Whether an insurance agency chooses to secure its future through acquisition or helping a new generation of principals buy into the business, you'll need access to cold, hard cash to close the deal. Yet lending specialists and agency consultants warn that your local bank won't necessarily be eager to finance a perpetuation program–and even if the money is available, loans can be risky business.
"Many agents are often surprised when they go to their bank for a loan and have trouble," said Albert Lloyd, executive vice president for Marsh, Berry & Company Inc., the Willoughby, Ohio-based consulting firm.
"We're not surprised," he added, explaining that while agents and brokers know their firms are profitable, few banks understand this niche business, or have dealt with the intangible assets involved, which can scare them off.
Matt Grossberg, president and chief executive officer of NII Brokerage in New York City, had such an experience. A seven-year-old property-casualty agency that deals primarily in personal lines, his firm has 12 offices throughout New York State.
He explained that the firm's growth was primarily organic, but last year decided to make its first acquisition. He sought a lender and ended up visiting four banks in search of a loan.
"Most said that our balance sheet was weak and it would be hard to lend, but we knew they were wrong," said Mr. Grossberg. "We learned they had not done a deal in this industry prior to us. We packed it in and went to Oak Street Funding."
Indianapolis-based Oak Street Funding is unique in that it is a commercial lending institution funded by private equity money dedicated to lending to agents and brokers.
"We understand their business very, very well," said Richard S. Dennen, president and CEO. "This company was created because we understand independent agents have a difficult time getting capital to grow their business."
The company has been in business for four years now, and has issued loans in 44 states. It markets itself through 75 strategic partners–primarily wholesale agents–and advertises through traditional media, direct mail and e-mail.
Mr. Dennen explained that its lending practices are based on actuarial models and the understanding that there is a lot of perpetuation planning going on as owners age and find they need to do something to secure the agency's future–be it a buyout or succession plan. The amount loaned, he noted, will depend as much on the ability to pay as the ambition of the principal.
"It is up to the agency to decide how far they can succeed and what they want to do with the money," said Mr. Dennen. "If an agency doesn't grow, it is not able to compete."
One lender who has been on the scene for awhile now for independent agents is Farmington, Conn.-based InsurBanc–a federally chartered bank founded by the Independent Insurance Agents and Brokers of America and insurer W.R. Berkley Corp.
Bob Pettinicchi, executive vice president for InsurBanc, said many agencies are not used to borrowing money to support their operation, calling it "a wonderful business model," but observing that principals "don't appreciate the need for credit until they need it. They think it is easy [to get], but it's been an eye-opening experience for them."
Where the only experience many agents have taking out a substantial loan may be their home mortgage, they discover business loans mature over a shorter period of time–generally five-to-10 years–and involve bigger payments, explained Mr. Pettinicchi. They also learn that banks have difficulty understanding an agency's business model.
"We make loans supported by the enterprise value of the agency," he said. "Every agency has a bank that is happy to do business with them, until the agent needs to borrow. [Bankers] extend credit services to good depositors, but when asked by an agent for a significant amount of borrowing, that is the question most bankers dread being asked."
Since its opening in 2001, InsurBanc representatives have been active in meeting agents and counseling them about lending. Mr. Pettinicchi said they always recommend that agents work with a good lawyer or accountant when making lending decisions, noting that since its opening, the bank has had very good results with repayment.
"People are the asset [in insurance agencies], and we understand these people and how well they drive the locomotive," observed Mr. Pettinicchi. "That is what we get behind."
InsurBanc is not the lone association-affiliated banking institution. For example, there is American Partners Bank, started by the National Association of Mutual Insurance Companies–later merged with Federal City Bancorp Inc., based in Washington, D.C.
While many commercial banks might appear reluctant to lend to agents, one major bank player in the insurance field is Branch, Banking & Trust, more popularly known as BB&T of Winston-Salem, N.C.
Explained Vincent Dailey, senior vice president of BB&T and head of its Small Business Administration loan department, the bank is now beginning to make loans to independent agents looking for financing to help with their perpetuation strategy.
"We are very much in our infancy," he said of lending to agents. "We are getting our feet wet and going from there."
He said the bank is melding its lending experience with its insurance resources after it began hearing a demand from people who said that with BB&T's presence as a growing insurance brokerage firm, it should have the ability to lend to agents.
The initial program will be limited to the Southeast United States, but as its expertise grows, so will its facilities for lending and the size of its loans, according to Mr. Dailey. "Time is going to be the factor to get us up and going, and we are gearing up for it," he said.
On the question of whether it is a good idea to go the lending route, Brian Deitz, a consultant for Atlanta-based Reagan Consulting, said it is "an agency-by-agency decision."
The motives to seek outside financing can vary, he said. Some negotiate deals where there is a large amount of cash that has to be paid up front, and lending is the best move. Others do not want to reduce their stock equity in the firm, and feel more comfortable assuming debt.
Mr. Lloyd of Marsh, Berry also noted there are tax advantages to be gained by taking out a loan. He said any principal considering a loan should first run a cash-flow model to be certain the agency can service the debt. He said agents can do this exercise themselves, but typically it is best done by an accountant or consultant.
"The last thing you want is to be three years into a deal and suddenly find you can't afford it," he observed. "Planning this out on the front end saves time on the back end."
He noted that while there are positives in borrowing, there are also potential negatives–primarily, financial stress that can accompany bad calculations. Such complications can affect bonus payments, the ability to hire and retain employees, or even upgrade office equipment.
Sometimes an agency can be so financially stressed that it begins to tap into carrier trust funds, or "float"–the premium held for insurers until remitting is required. Mr. Lloyd warned that this can sometimes lead to bankruptcy, though many principals have become knowledgeable enough to run the numbers and avoid any problems.
"If I take on debt, I want to make sure it can be paid off in time," Mr. Deitz advised. "You only have so much cash flow and you are limited to how you are going to use it."
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