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How To Sell - Or Buy - An LTC Agency

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Reno, Nev.

“I can’t believe I’m thinking about selling my baby.”

Thomas Long says that was the first thought that came to mind when another firm approached him about buying his long term care insurance agency, Wisconsin Insurance World.

In 2001, Long ended up selling the agency to the Heartland Group, which combined with Wisconsin Insurance to form LTCI Partners L.L.C., Madison, Wis.

Long told the story at a session on starting, selling or buying an LTC insurance distribution firm here during a long term care insurance conference organized by the Society of Actuaries, Schaumburg, Ill.

Most agency owners realize that they must sell at some point in time, whether due to age, health, a need for capital, a desire to perpetuate the agency while making a timely exit, or even burnout, Long said.

Whatever the reason, one of the first matters to take care of is to make it known to potential buyers that the agency is for sale. The owners should use all available networks, including carriers, industry publications, and broker general agents, in addition to making calls to known industry acquirers, Long advised.

Another early item of business is to determine what exactly is for sale, he said: stock in the company; its book of business; the agency’s “machine”–his term for its distribution network such as agents, or the brokers the agency does business with.

Finally, there is the brick-and-mortar part, which the acquirer may or may not want.

If the owner intends to stay for awhile after the agency is acquired, another important consideration is whether the 2 agencies are a good match for each other, he said.

Before negotiating terms, the buyer will want to see a 12-month profit-and-loss statement and a letter spelling out what’s being sold; including a valuation of the agency or the part of it that’s to be sold.

The seller needs a great attorney, Long said. “You’ll need one experienced in mergers and acquisitions. If your current attorney is not, find one that is.”

Ask others who have sold or bought agencies what lawyer they used, he said.

“The attorney doesn’t have to be local,” he said. “You want someone who can understand your business.”

The owner who plans to stay on should make a personal visit to the other agency and talk to their key people, he said. Also important: Get clarification of what your duties would be post-sale, he advised.

For the owner who is not staying, a key consideration is to make sure staff is taken care of. “They deserve that from you,” Long observed.

Employment agreements will help protect producers and other staff, but it’s also important for the owner to be sure it’s the right organization for them and their clients, he said.

Another speaker at the meeting, Thomas Skiff, advised those shopping for an LTC agency not to jump at the first one that comes along. A decision to buy “must be part of your strategy and your plan to grow your agency,” said Skiff, president of LTC Global Inc., Medford, Ore.

One very good reason to buy a given agency is that it could substantially improve the income one receives from certain carriers, he said.

Most carriers will kick up bonus or commission levels once sales from an agency or broker exceed a certain level, he pointed out. If two agencies are strong with the same carrier, therefore, merging them will improve their overall income potential.

He gave the example of two agencies producing LTC sales for a carrier that awarded a 15% bonus rate to agencies that exceeded $1 million in LTC premium, compared to 10% for agencies below that level. In Skiff’s example, Agency A produces $600,000 in sales a year for the carrier, achieving a bonus of $60,000 at the end of the year. Agency B, with $700,000 in annual sales, qualifies for $70,000–a total of $130,000 between the two.

Combined, however, they both have total sales of $1.3 million–which would entitle them to a total bonus of $172,500 from the same carrier.

Other reasons to acquire an agency cited by Skiff include a desire to expand geographically or to exchange one’s existing sales model for a potentially more profitable one.

Look for an agency that handles some aspect of the business your own firm cannot currently handle, such as providing greater sales support, improving underwriting review, supporting worksite marketing or adding leads from nonprofits or other member-based organizations that are serviced by the agency, Skiff said.

Income in the form of renewals and new business are other vital considerations, he said.

For renewals, Skiff pays close attention to the likelihood of future renewals, which is based at least partly on how long the underlying policies have been with the agency.

Skiff’s new-business analysis peers at the candidate agency’s revenue generation from first-year commissions, renewal commissions, product bonuses and other sources. This is then measured against the agency’s expenses for recruiting and training people, providing sales support, processing new business, generating prospects and servicing customers.

Also crucial is the financial risk of the carriers represented by the agency, he noted.

Louis Brownstone, chairman of California Long Term Care Insurance Services Inc., Burlingame, Cal., also spoke at the meeting about what’s involved in starting up an LTC brokerage from scratch.

There are 3 basic needs for starting any company, he said:

- Your our understanding of the industry, including what needs you are trying to solve.

- Your ability to build a team of people who can work well together.

- Luck–including the understanding that companies that are good at what they do make their own luck.

Strong capitalization, the ability to generate abundant leads, and the ability to be a significant distributor for several carriers are other important keys to a successful startup, Brownstone said.

He said it also helps substantially to have a good partner–someone to bounce ideas off and to keep one’s ego in check.

Being a “hard-driving” boss isn’t what it is cracked up to be, he observed. “These people are disappearing as the complexity of doing business increases,” he said. “One person can’t have all the answers.”


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