How Agency Financing Has Helped Agency Owners, Tales from the AgileCap Archives

Peter and Kyle Castle, AgleCap Lending Advisor, talk about the ways that agency owners have been able to buy, invest, grow, and sustain their agencies through borrowing. This isn't a shameless plug for AgileCap, it's a series of tales from Kyle's lending experiences, that show how agency owners have been able to seize opportunities for growing their agencies, even when they had a hard time finding financing for one reason or another. It's worth listening to if you're an agency owner who's considering growing your agency in any way in the coming year. You'll pick up valuable tips and insights.

Transcript

SUMMARY KEYWORDS

acquisitions, agency, insurance agency, lenders, lending, individual, sba, kyle, loan, market, marketplace, book, months, transaction, client, bank, sba lender, impact, income, selling

SPEAKERS

Peter, Kyle, Doug

Doug  00:15

Welcome to Insurance Agency Insights, where we're committed to helping small and medium sized agencies achieve their business goals. We're your hosts, Doug Burke, investment banker and advisor to the insurance agency industry, and with me is Peter Friedman,

Peter  00:31

CEO and president of AgileCap, a specially lender focused exclusively on the insurance agency industry. At AgileCap, we believe agency owners can take control of the course of their business when they have a thorough understanding of the financial aspects of their agency. Over the last 20 years, through the ups and downs of the US economy, AgileCap has advised agencies on borrowing money, acquiring new businesses and investing in their future. Every other week, we'll bring you insights on how finance and capital can and will impact your agency's future.

Doug  01:01

Our guest this week on the show is Kyle Castle. Kyle is a lending advisor at AgileCap. He's got over 10 years of experience in finance and lending. And he's helped many agency owners close on acquisitions. Welcome, Kyle.

Kyle  01:17

Thanks, Doug. Thanks, Peter. That's correct, I've been at AgileCap for a while now. And the thing I really enjoy about my job, and what always intrigues me, is the uniqueness and the individuality of agencies, and their vision for growth and their growth potential. As a specialty lender, we're able to see and share the owner's vision for growth opportunities. I've got a couple of examples today that I wanted to speak about that kind of highlight what's happening in the marketplace, as well as what we've seen.

Doug  01:52

Great. I can't wait to get to them. Peter, to start us off, you worked for years in corporate mergers and acquisitions in a variety of industries, including the insurance industry, before focusing on the insurance agency market. Can you give us a little perspective on the world of mergers and acquisitions in the insurance industry today during the pandemic?

Peter  02:13

Sure, Doug, we can look back about 10 years, and that mergers acquisitions, and the insurance agency industry was hit pretty hard during the recessionary period of '08 till about 2012. And since 2012, it's been a pretty steady increase, almost to the point in 2019, was a strongest year pretty frothy valuations and a very strong market for insurance agency acquisitions. That radically changed, really towards the end of the first quarter in 2020. So from one of the strongest markets that we've had in history in 2018/2019, to almost a dead stop. And it's obvious the reasons why: it's really COVID-based. What's been interesting, is the evolution of what's happened in the market since the COVID - and the end of the first quarter - through the second and into the third, and what we're seeing right now. Early on, it was stop - period - "Really not sure what's going on"...I think that sense of uncertainty existed in all markets. It was especially true in insurance, and it was really unclear as to what sectors would be impacted, and how it would be impacted. Towards the end of the second quarter, and into the third, there's been - I would say - an opening up in the marketplace. And there's a variety of factors. And it's very dependent. Some sectors in the insurance agency world, such as, if you cater to the hospitality industry - which is still highly impacted - you would have serious impact. If your large part of your book was non standard auto, and traditionally, non-standard auto would be a walk-in type of client who would pay in person and that has radically changed. Or those clients are economically fragile at this moment, and so they may not be doing as much insurance or insurance at all, as in maybe they're not working. So who's been some minuses, such as in that case. And there are some really odd pluses, because all of us had been at home and we're much more willing to answer the phone for numbers that we don't know; your insurance agencies have been able to connect with many more clients. So this period of stopping and really the back half of the first quarter through the second quarter has evolved to a period of "Hey, we think we understand". And in this third quarter, we're starting the transactions back up. There's a lot of motivation on sellers if they were thinking about selling before, and - I wouldn't say it's back to normal - but it's definitely strong...not as strong as 2019. And Kyle, I know you've talked day to day with insurance agency owners, what have you seen happen over the last two quarters in 2020?

Kyle  04:51

Thanks, Peter. A lot of owners have come to us with questions regarding the tax stimulus that came out from Congress. But also, from a market point of view, there has been a lot of activity and a lot of interest in acquisitions, post-the whole COVID quarantine. And many individuals are excited; many individuals are anxious to get back and start continuing to grow their agencies, both through traditional organic methods as well as through acquisition.

Peter  05:24

Yeah, it's interesting. It's unclear what the future holds. I mean, we could all say that, generally. But as it applies to the insurance M&A market, I think there's obviously the infection rate, and the implications of COVID, and it's a very regional based application - even very local based - it could be my town here in Utah, but not two towns over and what the impacts are, since much of the regulation is being done on a county level. There's economic impacts, which seem to be pretty regional, as well. And then you have the kind of frothiness and excitement of the presidential race, but in reality it's probably the implications of the tax code that would most likely change in 2021, that are causing people to say, "Well, the future is uncertain...Maybe it's something I want to think about selling now". And all these dynamics are floating around. There's a lot of complexity in the economy in general. And I think much of that flows into the insurance agency market.

Doug  06:19

So one of the keys to M&A is securing financing to buy another agency. And that's the world where AgileCap place. You guys lend to companies who want to buy another agency. Let's start at the highest level. What's going on in the lending marketplace - in the financing marketplace - of insurance agency acquisitions?

Peter  06:44

So if you go through the first quarter, and the impacts of COVID, the initial hit was just dead stop. "We're not lending anything", because there is so much uncertainty. Many of the bankers who are active and in leadership roles today were bankers and active in the recession. And so that was the initial playbook - stop everything. That loosened up relatively quickly. The initial impact to tighten the credit box was pushed much wider. The credit box opened up more for a couple reasons. One, the federal government jumped in and really facilitated a lot of liquidity into the broader marketplace, as well, as - we'll talk about this a little bit - the SBA loans and what kind of lending is like. As well as the initial reaction, after we recognized there wasn't a liquidity crisis - it was a different type of crisis - that was impacting the US economy. And so the credit box opened up, there's liquidity from the Fed, and there's an opportunity people saw, potentially - especially in this third quarter that we're currently in... trending towards the fourth - to continue lending, especially for those who are strong borrowers. Marginal borrowers probably are still going to have some issues. But stronger borrowers, I think - once we've gotten through that second quarter kind of freeze - are in a good position. And I'd say the lending markets are returning with very low rates in some areas. The Fed, that's a different story. At the end of the day, the CARES Act and the Federal Reserve lowering rates significantly close to zero, effectively (in the Fed fund window) as well as the SBA CARES Act changed the lending landscape. The biggest difference was the PPP loans - Payroll Protection Plan - that essentially became free money because it can be forgiven by the federal government. As well as part of the SBA programs; not only really low rates - in the high fives, the low 6% range for these type of products - but the first six months of principal and interest are completely forgiven if the loan closes by the end of September. And so the federal government's hand in this lending market facilitated it, I think, returning to historical levels, and really reduced or opened up the credit box that was being reduced. So there's been some macro impacts that have fallen through our lending world that are really driven by the federal government, predominantly.

Doug  09:17

So you're seeing a stabilized marketplace of some sort, and the lenders are back in action, financing deals?

Peter  09:24

I would say probably so. In speaking with others in our industry, generally speaking, those that cater to an SBA market have seen above normal, those that cater to non-SBA markets, we're seeing slightly below normal demand. But that's all now it says the SBA programs or federal government programs kind of come to an end. That's all coming back to, "Hey, we're in a normal volume, of sorts". Still a material demand. Kyle, I don't know what you see, when talking to borrowers who may be talking to AgileCap but also talking to other lenders. What did they see from those other lenders? Is there a real desire to lend money or are people pulling back? 

Kyle  10:04

It's interesting because we see it from the client's point of view. And so when a client is speaking to a lender, whether they're a bank lender or an SBA lender, they're getting promised these low interest rates, and qualifying for these government programs...This SBA six months of principal and interest payments, as well as the PPP, which most banks and SBA lenders are putting a lot of focus on that, which is good, because it's  one of the big economic engines that's bringing this economy back. But there are a lot of individuals who don't feel like they're getting the time and the attention from these banks and these SBA lenders, because they've got these, "bigger fish to fry" over here. And so if a transaction was either marginal, whether it's because the acquisition wasn't as strong or whether the individuals have some credit blemishes, they're getting pushed on the back burner, and not getting the attention and recognition from the lenders that they feel that they deserve.

Doug  11:05

We often hear this called "The lender backlog" that the big banks have a backlog of transactions that they're processing. We certainly saw that with the PPP loans, that they had a hard time processing them as quickly as the demand for them hit them. So would you say right now, there's a large backlog among the large lenders?

Peter  11:27

So I have seen material backlogs in August. I would say that was the apex of a backlog in - not our bank and our lending institution - but in the broader market, especially related to SBA. I think the backlog has worked itself out to some extent. It is not as at the spike, it was in the August time period. And I think there's more openness in the market right now than there was. But, Kyle, are you talking to clients who maybe have been ignored, and - which is another word for "the backlog" - from other large lending institutions that we're talking to more, or maybe you've seen something I haven't?

Kyle  12:09

Most definitely. As the deadline approaches, individuals are realizing that the dangling carrot in front of them isn't going to be theirs, because the banker is not getting back to them on time, they're not progressing through the loan process with that lending institution, and so they are beginning to look at other solutions, other opportunities, other lenders who are still in the marketplace.

Doug  12:35

So Kyle, why don't you dive in and tell us about some of the specific transactions where AgileCap has executed that might provide our listeners with some insights?

Kyle  12:46

Sure. Thanks, Doug. So one area that many lenders have a difficult time with, is partial buyouts. A partial buyout is when an existing partner wants to buy out one or more partners from their business. Many lenders, including the SBA, don't like partial buyouts. And so I have an example here that we did a couple of months ago for a gentleman in Wisconsin. We'll call him, Adam. Adam had been with his agency for 10 years. Him and his business partner built this agency from scratch. It's a good strong P&C book, and combined - between their two books - he had, or they had, around $330,000 of annual revenue. And he needed a loan to buy out his partner's book. And so we have his income, and we have his business partner's income that we're relying on to be able to make the cash flow, the debt service, to be able to satisfy for this loan. This individual had good credit, he is a individual who could, you know, "be a bankable client" but because of the type of transaction - the partner buyout - he was unable to find financing. And he reached out to us and was almost pleading for help. He's like, "I'm not sure where to go; I talked to my local banker, and he didn't know what to do with this. Is this something you guys can do?" And we helped him through the process. We helped him get the legal and accounting advice he needed to see the transaction completed. So that's one example of an area that lenders are underserving.

Doug  14:33

You would call that a partial buyout scenario?

Kyle  14:36

Correct. 

Peter  14:37

Kyle, I've also seen lenders have issues with smaller agencies. There is a correlation of a small agency and the probability of success or failure; and therefore smaller businesses, in general, sometimes don't get lent money. Have you seen that in the marketplace and in some of our clients as well?

Kyle  14:55

Yeah, there is another example. I have an individual in Georgia. She came to us, we'll call her Sue. Sue came to us and she was looking for a loan to be able to get out of some debt, as well as to give her some working capital. Now, she only had around $230,000 of annual revenue. So it was a decent book - this isn't like a recent startup - she had been in the business for 20 years. This was her dad's agency. She took over ownership in 2012. So from 2012 to 2020, she had been running this successful agency, growing it and being successful at it. And so she needed to have a little boost and a little working capital to be able to go hire a new producer, as well as take care of some business debt that she wanted to consolidate and get off her books. And so we were able to assist her. Now many lenders won't look at that, because it's kind of an under the $250,000 range of what they're acceptable. At AgileCap, because we are a specialty lender, and because we are not a bank or the SBA, we can go down to $150,000 of revenue for an agency. So we've got a lot more flexibility, in that regard, to assist other agencies who may or may not be able to be serviced by their local bank or other lending institutions.

Doug  16:18

So Kyle, that's a unique niche and a very unique product. What are the factors that you look at, in that smaller agency, that might get you over the hump to make the loan that others might pass on the deal?

Kyle  16:32

Sure. Experience is going to be a big deal, we want to see that these smaller agencies have the experience and the ability to run a profitable agency. Yes, she had some business debt that she wanted to consolidate. But over time - and we looked at her historical income - she was able to grow this agency, and we are in a position to help her get to the next level, because she had been running this agency successfully in the past.

Peter  17:01

It's interesting. I've seen on the other end...so this is what Kyle's talking about, is a smaller agency. I've seen larger agencies that are trying to do a series of acquisitions. And the conversations I've had with some of the owners is that banks (SBA, or non-SBA, but larger banks) are nervous about allowing people to do multiple acquisitions in a row in a shorter time period (maybe one every six to 12 months), because they want stability. And I don't know if you've seen something like that, or is that just a myth floating around there in the marketplace?

Kyle  17:41

No, this is actually one area that we kind of excel at. I would say the vast majority of our clients come back to us for additional funds for another acquisition. I'm thinking of an individual in Southern California. He and his business partner started a small little agency from scratch, in 2016, and they started growing this agency. And in 2018, they came to us for a small acquisition in Oklahoma. So they're in Southern California, they found this acquisition in Oklahoma, and he had (him and one of his business associates) had ties to Oklahoma. And he saw this opportunity to buy this agency. And from a financial point of view, it made sense to us. His agency was strong and was growing. And he saw this other agency, that was a good healthy agency, and he wanted to add it to his portfolio. And we assisted him with it. Now, six months later, he had another acquisition that came across his table, and it was too good for him to pass. It was a homeowner's policy in Northern California. It was a virtual book. And after due diligence and consideration, it made sense. It made sense from his point of view. And it made sense from our point of view. And so what we did is we consolidated his existing loan, added the acquisition loan to it, and re-rolled it into a new loan for him. So we had one loan payment, for the second acquisition from us. And right now this one's kind of a unique deal, because it's also a bridge loan. Because we've helped him get to a specific goal. He had a goal that he wanted to be up to $500,000 of annual revenue. That was his eminence partner's goal where they wanted to reach. And now they've reached that goal of $500,000 of annualized income from insurance. And so they're now in discussions with an SBA lender, nonetheless, to get long term financing so that they can pay down this debt that they have acquired - this debt through these acquisitions. And so they have this SBA loan at which they are taking advantage of the CARES Act and they will get six months of principal and interest forgiveness. And so they're able to do that because we were able to help them grow. We were able to provide the funds for them so that they could do these acquisitions, get to their goal, and now they're going to stabilize that income and pay down this debt with this low cost loan from the SBA.

Doug  20:11

Kyle, you use this phrase, "virtual book", explain to our listeners what that means.

Kyle  20:16

So a virtual book is - in our minds, we typically think of an insurance agent having a small office on the corner of Main Street, and they're, they're selling policies out of their office door. And that's a "brick and mortar" type of operation, very successful. But then there are also these "virtual books", which are the same type of concept, but mainly for individuals who don't need to go down to the Main Street and talk to their insurance agent, but would rather call, text, or email them and get the same type of service. The term would be used for any agency that is not located in the town of the client, you know, still full service insurance agency, but not in their general locale.

Doug  21:03

And is that something that you're more comfortable lending against, then perhaps other lending sources?

Kyle  21:08

No, I think that one's pretty general. I think a lot of lenders are comfortable with the virtual business model.

Doug  21:17

So this scenario of serial acquisitions, where someone wants to grow with more than one transaction - one after another - what is it that you look at that gets you comfortable that a company is capable of doing that, when a lot of lenders want them to digest things one at a time, and really season the portfolio before they go and do the next deal.

Kyle  21:40

So we look at a couple of things. Obviously, cash flow is king. Whether it's cash flow from the existing agency, and the cash flow from the new agency. And the combination of those two, are really what we're looking at, because we are collateralizing, the commission's from these insurance sales. We are using the historical income as a reference point. Now, if these are both brand new startup scratch agencies that they're asking, you know, a very high sales multiple to be able to do these acquisitions, then I'm not sure if we're going to be comfortable with it. And so we're looking for the historical income. And we're looking at past performance, both of the individual as well as the agency, to be able to make ourselves comfortable in those scenarios.

Doug  22:28

So Kyle, are there other scenarios that we want to talk about, where you guys have played a role?

Kyle  22:33

Yeah, so there's a I want to kind of touch on this bridge lending idea. Because many individuals who are bank qualified need to close more quickly than the bank or SBA can accomplish. Often, you've got motivated sellers who need to sell for a myriad of reasons...whether it be for divorce, or getting out of the business - they're, you know, they're wanting to move down to Florida, because they've had it with COVID - and they're done, and they want to go right off into the sunset. They don't want to stick around for six months for this acquisition to complete. And so they want to be done and are very motivated to be able to sell this agency and not sell a "dog", but they just want to move on to the next phase of their lives. And so we at AgileCap, because we're not a bank, because we are a private lender that can move very quickly, we can wrap our head around a situation. We can understand the finances, understand the individual who's trying to acquire them, we can make the decisions very quickly because we are a flat organization that focuses on one thing, and that's insurance agency acquisitions. We can help them acquire these agencies, help them stabilize the income, and then they can get qualified for longer term financing, much like this individual did in Southern California. 

Kyle  23:54

There's one more deal that I want to talk about. This individual's in Oregon. We'll call him Tom. So Tom had a very interesting situation. He actually sold his agency. And then he stayed on as a minority owner and a producer. He saw an opportunity to join forces with another individual - this business partner - he saw an opportunity that would offer more policies, better rates, it introduced him into a new market. So on paper, this acquisition - or the selling of his agency - to this individual made sense. And about six months into the relationship, he realized that the partnership wasn't going to work out. And he was flummoxed at what to do. He talked to his local banker and said, "Hey, is there a way that I can get a loan on my agency to buy back my agency I just sold?" So the time had been roughly about six months since he sold it, so there was no historical income of the new ownership of what they had done. It was kind of a messy deal. I mean, all the paperwork was legit and clear and understanding. But from a logistics point of view, it was it was a little hairy. Because again, we're a flatter organization that we're able to understand his experience, what he's gone through and - looking at his past historical income - and being able to look at the merging of these two businesses. We're able to see that we can help him separate them, so we were able to provide him a loan to buy out his new partner, to buy back his agency. So we provided him that loan. And again, this individual is, is trying to take advantage of the SBA CARES Act, so that he can have six months of principal and interest reimbursed. So that's a unique situation that this individual regretted his decision, didn't want to burn any bridges - didn't want to, you know, walk away and just throw his hands up in the air - he was able to buy out his partner, and it was it was an intense - I had several conversations with both the buyer (or the individual) and the seller (the partner / former partner to be) - it was intense. These gentlemen, you know, both successful agents in their own respective realms. And I wouldn't say it was hostile, but it was not as amicable as some transactions are. But we were able to see it through; we were able to help him by his agency back. Those are the things that kind of bring me joy, bring me the satisfaction of being able to assist them.

Doug  26:38

Thank you, Kyle. This has been really helpful. These kind of unique anecdotal special situations are really the time to call AgileCap it seems.

Kyle  26:48

Yeah, that's exactly why we're here. Because we can see unique situations and we can wrap our head around them, assist individuals who want to get to the next phase want to get to their financial goals, and help them along their growth initiatives.

Doug  27:04

Well, thank you, Kyle. Thank you, Peter. And I hope our listeners enjoyed your insights.

Peter  27:10

Yeah, thank you, Kyle, I appreciate you taking the time, as I know you're quite busy, to spend some time with us. How would people reach you if they have a question about a particular deal or kind of your view of what's going on in the marketplace?

Kyle  27:26

Sure, sure. So I can list my phone number and email but I think the best place to get a hold of us is our website. And that would be agilecap.com and on there, you can fill out a Contact Me Form and I'd be happy to reach out to you and discuss your unique and individualized situation and see how we might fit your growth plans, your growth initiatives.

Peter  27:52

Great. Thank you so much, Kyle. Thank you everyone for listening. Please continue to follow us on Twitter @agilefunds or Facebook @agilecap, online at www.agilecap.com where you can sign up for our newsletter. We have other podcasts and updated information as we keep you all informed on what's going on in the marketplace.