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Met an agent who wants to sell their book of business? Apply the framework below to complete the purchase and integration of their book.
Note: this information is for general purposes only and not intended as legal advice. Please consult a qualified attorney for advice specific to your transaction.
You first want to understand what you’re purchasing, which will impact the value of the book and how hard it will be to complete the purchase.
You need to understand why the agent is selling. Do they need funds immediately and looking to cash out? Do they just want to retire and have someone service their clients? You should structure the deal so that it meets their needs and your own funding constraints. There are two main components:
Price / valuation
Typically the total price of the deal is about 2-2.5x annual recurring revenue. That means if the agent’s book expects to pay out $200k this year, the total price of the book would be $200k - $250k. The price will fluctuate depending on the types of policies; for example, a book consisting primary of dual Medicare-Medicaid plans will be much lower (1.5x-2x) because the expected retention of those policies will be worse.
Structure
The simplest way operationally to pay for a deal is to offer an upfront payment for the total valuation of the book. The seller also generally prefers this as they get the funds upfront. As the buyer, it creates considerably more financial pressure but is often worth financing it through an SBA loan or local lender (you might be paying 2-2.5x the annual revenue, but it will pay cash flows for 5+ years). If you do not have the financing in hand and want to reduce your debt burden, an alternative is to offer less upfront, and more over time, e.g. you can offer 1x the annual recurring revenue, plus 50% of cash flows for the subsequent 3 years. In effect, this is a “seller financing” option where the seller agrees to receive the payouts over time.
After you agree on the price and structure of the deal, it’s go-time! These deals require only simple agreements stipulating that the seller sign paperwork to transfer the book over and assist with outbound communications with their clients. It is best practice to have an attorney review the agreement. For larger deals, you might be required to place the funds needed to purchase the book in escrow; they should be released only when the conditions of the sale are met, which should include the successful transfer of the book of business from one agent to the other.
Spark would be happy to assist with book of business transfers, and can instruct you about the rules for each carrier.
After the deal is completed, it is highly recommended that the seller hands-off their clients to you through two communication pieces - the first from them, and the second from you. Specifically:
Sample Member Notification.docx
The policies to re-assign books of businesses for the largest carriers are below. These policies changes periodically, so for all other carriers we recommend reaching out to the carrier directly.
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