Should I Invest in an Allstate Insurance Agency? [2023]

 

We’ve previously covered the small business opportunity to purchase or start an Allstate insurance agency.  Unlike other national brands such as McDonald’s, UPS Store, Ace Hardware, 7-Eleven, etc., you don’t actually have to pay a franchise fee.  You just need to be approved, show adequate amounts of liquid reserves (typically $100,000), and complete a training process.

Buying a Book of Business

If you are buying a book of business (BOB) rather than starting from scratch, you need to buy the economic interest in the book of business from the existing Allstate agent. (Comment: starting from scratch is almost always a mistake and the failure rate is high.  It generally only works if you have some extremely lucrative resource for generating new business or are owned and operated by a car dealership)

An Allstate BOB typically sells for around 2X annual commission revenue, although that number has come down in recent years.  The AllstateForSale.com website has a quarterly newsletter that list recent sale multiples.

One thing to note is that independent agency BOBs generally sell for higher multiples, are much easier to sell, and generally don’t require the strict approval process of an exclusive agency such as Allstate.  However, they are much harder to find and many of them sell “off market” before they even need to be listed for sale.

Generate Commissions and Get Paid Upon Exit

Once you own an Allstate agency, you receive commissions on new business and renewals.  If you can consistently sell more than you lose in non-renewals, then you can increase your revenue from the business each year.

When you are ready to exit, you can sell your economic interest in the book of business to a new or existing agent, or turn it over to Allstate Insurance Company in exchange for a buyout called the Termination Payment Provision (TPP).  The TPP is around 1.5 times annual commission.

Because of this, you don’t really ever see sales of an agency below 1.5X, because the agent can just take the TPP instead of sell.  The exception would be for a BOB that was less than 5 years old from initial scratch date and wasn’t fully “vested” due to being part of a special incentive program.

Changed Perception of this Opportunity

So you have a national recognizable brand name that spends billions of dollars in marketing, no franchise fee, and a recurring revenue stream….what’s not to like?  Seems like people would be lining up to invest, but that is not the case.  In fact there are far more Allstate agency owners looking to exit than there are buyers.

If you look at the AllstateForSale.com website, as recently as 2015, the number of Allstate agencies listed for sale in the State of California was 5.  In 2022, the number was a whopping 49.  Additionally, according to Allstate’s 10-K filings with the SEC, the number of agents dropped from 10,400 to 9,300 between 12-31-2020 and 12-31-2021.

Factors Increasing the Number of Agents Wanting to Exit

The discrepancy between agents want to leave and outside people wanting to become agents is somewhat complicated.  However, there are several factors at play that have made the Allstate agency opportunity less attractive than in the past.  These include:

❌ A major shift in agency compensation.  One publication described it as “Allstate slashing base pay for its agents beginning in 2023.”  Renewals used to be paid out at 10%.  Then they went down to 9% but you could keep it at 10% if you met certain qualifiers.  Then 9%.  Now it is being dropped to 7% starting in 2023 (with some monoline renewals going all the way down to 4%).  New business compensation is being increased but you have to meet some somewhat challenging qualifier numbers to take advantage.  This is a sea change for many Allstate agents.  They bought their books or invested in leads and marketing based on getting a consistent renewal stream over time.  Cutting that stream from 10% down to 7% is a 30% drop.  That’s huge.  A $2M premium book that once generated $200,000 in annual revenue will now only generate $140,000.

❌ Allstate’s Direct channel.  Allstate has decided to compete directly against its agents and much of its marketing directs consumers to visit Allstate.com or call 1-800 ALLSTATE to deal directly with the company.  Allstate also decided to offer 5-9% lower prices to consumers who go direct instead of those that buy a policy through agents.  That change is obviously quite problematic for agents.

❌ Allstate Insurance is not a low cost provider.  In many cases they are one of the more expensive insurance carriers in the marketplace.  The mantra to focus on growth doesn’t seem to jive with the product pricing when compared to other carriers like GEICO and Progressive.

❌ Allstate’s technology is performing poorly.  The quoting system called AdvisorPro has been rolled out prematurely and has frequent outages.  The mandatory phone system called Allstate Agency Voice has also received significant negative feedback from the agency force.  Both of these problems are fixable but they’ve caused current agents a lot of problems.

❌ Allstate’s management team of Tom Wilson and Glenn Shapiro is unpopular with many Allstate agents and is seen as anti-Exclusive Agent.  Management would argue they are just trying to grow sales through direct sales and independent agencies, and are not anti-Exclusive Agent.

Positive Factors for the Potential Agency Buyer

On the other hand,

✅ Mergers are being allowed for the first time in years.  Current Allstate agents ranked in the top 5%-10% are allowed to buy other agencies to quickly increase their book of business and the resulting renewal revenue.

✅ The values of Allstate BOBs have dropped significantly.  You aren’t buying based on a 10% renewal and 2.5X – 3X revenue like the olden days.  You could be getting a much better price and you could be bringing in much more revenue than your monthly loan payment.

✅ If you are skilled at generating new business and can meet the minimum thresholds in order to receive the enhanced variable compensation, you will generate very large new business commissions at the new 20-25% compensation levels for new business.

✅ High inflation like we are experiencing today actually benefits someone who buys an insurance agency (or any growing business) with a fixed-rate loan.  That is because if every insurance company raises rates, many customers will stay even though their rates are much higher.  The size of the book of business increases but the loan payment stays the same.

So who should invest in an Allstate Insurance Agency in 2023?

It is impossible to tell someone authoritatively whether they should or should not invest in an Allstate insurance agency.  Since you are not just buying a passive investment like a stock or bond, your financial success is going to be dependent on you — the agency owner — and your active ownership of the agency.  In some sense, you are buying a job.

However, there are certain people that might want to consider investing, and others that generally should walk away because the odds are stacked against them.

There are generally two types of people that should consider investing in an Allstate insurance agency.

1.) The first type is an existing Allstate agency owner.  The opportunity to buy other books and merge them into yours is probably temporary and may be closed soon.  In many cases, buying another book is a complete no-brainer.

Let’s say you are able to buy a $2M book to add to your existing book.

You negotiate a $300,000 purchase price based on a 9% renewal rate for pre-2023 business and a 1.7 multiplier.  That’s a $306,000 purchase price.  If you can leverage the equity in your existing book and finance the entire purchase, the monthly payment at a 7% interest rate and a 5 year term would be around $6000.  However, the book would bring in around $15,000 a month the first year and then decline at a mild pace over time if you kept renewals in check.

2.) The second type of person is someone who has already operated an insurance agency as an agency employee or manager at Allstate or a direct competitor like State Farm or Farmers, or who has operated a call center type of sales business outside of insurance.

Preferably not a company or product that is sold based on being the low cost provider, but a premium or middle level product sold based on value for the price; Allstate is generally on the higher end when it comes to price, at least for auto insurance.

This type of person would be completely aware of the minimum targets they need to hit in order to earn variable compensation, AND be convinced because of their previous experience that they could exceed these without a doubt by at least 25% each month.  This person should have experience in hiring, training, and supervising successful salespeople.

Someone needs to be all-in on growth and willing to exit the business quickly if their new business growth process ever falters.

The Days of Passive Owners Just “Milking” Renewals are Probably Over

Allstate previously recruited agency owners that were looking for an annuity type of investment that continued to pay them year-after-year regardless of effort level.  The 10% annual renewals were rightly seen as a cash cow.

A lot of agency owners owned other businesses in fields like real estate or tax preparation, and bought an agency to supplement their income.  Small town agency owners didn’t spend any money buying Internet leads or doing telemarketing, but kept retention high and sold enough new business to walk-ins and local people calling in for a quote.

If the agency had $2M in premiums, many agencies would look to just maintain that size and try to keep the retention levels high by having a service-focused employee.

With renewals being cut to 7% with new business rates being increased to as high as 20-25%, the Allstate agency ownership opportunity is looking more like a sales job than an annuity.

For those that want the traditional high renewal income / low sales requirement business model, buying or opening an independent insurance agency is a better way to go.