EF Fall 07.indd - National Association of Professional Allstate ...

usinessStepping Stones to Purchasing an AgencyBY PAUL CLARKEIf you’ve decided that the life of anAllstate agent is the life for you, someadvance planning will help you proceedwith a more informed perspective.Whether you are an existing Allstateagent or a new agent, you’re taking a bigstep when you decide to acquire an Allstatebook of business. Not all agenciesare created equal, so it’s critical to choosethe one that best matches your specificcircumstances and vision for your future.Answers to the following questions willserve as stepping stones to your goal ofbecoming an exclusive agent positionedfor success and prosperity:1. What is the book of business worthto me?2. How will I pay for the book ofbusiness?3. Which purchase opportunity isbest?What is the book businessworth to me?Determine the value of a book ofbusiness. Market value isn’t the only requisitemethod for valuation. Every bookdoes not have the same value to everybuyer. You will need to determine howmuch a particular book is worth to you.Example: A small agency with 800policies may appeal to an existing agentlooking to merge because its purchasewill grow the existing agency withoutsignificantly increasing overhead. In thissituation, the agency owner is ‘padding’his income by merging a small book.However, a book of this size is unlikelyto provide more than $20-25K in annualsalary for a first time purchaser — not aviable choice for someone looking for anagency to serve as his or her main sourceof personal income.Now that we have determined that everyonehas a unique perspective when itcomes to the value of a book of business,let’s look at the primary factors that playa key role in the decision-making processwhen making an offer to purchase.Be reasonable when setting your personalsalary. If you have already establisheda career in the insurance businessand are accustomed to living on $80,000a year, don’t expect to suddenly cut backand be able to survive on an annual salaryof $50,000. This kind of drastic lifestylechange is very difficult and probablyunrealistic, be practical about how muchyou will need to live on. The revenuethat remains after you take out overheadexpenses and your salary is what will beavailable to service your debt. Once youhave established what your salary requirementsare, you can begin to determinethe size of book you should buy.Perform an accurate cash flow analysis.An agency produces a stream of renewalincome that must be managed. Toarrive at the true net of the business, youwill need an accurate cash flow analysis.From the seller’s annual commission income,you must have enough cash flowto cover your true overhead expenses,such as rent, utilities and staffing, theloan payment and, of course, your personalsalary. When reviewing the seller’shistorical operating results, it will be necessaryto adjust customary expenses, suchas meals, travel, depreciation, and makenon-customary adjustments, such as subtractingout wages paid to family memberswho do not work in the agency.It is also a good idea to build in a cashflow cushion as your agency will certainlyexperience fluctuations in the amount ofrenewal commissions received. Plus, it isimportant that you understand that theagency you have purchased may not receivean achievement bonus. Borrowing alarge sum of money on a break-even cashflow basis is a very dubious proposition.Determine the price you can affordto pay. Now that you have completed acash flow analysis, factored in a realisticwage for yourself and have included thetrue overhead expenses of the business,you can determine what price you canafford to pay for the book. If the annualnet amount available to service debt is$100,000, you certainly cannot afford a$10,000 monthly loan payment. Talk tolenders who are knowledgeable about Allstateagency financing. If you know youcan get 10-year financing at 9.5%, you canback into a reasonable purchase price.How will I pay for the book?Put yourself in a favorable positionbefore applying for financing. Lendersare impressed by agents who know theirbusiness and are confident about the successof their upcoming acquisition. Beprepared to talk to your lender about thestrong points of your pending transaction.It will also be helpful to presentyourself as a desirable financing candidate.In order to do so:• Check your account history to ensurethat your credit record is as clean aspossible.• Reduce your credit card exposureas much as possible.• Be prepared to provide a detailedexplanation of any delinquencies appearingon your credit report.• Prepare a detailed résumé highlightingyour successes.Find the right lender. The successof your business will depend in part onthe quality of the financing you receive.Look for a seasoned lender that possessesa thorough understanding of theAllstate business and has experiencefunding agency acquisition loans. Selecta lender who can accommodate your financingneeds, and provide a uniquelyqualified management team and highlyexperienced professional staff who arecommitted to helping you succeed bothin the short term and the long run.44 — Exclusivefocus Fall 2007