Purchasing (or selling) a book of business (1)

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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.

Understand what you’re buying

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.

1. Number of policies by type: are they MAPD, Medicare Supplement + PDP, Medicare Supplement only? (MAPD typically is more valuable than Medicare Supplement)
2. Age of clients: is the average age 65 - 70, 71 - 75, or older? (the younger the book, the more valuable)
3. Carriers represented: are the policies written with UnitedHealthcare, Aetna, and other major carriers, or are they primarily regional carriers? While the large carriers will support book transfers, some of the regional ones might block them. It is best to seek the approval first.

Structure an offer

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.

Complete the deal

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.

Introduce yourself to their clients

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:

• Have the seller send a letter to their clients introducing you
• You should follow up with your own letter and email introducing you with the seller cc’d (on the email at least!). Invite clients to a 1on1 meeting, virtual or in-person. Most won’t take you up on it! But it’s a good way to meet some clients and generate referrals.
• Even then, you should expect to have some attrition so don't worry about getting every client to a face to face; this is why you’re only paying 2-2.5x the annual revenue.

Successor agreements and transferring books

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.

• Understand what you’re buying
• Structure an offer
• Complete the deal
• Introduce yourself to their clients
• Successor agreements and transferring books