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If you are planning to acquire an insurance agency, you may be wondering how to finance the purchase. It is essential to determine if the purchase is a good deal and if you are paying a fair price. In this blog post, we will discuss how to finance the acquisition of an insurance agency and provide some tips on how to evaluate the financials.
Evaluate the Financials
The first step in financing an acquisition is to evaluate the financials. You will need to sign a non-disclosure agreement (NDA) and get the last three years of tax returns. It is essential to have a year-to-date interim statement and not rely on just the P&L statements. With this information, you can assess the business's cash flow and determine if it can support the new loan amount.
Work with a Banker
If you are serious about buying the business, it is advisable to work with a banker who specializes in this type of deal. The banker will spread out the numbers on a worksheet and figure out what they can add back in for taxes, depreciation, and other expenses. They will also run debt coverage ratio (DCR) calculations to determine if the cash flow will support the new loan amount.
Add Backs
It is common for sellers to run their personal expenses through their business account to lower their taxable income. As a result, it may be necessary to get online with them and determine what expenses can be added back in. Bankers may also find that there are certain salaries that will not be there when you take over the business, so it is crucial to determine what these are.
Projected Cash Flow
Once the banker has all the financial information, they will determine if there is enough projected cash flow to support the loan. They may ask questions such as whether there is anything they can add back in, and there may be some back-and-forth discussions. However, this is common for bankers, and it is an essential part of the evaluation process.
Find the Right Banker
It is crucial to find the right banker for your acquisition. Look for a banker who specializes in these types of deals and has a high probability of funding them. Working with the right banker can make the process much smoother and less stressful.
Conclusion
Financing the acquisition of an insurance agency can be a daunting task. However, by evaluating the financials, working with the right banker, and determining the projected cash flow, you can make the process much smoother. Remember, it is crucial to find the right banker for your acquisition, and do not be afraid to ask questions or seek advice. By doing so, you can increase your chances of success and ensure that you are getting a fair deal.