What to consider when buying, selling, or merging an insurance agency

Most independent insurance agencies have noticed the uptick in agency mergers and acquisitions in the last several years, with over 1,000 independent agency acquisitions announced in 2021 and 40% of independent agency owners saying they anticipate a change in ownership in the next 5 years according to Big I’s 2022 Agency Universe study.

The sale or merge of an agency is a big decision for both the buyer and seller, and there are a number of important items to consider to ensure the process is as smooth as possible and the value of the agency isn’t impacted. Our recent HawkTalk Live webinar discussed this topic with a panel of guests including customers Scott Howell of iProtect Insurance and Colleen Wood of Montana Farmers Union, as well as HawkSoft employees Tiffany and Noemi, who aid agencies in these transitions as part of the Customer Success team. We’d like to share some of the top takeaways of important items to consider during the merger/acquisition (M/A) process.

In this article:

• Why are agencies being acquired?
• Things to consider during a merger/acquisition
  • Non-cash benefits
  • Agency technology
  • Carrier agreements
  • Buildings, offices, & maintenance
  • Employees

Why are agencies being acquired?

Our panelists discussed several factors that have influenced the current influx of mergers and acquisitions happening in the industry, including the pandemic and advent of remote work, as well as carriers pulling out of certain regions and making it difficult for agencies to maintain policies. Scott Howell pointed out that large private equity-backed firms bought up a vast number of small agencies that were struggling during the pandemic, when costs were low.

Now that agency value is recovering, he observed that “the same firms that were buying before with no questions asked are now putting agencies under the microscope before buying. They want to see more data and are being more cautious before buying.” Still, an agency M/A has the potential to be hugely beneficial not just for the buyer, but for the purchased agency. The group discussed several potential benefits or reasons that an agency might consider an M/A, aside from pure profit.

Potential benefits of agency acquisition/merge:

• Larger book of business, geographic service area, etc.
• Additional markets - more LOBs, resources on specialty lines, cross-selling opportunities, etc.
• Better carrier opportunities – more appointments, better commission, etc.
• Improved workflows & support – better resources, standardized processes, additional technology, etc.

Things to consider during a merger/acquisition

The panelists, most of whom have experienced an acquisition firsthand, pointed out that agencies often sign purchasing agreements without considering all the future ramifications for the agency, including agency data, technology, relationships with carriers and other parties, and creating a smooth transition for employees. Here are some important areas to consider before finalizing an M/A.

Non-cash benefits

When selling an agency, it’s tempting for sellers to simply choose the buyer offering the highest price for the agency. However, there are non-cash benefits that should be considered too. A PE-backed firm may offer the highest price, for example, but an internal buyer may be able to offer assets that are even more valuable to the seller, like internal agency knowledge and relationships and the influence to retain the current agency staff.

Buyers may also offer other benefits beyond the sale price, such as profit sharing, stock options, or long-term growth incentives, which could potentially outweigh a higher immediate sale price. Sellers should also consider the role they want to have at the agency after the sale. “Think about your future at the agency,” Scott recommended. “Do you want to continue working there for a certain number of years? Do you want to have a part-time or consultant role? Make sure that’s part of the contract, or the buyer has no obligation to respect it.”

“Think about your future at the agency. Do you want to continue working there for a certain number of years? Do you want to have a part-time or consultant role? Make sure that’s part of the contract, or the buyer has no obligation to respect it.”

Scott Howell

Make sure you understand what things are most important to you as a buyer or seller, and that you’re choosing the buyer/seller that offers the most value in those areas—not simply the highest sale price. “Ask around about the buyer you’re considering,” Scott encouraged agencies, “or even ask the buyer if they can get you in contact with other agencies they’ve bought. Ask them to tell you the good, the bad, and the ugly.” Colleen agreed that buyers should do the same: “look at the previous owner and how they did business, and look at the customers they have.”

Agency technology

It’s incredibly important to understand how the M/A will impact the technology being used at the purchased agency. Consider these questions regarding the purchased agency’s technology stack:

• What technology does the purchased agency use?
  • What things are different from what the acquiring agency uses?
  • Which tools will be kept, added, or lost?
• Will users needed to be added to or removed from any tools?
  • What is the associated cost?
• Are there termination fees with any tools being removed?
  • What contracts are in place?

Changes to familiar systems, processes, and tools can rock the agency and inhibit the productivity of staff if not handled well and planned for in advance. Here are some of the most important pieces of technology to consider during an M/A.

Agency management system

Likely the most substantial and complex piece of technology at an agency is the agency management system. In fact, HawkSoft employee Tiffany mentioned that one of the reasons she left the agency she worked for prior to HawkSoft was because they didn’t adequately train employees on the new system they would be using due to an acquisition. Here are some important questions to consider if the purchased agency will be moving to a new management system:

• Is the buyer incentivizing the purchased agency to change to a new system?
• How will employees be trained on the new system?
• What will the data conversion to the new system look like?
  • What data will transfer?
  • What data cleanup or standardization will be needed?
  • What is the associated downtime and cost?
• Who owns the agency data?
  • Is the owner stipulated in the contract?
  • Are there fees associated with obtaining ownership?
• How will the seller maintain a copy of data for E&O purposes?
  • What is the cost and who is responsible for paying it?

HawkSoft employee Noemi emphasized the importance of understanding which party is responsible for any costs associated with changing or merging management systems, which can be substantial and may not be outlined in the sale contract. “If you’re changing systems,” Tiffany recommended, “contact the new system and ask them what the conversion process is and how long it will take. Every single vendor brings different data over and has a different process.”

“If you’re changing systems, contact the new system and ask them what the conversion process is and how long it will take. Every single vendor brings different data over and has a different process.”

Tiffany, HawkSoft Customer Success Manager

Colleen mentioned that her agency recently moved to HawkSoft as part of an M/A. “I was very nervous about how much data would come over to HawkSoft,” she said, “but every bit of it transferred over. We were on one system one day, and two days later we were on HawkSoft. I thought I would be getting back into the previous system every day, but I’ve only had to once or twice. It’s been fantastic. When we went through this with other systems, we would only get the policy downloads through IVANS, and had to manually re-input the rest.”

Even if the purchased agency is using the same system as the purchasing agency, the two databases will likely need to be linked or merged, and it’s important to understand the work and cost it will entail. See our Mergers & Acquisitions checklist for a list of specific HawkSoft settings that may be affected by an agency M/A.

Additional agency technology

There are a number of other software tools to consider during an M/A. While transferring data may not be an issue since it likely comes either through the management system or directly from carriers, you will still need to coordinate whether there will be a change in technology or who owns and handles the account.

• IVANS Account
• Rater
• E-signature tool
• VoIP/Phone system
• Email marketing tool
• Other integrations: review management, analytics, pipeline management, etc.
• Office licenses & subscriptions: Microsoft Office, Adobe, etc.

Carrier agreements

Another major thing to consider is how the M/A affects the carrier appointments, contracts, or terms of the purchased agency. Will the agency retain its original appointments and thresholds and receive the same commission and bonuses? Tiffany pointed out that appointments are sometimes tied to the agency owner, and will not necessarily pass to the new owner.

On the other hand, additional carriers or better terms could be available through the acquiring agency. Take a close look at your carrier contracts to determine how they will be affected. “Talk to carriers before the sale and get in writing what will happen to the contract or appointment,” Scott recommended. “My advice is ‘plain speak is best understood’.”

Buildings, offices, & maintenance

The M/A contract stipulates what will happen to the building or office space of the acquiring agency, whether it is changing locations or simply changing ownership. However, the panel agreed that there are many associated items that may not be clearly spelled out, from the hardware technology, furniture, and other physical assets within the office to any contracts associated to building maintenance (security, cleaning, landscaping etc.).

“Everything down to who’s washing the windows has to be thought about,” Tiffany said. “They may seem small, but they can quickly bring the office to a halt if they’re not taken care of.” Create a list of all contracts associated with the office space and make sure each one is transferred to the responsible party if needed.

Employees

The panelists all agreed that how the transition is handled with the employees is one of the biggest factors in determining the success of the M/A. Scott shared that his agency has gained experienced employees who left their prior agencies due to negative M/A experiences.

Colleen told the panel that when she bought an agency in the past, the selling agency didn’t inform the employees, leaving her with the unexpected duty. “I ended up being able to keep all the employees,” she said, “which was invaluable because they’re the ones with the relationship with the customers.” Noemi agreed that “it’s important to make sure employees are involved in the transition process as early as possible so they have the tools and technology they need to be successful.”

“It’s important to make sure employees are involved in the transition process as early as possible so they have the tools and technology they need to be successful.”

Noemi, HawkSoft Customer Success Manager

The panel agreed that the best approach is to be upfront with the staff, inform them as early as possible, and provide them with the answers and assurances they need to feel secure about the transition. Employees are more likely to leave if they feel information is being kept from them, or if communication is insufficient and they feel their concerns aren’t being addressed.

Here are some important considerations regarding employees:

• Which & how many employees are staying?
  • Is the buyer providing an equitable benefits package with commissions, health insurance, etc?

• Will any employees be let go?
  • Whose responsibility is it to have these conversations?
  • Who will pay severance, unemployment claims, etc?

• Who pays commission owed to producers?
  • If producers leave, do they take their book of business with them?
• Are any incentives being provided to motivate employees to stay with the agency through the transition (e.g. a bonus for agency growth)?
• How will the M/A affect the roles and workload of current staff?
• How do current employees feel about the M/A?
  • Have they been adequately informed about the M/A, or do they have questions?
  • Are any employees at risk of leaving due to the transition?
• What training will be provided for staff on new tools and processes?
• How is the agency’s branding affected by the M/A?
  • Do staff understand how to refer to the agency and explain the changes taking place to customers?

Prepare for a successful sale

An agency acquisition or merge is a huge undertaking that can feel overwhelming whether you’re on the buyer’s or the seller’s end. Paying attention to the key areas mentioned in this article when negotiating the sale and handling the transition will ensure that the agency retains its value, as well as the satisfaction of its customers and employees, through the sale and beyond.