Financing your next agency acquisition

Private equity and other platform companies usually get much more attention when it comes to acquiring insurance agencies. Some people say independent buyers aren't as active in these purchases, but that is not always true.

A big difference exists between independent firms that close deals successfully and competitors that take the agency away. This has nothing to do with how well they know the seller. It all comes down to who has the money available when the seller is ready to close. Independent borrowers can always compete because they can arrange financing in a way that doesn't affect the agency's renewal cycle.

Cash at closing is still always the winner. Nothing matters more to the seller than certainty and confidence in the buyer. There are multiple things that can cause some valuation problems, such as earnouts, seller notes or roll-ups. Treat deal structuring and financing as a single process. Make sure you have cash available at the end of the closing process. This shows you have done your own analysis and due diligence on the project's cash flow and aren't relying only on the seller-financing structure.

Here are some of the main things lenders look for.

• Spreading yourself among different carriers, products, and clients. Keep your options open with multiple companies and products so you don't rely on a single relationship.
• There must be records showing that accounts and producers have been retained. If key individuals don't join you after the sale, this can cause issues.
• It is always a good sign to see the profit and loss statements in agreement with the tax returns. You should clearly understand the owner's add-backs to better understand the proper cash flow.

Capital should always match the goal. Capital varies from one instance to another because each dollar serves a different role. Use the right tools to achieve your goals.

• You should use the acquisition capital to obtain the agency or the book into your possession.

Working capital can cover any discrepancies in the timing of operating costs, carrier payables and commission cycles.

The major mistakes that can sink financing

In most instances, you can avoid issues such as the financing being delayed or called off at closing by keeping these examples in mind:

• There should never be an instance where you are paying more than the cash flow can support. If the debt coverage ratio or service is narrowing the margin, then a high multiple isn't worth getting excited about because it isn't valued correctly.
• Having enough working capital in the beginning is a vital role for a successful acquisition. If an acquisition leaves the company or borrower with no cash on hand by the second or third month, the financing structure may be wrong.
• Always ensure the correct books are kept and add-backs are clearly shown so the underwriter can better understand the cash flow. Lenders prefer clean, well-maintained accounts so they don't have to spend unnecessary time.

The best next steps

The records must be in order for the past three years, ending with the most recent year. You must obtain a risk and debt-service evaluation based on the business's actual cash flow. The entire evaluation cannot focus only on the business's revenues. Discussing all these issues and scenarios with your accountant, lawyer and lender during the deal process can significantly improve your chances of success.

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Chris Cornella is the vice president of business development at US Professional Funding and US Medical Funding. Contact him at chris.cornella@innfeedback.com.