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Paul Zimmerman

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To Buy, Or To Form, An Insurance Agency . . . That Is The Question

Thinking about getting into the insurance agency business? If so, you are faced with an interesting choice: to purchase an agency and its licenses or start from scratch and apply for new licenses. As you can imagine, each of these options comes with its own benefits and pitfalls, and the best way to proceed is dependent upon your goals and circumstances.

For the sake of this discussion, I make the following assumptions: (1) you want to form and operate an insurance agency with the potential for multi-state growth; (2) (if you are leaning toward purchasing an agency) you will acquire the business itself and the licenses of the company with it; and (3) (if you decide to apply for new licenses) you will be forming a new entity altogether, as opposed to expanding an entity you already own that may have pre-existing issues.

Purchasing an Agency with Licenses: The Pros

If you are able to purchase an established agency, the biggest benefit can be summed up in one word – immediacy. Once the transaction is complete, you will be on your way to writing business. Indeed, depending on the size of the agency you are acquiring and the complexity of the deal, you can be operational within a month or so. Any regulatory issues can be dealt with after the acquisition is completed, by providing notice to the various states where the purchased company is licensed. (Note that this may not be the case if you decide to change the agency’s name—a process that can add a surprising amount of complexity, and legal fees, to your transaction).

Additionally, by purchasing an existing business, you may be availing yourself to more than just licenses. The company will be have already been legally formed, may potentially have a known brand and client base, and could already be operating profitably. These factors would allow you to hit the ground running with cash flow and the built-in potential for growth.

Purchasing an Agency with Licenses: The Cons

Though purchasing an agency may be convenient, such a deal is not without possible baggage. Remember, you are not just acquiring licenses, but also any history of regulatory action or wrongdoing committed by the company while those licenses were held. In addition, you are taking on any of the agency’s pending legal headaches (e.g., employment violations, pre-existing litigation, etc.). Of course, these issues would presumably be uncovered through a careful pre-purchase review of the company’s records (typically conducted by attorneys in a process called “due diligence”), but depending upon the agency’s size, due diligence can be quite costly. Likewise, any liability for pre-existing issues could be assigned to the selling party, but such an arrangement would need to be negotiated prior to completing the purchase (delaying your start date) and may be difficult to enforce.

Applying for Licenses: The Pros

The benefits of obtaining new licenses for your insurance agency are the absence of the cons discussed above. By starting at square one and procuring new licenses, you will not need to worry about being saddled with the errors or bad reputation created by another company. Truth is, to apply for an insurance license is not particularly complicated; in fact, the process is streamlined through an organization called NIPR (the National Insurance Producer Registry). You simply provide basic biographical information about your company, identify an individual licensed agent who is willing to be responsible for your agency, and answer a few background questions.

Another pro: the application itself is much less expensive than the purchase of an existing business (unless you are able to buy an agency for $200!). This alone is an excellent reason to apply and start your agency from the ground up.

Applying for Licenses: The Cons

The biggest problem forming an insurance agency from scratch is the time it takes before operations can commence. The application itself will need to be processed in the state or states where you have applied, and the time a state takes for review and approval will vary. Some states may have follow-up questions or require additional biographical information, like fingerprints.

More importantly, if you are not working with an individual who holds an agent’s license, you will need to either become licensed yourself or find someone willing to do so. This means you will need to go through the process of obtaining an individual insurance agent’s license before you can even apply for the agency’s license, which adds even more time to your hoped-for launch. There is more. If you have not yet formed the legal entity that will hold the licenses, formation of that company may also take several weeks. And while some states will rush the process (for a fee), others simply do not offer the option to expedite. To the contrary, many states have “seasoning” requirements whereby out-of-state licenses cannot be obtained until the company has been operating for a set period of time. The bad news—this makes the process of expanding operations even longer.

Bottom line: if you are in a rush to start operating or are concerned about losing leads for substantial business, you may want to consider purchasing a company that is already licensed to avoid a potentially lengthy application process and review period.

All things considered, to buy, or to form, an insurance agency is an interesting question, indeed.

This blog post is not offered as, and should not be relied on as, legal advice. You should consult an attorney for advice in specific situations.