One of the best ways for insurance agencies to grow is through acquiring or consolidating with another agency or book of business, especially since organic growth has softened. And many agency owners are finding that repeating the process – becoming serial acquirers – reaps strong benefits for their businesses if done correctly and effectively. Before heading down that path, it's important to understand the keys to making successful acquisitions and smart financing options.
General benefits of serial acquisitions
Regardless of the industry, serial acquisitions can provide the following advantages for the purchaser:
- Economies of scale – Serial acquisition allows overhead costs to be spread over progressively larger revenue streams. This advantage grows as the number of acquired firms increases.
- Instant revenue increases – With each new acquisition comes new revenue. These revenue increases can fund technology upgrades, enhance marketing efforts, and additional acquisitions.
- Higher company valuations - A Kearney study has shown that serial acquirers create greater shareholder value than companies pursuing fewer acquisitions. In addition, their success leads investors to assign higher values to serial acquirers.
Benefits specific to insurance professionals
In addition to the general advantages, there are several benefits of serial acquisition specific to the insurance industry:
- Ability to reach higher carrier bonus levels and higher commission levels – Most carriers offer incentives for agencies to meet certain levels of premium. With serial acquisitions, an agency can reach higher levels faster than through organic growth alone.
- Easier cross-selling and multi-lining – With multiple agencies connected through central ownership, clients can be offered new products and bundles, producing organic growth from inorganic growth.
- Immediate cash-based revenue – A buying agency takes on the predictable cash flows of the purchased business. With these liquid assets on hand, the buyer has more choices regarding how to continue growth and expansion.
- Access to talent – The shortage of new talent entering the insurance field is well documented. Serially acquiring other agencies allows a business to continually bring on experienced team members who can produce from day one. However, it's important that they also fit into the overall culture.
- Access to specialized knowledge and technology – Serial acquisitions are a great way to build up an agency's tech portfolio and expand into new service areas. With a careful eye to each target company's unique strengths, a serial acquirer can assemble a formidable agency with the ability to provide a wider range of services to a growing clientele.
Seven keys to successful serial acquisitions
While there are many advantages of acquisitions (serial or individual), it's important to go into the process with one's eyes open. Not every acquisition opportunity is going to be a good fit, so it's wise to keep several points in mind when evaluating a potential acquisition target:
- Foster cultural alignment - Adding more agencies to a portfolio is most successful when both have a similar workplace environment and are built on the same principles and goals.
- Retain + maintain human capital - As mentioned previously, keeping talented employees on both sides of the acquisition should be a focus - those who can drive success and are flexible in a new environment.
- Maintain strategic focus – An acquisition only makes sense if it fits with the agency's overall strategic focus.
- Develop expertise – Acquisitions require specialized knowledge. If an agency is planning to pursue serial acquisitions, it's worthwhile to have a dedicated individual or team with the interest and knowledge to take the lead on investigating opportunities and structuring deals.
- Be willing to walk away – A deal that sounds great at the start may not look so good as time goes on. An agency owner needs to have the discipline to walk away from a deal that throws up red flags or doesn't prove to match the buyer's objectives.
- Plan integration early – An acquisition is only successful if the companies involved integrate well after the sale. Plans for integration need to start early in the negotiations so there are no surprises when the companies come together.
- Have a goal – Acquisitions should be part of an overall strategy for growth. Setting a goal for growth – e.g., $1 million in revenue per year – can help a buyer evaluate potential targets. This strategy avoids wasting resources on small fish as well as preventing becoming overwhelmed with targets that are too big to successfully integrate into the current business.
Financing options
Agencies with abundant liquid capital may choose to pay cash outright. However, that approach limits how much can be spent on other areas that drive growth (such as technology investments).
Loans from the Small Business Administration (SBA) are another option. With SBA loans, the borrower's personal assets are often used as collateral, and the paperwork for approval can be daunting. Even so, SBA loans can be a good option for borrowers whose credit is less than ideal.
Financing through specialty lenders who focus on the insurance industry is an appealing choice. These lenders – in contrast to most traditional banks – understand the nature of the insurance industry. They will often use the projected increase in cash flow as collateral for the loan, rather than encumbering other assets.
Summary
In today's market, it's very hard to grow organically… so if you're going to grow, you've got to get into mergers and acquisitions.
Serial acquisitions can be a powerful way to turbocharge an agency's growth. It requires research, focus, and planning, but it can provide a big payoff when well-managed.
