Buying a Book of Business

[CR in STL]

I have the opportunity to purchase a book of business (early stage of the discussion) and the products are employee benefits. I have never purchased a book before. The person who I would be buying from is a close family friend who has been in the business 30+ years and is going to semi-retire. I would only be buying a portion of the business and he will stay on with the company since he is not selling everything. I have lots of questions and don't even know where to begin so besides answers to the questions I post any comments or suggestions would be appreciated.

1. What and where are the resources for me do research
2. What conditions should go into the agreement
3. What are the potential issues after I take over
4. How do customers typically react
5. What is the best way to finance it
6. How do you determine the value

I guess this will do it for now again any other comments would be welcomed

 

[Rickr]

Hi CR,

1. What and where are the resources for me do research

To understand what you are buying and how the business works is the most important factor. You should work in the business for a time to see for yourself (even as a volunteer). After that the only place to get research material is from others in the same business or perhaps a consultant working in the Benefits field.

2. What conditions should go into the agreement

See a lawyer. If you are buying part of the business, make sure you can buy the rest and that you have first right of refusal. Are you buying Shares in the Company or Assets? Assets would normally be preferred by a Purchaser for Tax considerations, the Vendor would probably like to sell Shares. See an Accountant.

3. What are the potential issues after I take over

Depends what issues are there! They will be your issues after takeover, so you should do some Due Diligence. Look at files, have an expert look at the computer system, get a full description of the employees that are there - their qualifications, copies of their last reviews, disciplinary problems, how they get paid etc etc. People are usually the biggest concern.

4. How do customers typically react

If you communicate directly with the customers and let them know that you will be there for them and the Vendor will be staying for a while to smooth the transition customers usually react well. Keep in mind that this is an opportunity for unhappy customers to bail out. Find out if the largest customers are happy before you buy.

5. What is the best way to finance it

Get Vendor financing. The Vendor will have an interest in your success. Next - supplier financing. Same principal - your supplier will have an interest in your success and then - the banks, and good luck with that. You will need a Business Plan and historical financial data.

6. How do you determine the value

Always look at the Return on your investment. If the Earnings of the company (EBITDA) are divided into the purchase price, what is the percentage? Does that match your criteria as an investment. Don't count what you earn as wages as part of the earnings. If it's not profitable, it's worth zero. If it makes $100,000 in pretax profit (Earnings) and you would be OK with a 15% ROI, then you can pay 6.66 Times the Earnings or $666,000. More purchase price = longer payback and reduced return.

Good luck with it.

Rick Restell
Restell Strategic Partners
Mergers & Acquisition Consultants
1-866-930-0682

 

[CR in STL]

Rick
Thanks for the info, it's a good start as I will probably have many more questions.

He has a pretty substantial book of business and is pretty much a one man show so office staff will not be an issue.

The customer I have met some of them and they have been doing business for many years so I think their satisfaction level is fine plus he will still be involved in the business which will be nice to make the transition seamless

Would you elaborate more on the vendor financing

 

[Josh]

Hi CR,
4. How do customers typically react

If you communicate directly with the customers and let them know that you will be there for them and the Vendor will be staying for a while to smooth the transition customers usually react well. Keep in mind that this is an opportunity for unhappy customers to bail out. Find out if the largest customers are happy before you buy.

6. How do you determine the value

Always look at the Return on your investment. If the Earnings of the company (EBITDA) are divided into the purchase price, what is the percentage? Does that match your criteria as an investment. Don't count what you earn as wages as part of the earnings. If it's not profitable, it's worth zero. If it makes $100,000 in pretax profit (Earnings) and you would be OK with a 15% ROI, then you can pay 6.66 Times the Earnings or $666,000. More purchase price = longer payback and reduced return.

Good luck with it.

Rick Restell
Restell Strategic Partners
Mergers & Acquisition Consultants
1-866-930-0682

With all due respect, how many insurance agency or book of business sales have you been in?

CT in STL: It depends on the line of business. This is something that is really complicated and many things can factor into how much business will shake loose. If it's a health book of business and everyone was staying with the guy because they like him (or her), even if they know the rates are high, once there's a new owner they might make the move they've known they needed to do for years. If it's a P&C shop that does mostly personal lines, odds are most of the commercial business was done because there was a personal relationship and unless you lock those accounts down before the sale it's not only possible, but likely someone will walk.

The ***best*** thing you can do is talk to some agency owners in that area in generalities and let them know you're thinking about buying a book of business and ask them what books are going for these days. Usually the sale price is a multiplier of the size of the book of business. A large office with multiple locations and a large client base might be worth 2-2.5 times book value, a small book of business that's a one man shop might not even be worth 1.5 times book value. A guy I did some work with bought a book of business that was just under 700k in premiums and had a lousy captive contract with Allstate and was only getting 10% renewals plus bonuses. If he didn't grow his agency they way they would like they would force him to sell it. Well the nice man didn't want to get his hands dirty so he hired someone to manage the whole thing for $30k/year which put is income at $40k/year, then you pull out rent, office expenses, e&o and the payment he had to make on the loan he took out to buy the book of business and he was losing money. He didn't have much money to invest in marketing and what few dollars he had were wasted on junk leads. His office manager ended up leaving and last I heard to book of business was involuntarily up for sale. Even though he grew the book of business up to around 800k or so, he'll probably never get out of it what he paid for it because he paid wayyyy more than it was worth.

You don't want him in the office once you buy it, which may be the way you want to finance it. You should ask him if the sale price can be a precent of the commissions either flat for X amount of years or maybe decreasing. You're going to have a big fat family mess if he's still in there because of things like, when the phone rings, who gets the lead? Should he be doing customer service work on your book of business? Should you be servicing his book of business? On paper it may look like a good idea, but you want to be running your own shop. That being said, if he's in there for a month or two as a transition period or comes in 1 day/month it'd probably be fine, but it shouldn't be a semi-retired position unless you really want a mess on your hands.

Questions for you:

What type of book is it?

Is it captive or indy?

Are there bonuses in connection with loss ratios or any other statistics such as growth or retention?

What are the retention numbers?

What type of advertising is he doing?

What are the overhead costs?

What type of hours do his customers expect to be able to have service?

Do you have anyone that can fallback and cover the office for you if something comes up?

What is YOUR marketing plan going to be so that if you do this for 5-10 years you'll have at least 1 or 2 employees that will be able to run things and hopefully grow it whether you're there or not?

PM or e-mail me if you want more details. I believe the other gentleman that took the time to write out a post has experience buying and selling businesses, but doesn't have as much experience buying and selling books of business.

 

[Full Throttle]

A "book buyout" is very common in the employee benefits area. In my area, two times the books revenue is a common measure and many selling brokers won't require money down. Essentially you use the proceeds of the book of business over two years (sometimes four) to buy out the seller and after the buy-out is complete, it's your business going forward.

Example:
Book of business generates $100,000 in revenue (not net profits).
The book sells for $200,000 (2X revenue) and is financed by incoming commissions over two or four years.

 

[CR in STL]

MedicarePlan-
thanks for your reply, it is an employee benefits company and first we are in the early stages of talking. The person I am working with has a pretty substantial book it is his baby that he built over 35 years and I have been working for him for a little while. He is going to sell me part of his book and continue to work and mentor as I am still relativley new to the business which is what I asked of him plus he doesn't want to see what he built up fail.

 

[stuy119]

MedicarePlan-
thanks for your reply, it is an employee benefits company and first we are in the early stages of talking. The person I am working with has a pretty substantial book it is his baby that he built over 35 years and I have been working for him for a little while. He is going to sell me part of his book and continue to work and mentor as I am still relativley new to the business which is what I asked of him plus he doesn't want to see what he built up fail.

CR-

Be careful about this. With all the talk of reform going around, you might want to hold off on making a decision as long as you can, unless the majority of the income is in something other than health insurance (which it probably isn't).

Just a bad time.

 

[ABC]

From a health insurance stand point you want to structure a buy out that has direct correlation with retention.
If the current block has 600+ lives that are on the books and once you buy it you lose 250 then the sellers gets paid less.

I would discourage from talking to other local agencies about the purchase. If there is blood in the water they will go after the block. I have picked up a few group clients after buyouts.

To buy a block of business in this economy is very high risk.

Look at the block and see how many clients he/she has lost since 2007. Then look at overall commissions and how much they have decreased in the last couple of years.


When it comes to determining value.
Back in 2007 I looked at purchasing agencies. Standard at the time was around 2 x earnings. If you have a unique market you might get 3 x maybe even 3.5x. On the health side I would call a agency unique if they had the only contract to sell a association plan in that area that beat market conditions.


Right now a health block is only worth about 1x revenues and that might be high if a Gov. option is put into effect.

There is a reason why the owner is trying to sell to you.

 

[CR in STL]

Acutally I approached him to sell, it was something he was thinking about in the future but now after our conversation he is thinking about it now

 

[ABC]

Acutally I approached him to sell, it was something he was thinking about in the future but now after our conversation he is thinking about it now

Why do you want to buy a portion of his block?