process is in buying a business with an SBA loan. This guide covers the parts that are specific to agencies.

What you’re actually buying

Start with ownership of the accounts:

• Independent agency. The agency generally owns its book, subject to its carrier contracts, and can sell it.
• Captive agency. The carrier often owns or controls the book, and the “sale” may be a transfer of the agent’s rights under the carrier’s program. The carrier’s approval and terms decide what’s possible.
• Hybrid or cluster arrangements. Read the agreements; ownership can be split.

Then the carrier relationships. Carrier contracts and appointments are typically with the agency or the individual producer, and they don’t move automatically to a new owner. Before you commit, find out which carriers will contract with you or keep the agency’s contract after the change of ownership. A book written with carriers that won’t appoint you is worth less.

What lenders look at

Commission statements, not just tax returns. Lenders commonly ask for carrier commission statements to see revenue by carrier and line of business, and they reconcile them to the tax returns. The tax returns are still verified against IRS transcripts.

Retention. Policy and revenue retention over several years is the single most important number in an agency deal. Bring it by line: personal auto and home, commercial, life and health, benefits.

Mix and concentration. A book spread across many personal-lines households behaves differently from one where a handful of commercial accounts drive most of the revenue. Concentration in one carrier is a risk too: if that carrier exits the state or changes commission schedules, the agency’s revenue moves.

Contingent income. Profit-sharing or bonus commissions depend on loss ratios and volume and can swing widely. Lenders typically treat them more cautiously than base commissions.

Producers and staff. Who services the accounts? If producers own their books or have agreements that let them leave with clients, that changes what you’re buying. Look at employment and non-solicitation agreements and how enforceable they are where you are.

On larger acquisitions, the current SBA rulebook requires a quality-of-earnings report that assesses revenue quality, customer concentration and contract continuity, alongside the valuation. See quality-of-earnings review.

Add-backs and deductions

Agencies often run the owner’s personal costs through the business. Common add-backs: the seller’s compensation, personal vehicle and travel, family members on payroll who won’t stay, one-time technology conversions. Common deductions: a market salary for you as principal, and the cost of a licensed producer or account manager to replace work the seller did personally. If the seller wrote and serviced the biggest accounts, that cost is real. The add-backs entry explains the general principles.

Licensing

You’ll need the appropriate producer licenses for the lines the agency writes, and the agency itself may need an entity license. Licensing is state by state. If the agency writes in several states, licensing in each is part of your closing checklist.

Collateral

With few hard assets, the business alone usually won’t fully secure the loan. When there’s a shortfall, SBA rules direct lenders to look at other available collateral, which can include equity in personal real estate owned by the principal owners. Life insurance on the key person may also be required; the lender’s analysis has to address it.

Structuring the handover

The first year after closing decides the retention number. Use the seller’s transition period, within SBA limits, to introduce yourself to the largest accounts personally and to settle carrier relationships. If the seller wants to be paid partly on how many clients stay, that kind of contingent payment to the seller is not allowed in an SBA-financed purchase, but a performance-based reduction in favor of the buyer can be (see earnouts). More in the seller transition period.

Before the letter of intent

1. Do you own the book you’re buying, and which carriers will appoint you?
2. What’s the retention history by line, for at least three years?
3. How concentrated is revenue by carrier and by account?
4. How much of the income is contingent, and how has it moved?
5. Who services the largest accounts, and are they staying?

For valuation, see how to value a business for an SBA loan. For a professional-practice comparison, see buying an accounting firm. Run your numbers in the acquisition calculator, and if you’re looking at an agency, tell us about it.