Buying an Insurance Book of Business 101

Fran Majidi October 1, 2022
Buying an Insurance Book

If you’re looking to buy an insurance agency and are unsure how to begin, you’ve come to the right place. You’re probably asking yourself, Should I buy an insurance book of business? We’ll tell you what you should expect from this very steep investment, which could be very valuable, if you buy the right insurance agency. Your revenue will depend on many factors.

Questions About Buying an Insurance Agency

Questions you’ll find answers to in this article: Do you always have to do a valuation before you buy an agency? What if you're really interested in that book of business but don’t want to spend the money for an appraisal? Is it always worth it to do a valuation, even if it’s a small book/agency? How can I tell if an insurance book of business is worth the cost? What should I expect realistically after I buy an insurance book of business? How do I finance this huge purchase and run a successful insurance business? Are the clients the right match? And more. We’ve got answers for you, so dig in!

What to Look at in an Insurance Book of Business for Sale?

Buying an insurance agency requires some research. There are several ways to do a layman’s valuation of the insurance book of business you’re considering buying. First, what territory will the insurance agency cover and is it one you’re insured to sell in? If so, how well do you know the area your insurance agency will be servicing? You need to know crime rates, whether the area is made up of high or low risk customers in the book of business? Is it the right market for you and insurer(s) that you represent? Otherwise, buying an insurance agency may come at a great loss right off the bat. Insurance agencies differ in the risk pool they take on and they types of policies they sell.

Industry Trends and Local Laws

Look at market trends in the insurance business next, to see what major changes may take place soon in the area the book of business covers (is there major construction or new businesses cropping up in the area?) How about new rules of the road or anything that may affect the insurance product you sell in any way? If speed limits go down, speeding tickets go up, making it a higher risk book for an agency.

Is It the Right Insurance Agency?

Make sure the territory of the insurance agency aligns with your demographic. If you don’t want young drivers, don’t buy a book of business covering where the biggest university in the state is situated. Insurance agencies are reliant on nearby businesses, so buying an insurance agency requires some research. Look at the value of the customer-base to determine whether or not the price is right on the insurance book of business for sale.

Due Diligence in Buying a New Business

Dig deep and ask uncomfortable questions about the insurance agency, like, “Why are you selling your insurance book of business?” If the owner of the insurance agency is young, be wary, because it may mean that they weren’t making any money selling insurance (but perhaps out of inexperience)! If they are older and at retirement age, you can be less skeptical.

There are many reasons an agent may decide to shut the doors on an insurance agency, having a family is one of them. So, we’re not saying that a young, seemingly vibrant insurance agent can’t switch careers for other reasons than failure but you’ve got to find out why they are giving up and see how much they were making. Now, you may be a better salesperson, too, so keep things in perspective when shopping for an agency!

Ask questions about the agency and their best practices to see if they were at fault for the failure of the agency, if that was the case. Who were the agency vendors? How did the agency nurture existing customers? Do they sell surplus lines? Can you see an audit? Check for cybersecurity filings and a proper review of the agency’s practices. Don’t be afraid to ask for these things. And make sure to reach out to the carrier(s) the insurance agency worked with to make sure you’re getting the full story.

Are You the Right Insurance Agent to Purchase the Agency?

Most importantly, make sure you sell the lines of insurance needed for the insurance agency to maintain its book of business. For instance, if you only have a P&C license and many clients on the books have life insurance, you will not only lose some of the value of what you bought but may lose these clients’ P&C business as well.

Obviously, do not buy an independent broker's business if you are a captive insurance agent and vice versa. You must be able to service each client based on their carrier. No one said shopping for an insurance book of business would be easy, but it may be worth it if you find the right business with the right agreement.

Insurance Book of Business Valuation: Do I Need a Formal Valuation on a Book of Business for Sale?

Usually, books of business that are half a million dollars or less do not need a valuation, which would cost around $5,000 to $7,000. Are you buying an insurance agency worth less than $500,000? You’ll need something which is the equivalent, the Opinion of Value book, which covers the income statement, gives a description and value figures using best practices of valuation called Valuation Methods (see below). Expect to pay at least $2,500 and as much as $4,000. One form of valuation is not superior to another. One simply covers a smaller insurance agency versus a bigger one.

What Are the Valuation Methods for an Insurance Book of Business?

1. The Capitalization Method looks at the rate of return on the buyer’s money risk-free and then adds a risk factor for the purchase of an insurance book of business.

2. The Price/Earning Method of valuation uses profits to determine value. The valuation is an average of six times the pre-tax profit.

3. The Present Value of Future Earnings Approach looks at the book’s earning potential.

The calculations for these types of books of business may make your hairs stand on ends depending on how much you employ math into the operations of your business. All three methods should value the book about the same.

What Can I Hope to Make After Buying an Insurance Book of Business

Usually, profitability of books of business is somewhere between 15 to 25%. Again, it all depends on the agency you buy.

Is There an Alternative to Buying a Book of Business for a New Agency?

According to Insurance Journal, it’s not a good idea to roll a book of business into a standalone firm. And according to experienced agents who’ve bought an insurance book of business in the past, you can’t expect that all the customers will stay. You may be working at a loss in the beginning despite paying a lot of money. More on this later.

After you buy a book of business for your agency, it shouldn’t necessarily be your own source of sales. Diversify your lead generation strategies. Buying good insurance leads can have the same or higher profitability rate than buying an insurance book of business if you work with the right vendor, thoroughly work every lead with a good follow-up process and really make the most of every opportunity each lead presents.

As a complement to a book of business, buying insurance leads works extremely well in growing an agency; you'll still need to make fresh sales while servicing each existing account. Growth depends on new business.

Financing an Insurance Book of Business

Your financing terms when buying an insurance book of business depend on your down payment, which can range anywhere between 20 and 50% of the total price for the book of business for sale.

Typically, the downpayment is paid the first year and then monthly, quarterly or annual payments are made to pay off the rest of the insurance book of business.

A Word on Lenders

Specialty lenders usually sell insurance books of business but the best rates are available through exclusive agencies, like an Allstate, State Farm or Farmers, which have their own finance companies.

Other lenders require at least 10% down and each lender has their own guidelines. Negotiate a deal that works for you, but make sure you understand and review the terms and conditions. Make sure that you’re working with a reputable lender.

Purchase Agreement on an Insurance Book of Business

Note that some states require an approval process while others simply need to be notified if you’re buying an agency. It’s advised that you attach a formal letter of intent, after an attorney looks it over even when it is optional. Check with the Department of Insurance in your state to find out what you need to submit.