Build vs. Buy an Agency: Organic Growth in Rising Interest Rate Environment


Now that interest rates are rising again, it’s time to re-examine whether buying an insurance agency is the smart choice for growth or whether building an agency makes more sense.

While lots of factors come into play when agents want to start their own agency or an owner wants to expand, it generally comes down to three questions:
How much time do you have to grow your business?
How much sweat equity are you willing to put in?
What is your exit strategy when you’re ready to retire?
For nearly a decade, we had some of the lowest interest rates in modern history. Money was cheap, and it made sense to finance a merger or acquisition by borrowing. The cost of borrowing used to be around 5 percent (prime plus 1-2 percent), but as prime moves closer to its historical average of 7 percent, your borrowing costs could jump up to 9 percent.

This leads me to my first point: How much time do you have to grow your business? Assuming you’re not in a rush to acquire an agency or new book of business, organic growth may be your best bet. Organic growth is the value you create when you invest in your own agency. Inorganic growth occurs when you purchase another agency or a book of business.

With inorganic growth, you earn a return on your investment, but you carry the expense of the capital to acquire it. Organic growth has the best return because you’re not borrowing money and tying up your capital. As interest rates rise, organic growth becomes more attractive. Organic growth takes time and discipline.

You grow organically by investing in marketing and advertising, your producers and your staff. You also create value by watching your expenses and being smart in how you generate income. Agencies that are willing to invest back in the business will be more attractive to a buyer. Those are the agencies that will have more options to grow, increase value and transfer ownership.

Regardless of whether you grow organically or inorganically, you need to get your house in order. Three factors to keep in mind are creating a top-notch team, updating your office management and CRM systems, and instituting financial controls.

Having a stable, reliable team makes all the difference in the world. This includes your top managers, producers and customer relationship team. You can’t grow if your producers aren’t producing. You also can’t manage new accounts if you don’t have the infrastructure in place to meet your customers’ needs. Make sure you have the computer systems you need to automate and efficiently market to customers.
Cash flow is also important. Do you have strong financial controls? How well do you manage the expenses? When you start growing, your working capital will be stressful. Do not spend the cost of growth and expansion from the cost of new equipment and software to training and marketing. At the same time, you have a plan to reinvest your agency.

Sometimes borrowing can be your benefit. Instead of unloading your working capital, you may want to borrow for the cost of bringing in a new manufacturer or acquiring a new office equipment. Even fast-growing agencies can decide to borrow some costs, such as buying and renting a building.

Finally, as corporate directors approach retirement, they start thinking about ways to transfer their companies to future generations, whether they are family members, partners, or an outside buyer. Such successive schemes may include borrowing.

Your exit strategy will be the most important business decision you make, and it will protect your commitment to start your agency. If you have invested in your agency, you will not have a problem selling an attractive fiasco. However, the organic construction of your agency can be rational in an environment of rising interest and with many rewards.

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