How are the top agencies responding to this development?

Many of the Best Practices agencies are now focusing their efforts on acquiring individual producers' books of business, rather than whole agencies. Some are finding this to be a much more rewarding effort than getting into a bidding war with several parties for a local competitor that goes up for sale.

But given that buying individual books is a relatively new effort for many, it brings with it a certain amount of uncertainty.

Although there is a great deal of information that has been written about agency acquisitions--such as valuation rules of thumb and common deal structure elements--many agency principals feel they are in the dark when it comes to how to value and structure the purchase of a book of business.

Here is an attempt to reduce at least some of the mystery surrounding producer book purchases and point to some of the "Best Practices" that are frequently being used:

o Determine who really owns the producer's book and whether or not they are willing to sell it.

If the producer you're talking to owns their book, your task is relatively easy. However, if the producer is under a restrictive covenant with another agency, it is more complicated since that agency is the legal "owner" of the book.

If a producer with a restrictive covenant wishes to join your firm, you really only have two legal choices--negotiate with the agency to buy the producer's accounts, or hire the producer and make them wait to solicit the accounts until the restrictive covenant expires, then buy whatever accounts the producer is able to bring along at that point.

Negotiating with another agency to try to buy a departing producer's book is very unpredictable. Some agencies, regardless of the circumstances, would never agree to sell a producer's book, feeling it would set a bad precedent with the remaining producers.

Other agencies tend to be more flexible. The more flexible agencies will negotiate for whatever they can get once it becomes clear a producer is committed to leaving, figuring the business is probably going to be lost anyway--either to the new agency, or to some opportunistic agency that steps in and grabs the account during the producer's transition.

Having a clear understanding of who really owns the business will enable you to properly approach the deal and make sure that whatever you pay for the book ends up the in the right hands.

There have been situations where an agency has paid a producer for their book, only to find out later that the producer's former agency owned the business and had a legal right to payment for the business.

o Get a clear understanding of what you're buying.

If you're going to price and structure a producer book purchase properly, you must evaluate some key issues. Value is always a function of three key variables--growth, profitability and risk.

On the first point, once you've purchased the book, how much growth will the producer generate for your firm?

A significant potential advantage of a producer acquisition (as opposed to an agency acquisition) is that a single producer can often provide a much higher growth rate than an entire agency, assuming you attract a producer at a point in their career when there's still some gas left in the tank.

Mathematically, a book of business that isn't going to grow in the future is worth roughly half that of a book that will grow by 15 percent per year.

On profitability, consider what will be the bottom-line impact of the producer's book. Often a single producer will generate greater incremental profitability for an acquirer than will an entire agency, since an agency will likely bring along its entire cost structure.

Depending on the producer compensation plan of your agency and the service requirements of the producer's customers, a producer's book might generate incremental profit margins equal to 30-to-50 percent of the book.

As in any acquisition, these future profits will ultimately be the source of payment for the book purchase, so having a reasonably accurate estimate of what they will be is crucial to understanding how much you can pay for the book.

And if you pay the highest commission splits in town, you need to recognize that you cannot pay as much to buy a producer's book as your competitors can.

On the third and last point, what is the risk that the book of business you are buying will end up generating less revenue and profits than you are expecting? This is really the key reason why individual books of business are worth less than whole agencies, even if one adjusts for size differences.

A whole host of issues come into play here, but the main issue is the lack of diversification that comes with buying the customers of a single producer.

Will the customers really stick with the producer? What if the producer becomes disillusioned and wants to leave your agency? What if the producer gets sick, becomes disabled or dies? Since these factors cannot be accurately predicted, the best way to deal with them is by developing a proper risk-equalizing deal structure.

o Structure the deal properly.

Once you've determined who owns the book and what its unique attributes are, you can then make an offer to buy it. Due to the higher risk driven by their inherent lack of diversification, most books of business are bought for multiples of revenue that are far less than that of an entire agency.

To try to create a win-win scenario, buyers will often use an "earn-out" type of approach, whereby they would pay a multiple of perhaps 1.0 times the commissions generated by the accounts being purchased--but will pay that over a period of years if, and only if, the business is retained. This amount is paid to the owner of the book (either the former agency or the producer, depending on the circumstances).

These book purchase payments are paid in addition to the regular commissions that are paid to the producer for handling the accounts (the producer should be on his new agency's normal producer compensation program as quickly as possible).

As in any transaction, tax issues are a key element of the deal. One of the great benefits of a producer book purchase is the purchase price is typically fully tax-deductible for the buyer. Compared to buying the stock of an agency (which is not deductible at all) this means that the buyer gets roughly 40 percent tax relief right from the start.

So, if you are frustrated by the lack of acquisition opportunities in your marketplace, you might want to consider an attractive and increasingly common alternative--the producer book purchase.

As others have found, it can be a powerful added tool to be used for growing your agency and building a top-quality sales organization.