ACQUISITION GUIDE liveoakbank.com/insurance

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1 INSURANCE ACQUISITION GUIDE liveoakbank.com/insurance

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3 INTRODUCTION Congratulations! As either an existing owner or first-time buyer, you ve reached the point that you re ready to build your business by acquiring an agency. As a bank that specializes in supporting small and medium sized business growth, we have learned a lot over the years about what makes acquisitions work or not. We ve seen hundreds of business transitions, and we ve learned that as a buyer, there are a few keys to success. Two success factors in business transitions are (1) thinking through a long-term growth strategy and (2) paying attention to detail. Deploying both of these practices will help make sure you buy an appropriate agency for the right price and manage the transition in a way that helps you retain clients from the book of business that you are purchasing. This guide will help you target an appropriate acquisition, successfully apply for credit, and manage the transition. SELECTING AN AGENCY TO ACQUIRE According to the figures published by Independent Insurance Agents and Brokers of America and Reagan Consulting, the average age of agency owners remains above 50 years old. 1 Although many agency owners may want to work until late in life, statistics show that many are likely nearing retirement and ready to sell. This provides an exceptional opportunity to the professional looking to grow through acquisition. As a buyer, you can and should be selective. Look for a business that is compatible with your own or, if you are new to ownership, one whose culture matches your working style. In addition, seek out an agency with a strong staff and a high customer-retention rate. Here are some issues to consider. 1) If you are an existing owner, are you looking to expand locally and combine offices, or will you expand to an additional location? If you are a first-time owner, are you comfortable with the location of the business? For the existing owner, if you are looking to combine both agencies into a single office, you ll need sufficient staff to handle the extra workload. If you re expanding to a second office, you need strong staff that can work well independently; you will also need technology you can access securely from multiple locations. If you will be working at both offices, look at traffic patterns to minimize commuting time. For the first-time owner, understand the current client base and physical location of the office. Are you comfortable with the current staff performance? Is the current market strong?

4 2) Is the target agency growing? Seek out agencies that have held onto their longtime clients and continue to bring in new ones, so you can capture the positive momentum. Always try to understand the demand drivers behind growth. Is this sustainable? Can it be improved? What is driving revenue stability and growth? What s the marketing strategy? 3) Is the agency s technology compatible with yours? When combining organizations, compatible technology will make for a much easier transition, especially if you don t plan to retain the acquired agency s staff for long. It can be very challenging for both clients and employees to change IT cultures. 4) Do you have a similar philosophy of client service? If you want clients to stick around, it helps to provide continuity and that means that services will remain similar, or even improve, once you take over. Maintaining services also means similar revenue and billing models. Who is currently responsible for client and account servicing at the target agency? 5) Is the agency s culture compatible with yours? When combining businesses, it s important that everyone can communicate and has a compatible workstyle. To take a simple example: If one office shares workflows and the other formally assigns clients to individuals, combining the two practices may get challenging for both clients and staff. 6) Are both agency s financials in good shape? Do a deep dive into your acquisition target and make sure it s healthy, with no problems brewing under the surface. The same goes for your own agency; make sure you have the healthy income statement and balance sheet of an attractive acquirer. Remember, when evaluating an agency, there should be enough cash flow each year to support your personal needs, make new loan payments and have a healthy buffer left over. PREPARING FOR OWNERSHIP Acquiring an insurance agency should be part of an overall strategic plan for your business. If you are clear on your goals and resources, you will have an easier time planning for an acquisition and expressing your vision to potential targets. The place to start is with a written business plan. A business plan is like a road map it helps you find the way to your goal. Taking the time to define your business goals and how you will achieve them is the heart of the plan. Adding in a timeline, benchmarks and metrics will make you and your team accountable for its success. As the manager of your business, take the time to write down and hold yourself accountable to each aspect of your business, for example: Marketing and Client Growth, Business Development Employee Management and Training Financial Needs, Budgeting and Expense Control Technology (Agency Management Software, Training, etc.) and other Office Systems Completing Client Work When you are looking to acquire an agency, your business plan will require some additional elements. A mission statement, SWOT analysis ( SWOT stands for Strengths, Weakness, Opportunities and Threats), marketing plan and financial plan will give people the context they need for evaluating your agency and their potential relationship with you.

5 YOUR BUSINESS PLAN SHOULD CONTAIN THE FOLLOWING ELEMENTS: 1) Executive Summary: The Executive Summary serves as a brief introduction to your agency. It should include the name of your company, its organizational structure (a sole proprietorship, LLC, etc.), the services you provide, your audience and ideal client, and your agency s position in the industry. It should also include: Mission and Vision Statements: A short description of your philosophy of service and future plans. Financing Requirements: Briefly summarize the amount of capital you will need to achieve your acquisition goals. 2) Company Description: This section should explain your qualifications and resources. Describe the structure of your company in some detail, including how you deliver services and monitor quality, and what kind of staff and equipment are required. Professional History: Make sure to describe your professional background, including degrees and designations, as well as your business history. Staff Qualifications: List staff members degrees and designations, if any. Continuity Plan: If you are a sole proprietor, detail the plans you have made to serve clients in case of your illness or incapacity. 3) Market Description: This section should discuss the current and potential clients for your agency. Do you provide specialized services to a niche clientele, for instance? Explain the services you provide, how you promote them, who your competitors are, and how you stand out. Target Market: Describe the ideal client for your agency and the size of the market in your area. Also, briefly describe the potential for your market to grow, how you attract new clients, and the cross-selling opportunities you create. SWOT Analysis: List your strengths, weaknesses, opportunities and threats to help you define what type of acquisition would be most attractive. Competitive Analysis: As always is the case, policy sales and valuable insurance relationships are highly competitive. You need to show how you stand out, based on your reputation, services and marketing. 4) Marketing Plan: This section describes the activities you have used to build your business and how you plan to attract clients in the future. Be sure to include a marketing budget. Market Analysis: What do you need to do to retain the clients you have and attract new ones? Include special services you provide, activities for retaining clients, and new programs. Also include your RFP procedure and success rate. Marketing Plan: Here s where you fill in the details of how you will reach your target market, including writing for the local press, mailings, sponsorship, referral source activities and more. Don t underestimate what it takes to attract and retain clients that is most professionals greatest business concern. Who at your business will be responsible for these efforts and determine what resources you will allocate, and what results or goals do you intend to achieve?

6 5) Operations Plan: This section details the resources you deploy to run your organization on a day-to-day basis, including computer and agency management software needs as well as your office location and rent, signage, utilities and, of course, staff. Your own professional service needs, such as your attorney and accountant or book keeper, belong here as well. Staff: If you intend to increase your staff after the acquisition, describe the anticipated staff need here. Location: If you intend to open an additional office location, describe it here, including hours of operation and when you or another principal plan to be on the premises. Data Security: Describe the current measures you take to secure client data, plus anticipated future security needs. 6) Financial Projections: As an insurance professional and business owner, you may be familiar with Balance Sheets, Profit and Loss Statements and Cash Flow Projections. Doing them for yourself may be surprisingly stressful but it is essential for both your acquisition target and your financing partner. Your forecast should include: Income and Cash Flow Projection: Outline of revenue expectations and budgeted expenses; including rent, staff salaries, utilities, supplies and software licenses, as applicable. Generate a projection for at least the next 24 months. Capital Expenses: Estimate, to the greatest extent possible, the capital costs of your planned acquisition; computer and agency management software investments, additional building renovations or improvements, etc. Projected Financing Need: How do you plan to finance the subject acquisition? Take a close look at how much capital you will require and how you plan to source it. Most acquirers use a combination of personal cash on hand, bank and seller financing. Look at the form the purchase will take whether it s an asset purchase or a stock purchase. This may affect the after-tax impact for the seller and how you account for the purchase postclosing for years to come. 7) Benchmarks and Milestones Your growth targets are highly individual; you may want to run a small local business, become a regional player or grow even larger. Whatever your dream, progressing toward it will be easier if you set milestones along the way. Keep yourself and your team accountable by setting specific goals for one year, three years and five years. Here are some goals to consider: Grow revenues by 5 to 10 percent annually Increase profitability or add new revenue lines by adding new services, such as other products such as life insurance or strategic risk management services and health benefit policies for corporate clients Create and execute an effective marketing plan Track proposal wins and losses to hone strategy Track specific financial and operational performance ratios, such as client retention rate, loss ratios, average number of products or policies per client, staffing expense ratio and liquidity.

7 FINANCING ACQUISITION When acquiring an insurance agency, professionals often combine bank financing with financing provided by the seller. At Live Oak Bank, we work closely with acquirers to verify that the agency whether it will be operated as a stand-alone location or combined with the acquirer s current business will contribute to a sustainable cash flow that is sufficient to manage profitability, loan repayment and continued wealth creation through increased business ownership. In the process, we will examine the business and personal records of the acquirer. Initial qualifications for the borrower include: Description of use of proceeds or business plan Resumes of key personnel Credit score of at least 640 No history of bankruptcy Three years of personal tax returns for principal owners Personal financial statement Initial qualifications for the agency s operations and book of business: Minimum (combined) agency revenues of $200,000 Three years of business tax returns YTD profit/loss statement and balance sheet dated within 90 days Premium and commission summary by carrier Letter of Intent to purchase preferred LIVE OAK BANK - YOUR OWNERSHIP RESOURCE At Live Oak Bank we are proud to have a team that is solely dedicated to working with the insurance industry nationwide. If you have a question about acquisitions, or other business-financing inquiries, please call us. Even if you are not ready to apply for a loan, we are happy to answer your questions and point you toward helpful sources of information. Our goal is to partner with you to make your dreams of ownership a reality. We hope this acquisition guide aids in your successful pursuit of business growth. To reach a member of our team, call or matt.richter@liveoak.bank 1 Independent Insurance Brokers of America and Reagan Consulting; 2017 Best Practices Study Update Learn more at liveoakbank.com/insurance

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