Allstate likes to call agency ownership “the best small business opportunity in America.”
You buy an agency owner’s economic interest in their book of business, then collect commissions on those renewals (now 9%) while you sell more policies and grow the income stream. Since people have to have auto and homeowners insurance even in an economic downturn, the recurring income should be at least somewhat recession resistant.
Additionally, as the cost of insurance goes up over time, the book of business should generally grow in size, as the loan to buy that book of business keeps getting paid down each month. And unlike starting an independent agency that no one has ever heard of (e.g. Joe’s Insurance Agency), you have the brand name of Allstate behind you.
Even if you hire one or more people to run your agency, buying an Allstate book of business is not a passive investment in the sense of buying a stock and collecting dividends. There will be angry customers that may demand to speak to “their agent” and there are fairly reasonable minimum production requirements. Staffing can be an issue if the people you hire do a poor job or quit.
But many Allstate agency owners do have other businesses or jobs and look at buying a book of business as an investment and not necessarily their only source of income. There are Allstate agency owners that own real estate brokerages, coffee shops, car washes, tax prep companies, and many other businesses.
Almost all agency owners have at least one person working for them that handles some (or in some cases, a very large portion) of the sales and service work. There are even a few instances where the agency owner no longer lives in the state where their Allstate agency is located.
Many banks don’t understand buying an Allstate agency in the same way they understanding buying hard assets like an office building or machinery. They aren’t comfortable with the collateral just being a book of business instead of something that they can touch and feel.
However, there are banks and non-bank lenders that specialize in making loans to insurance agencies. For those companies, an Allstate book of business is one of the loans they are most comfortable making.
They can look at standardized Allstate reports and understand how a particular book of business is performing compared to the other 10,000 agencies nationwide. They also know that customer loyalty to the Allstate name should help mitigate mass defections of customers when a new agency owner takes over. Finally, they can setup loan payments as automatic commission deductions, and most importantly, they can collateralize their loan by being first in line to receive the termination payment (“TPP”) from Allstate if the agency owner decides to walk away.
There are many lenders that will loan on an Allstate book of business, so in developing our list we looked at the lenders that a large number of agents have chosen to use.
Typically a lender list for something like a 30 year fixed rate mortgage would just rank-order the lowest interest rate or APR. However, obtaining a loan on an insurance book of business can be more complicated and most borrowers are going to weigh other factors of importance to them.
For instance, how difficult is the loan approval process, are the fees reasonable, how reliable is the lender on following through on a loan commitment, how punitive is the pre-pay penalty (this is a commercial loan and not a residential mortgage, so almost all of the loans are going to have some type of pre-pay penalty that decreases over time), do the loan officers communicate well, are promises kept by the loan officers, are there fees to refinance with the same lender, and what are the recurring reporting requirements after you close the loan?
In general, we have found that owner financing and Allstate Finance Company are the two best finance options for most borrowers. After those 2, the next 8 are pretty interchangeable and some of it is going to depend on who is most aggressive with rates at a particular time and whether you are in the geographic area they are targeting.
The 2 best options for most borrowers:
1.) Owner financing – if the owner is willing to sell you the book of business and carry the financing, this is the easiest way to get started. There won’t be a complicated loan approval process and there typically will not be any fees. No one is going to scrutinize the loss ratio of the book of business or what zip codes the customers are concentrated in. The owner may be willing to finance a higher portion of the purchase price. Even if you are able to obtain a loan from another lender for say, 75-80% of the purchase price, it’s not a bad idea to explore owner financing of the the remaining 20-25%. Many lenders are OK with the borrower having the owner carry back a portion of the purchase, as long as that loan is in second position.
2.) Allstate Finance Company – Allstate Finance Company probably has the most streamlined process for approval and one of the lowest fee structures out there. They generally will not lend against a book that is smaller than $1.5M in premium, so that does rule out most smaller books. Their rates are competitive and they generally allow you to refinance the book down the road without paying a prepayment penalty. They do have a prepayment penalty if you refinance with a different lender or pay off your loan early. Contact Eizel Cinco 847-402-8578.
The next 8 options in no particular order:
1.) Servis1st Bank – Contact Drew Battle 205-534-0553.
2.) Northwest Preferred Federal Credit Union – Contact Marcia DeCormier 503-403-6233. One of the key features of NW Preferred’s Allstate agency loans is that they offer loans with no prepayment penalties. Almost every other lender has some type of prepayment penalty (although it may be waived if you refinance with the exact same lender). If you are considering selling your agency in the near future but need funds until then, NW Preferred is a good option.
3.) Point Funding LLC – Contact Hannah Tyler 504-208-4406.
4.) Union Bank – Contact Charles Gravatt 804-647-6763.
5.) Capital Resources LLC – Contact Tom Sanders 866-523-6641.
6.) Regions Bank – Contact Matt Barrington 678-215-7888.
7.) PPC Loan – Contact Steven Kemper 281-419-0400. PPC Loan originates a very large amount of Allstate loans and even publishes a valuation metric for all Allstate agents to get an estimate of what their agency is worth. They function like a broker and your loan will actually be with a different bank.
8.) Valliance Bank – Contact Jake McGuire 918-798-2197.
Another option is to talk to your local community bank or credit union, especially if you already have a relationship with them. In general, they prefer to loan against businesses with real estate, or that have higher revenues then your typical Allstate book of business, however, occasionally you will find one that understands insurance book of business lending and is willing to offer a competitive rate.
What about Oak Street Funding?
Oak Street advertises a lot and they do originate a lot of Allstate loans. They also have been know to loan on smaller books that other lenders would not lend against. In some cases they are the lender of last resort when no other funding is available elsewhere. However, we compared a loan proposal from Oak Street with one from Allstate Finance Company and the Oak Street one was extremely expensive by comparison.
The loan was only fixed for 2 years, the rate went to prime + 4.5% after 2 years, there was a 2% origination fee, there was a $2500 non-refundable deposit fee, a 5% pre-payment penalty, $2125 in additional closing costs and something called a cash collateral funding equal to 2%. They encouraged the seller to finance a portion of the purchase in order to decrease their loan-to-value with Oak Street.
Allstate Finance Company offered a fixed rate. The total closing costs amounted to $750. There was no deposit, origination, “cash collateral funding”, or prepaid interest. There was no talk of the seller carrying back a portion of the purchase price. The prepayment penalty was 3% for 3 years and then 1% after that. After contacting Oak Street and letting them know they were not competitive, they did improve their proposal, however, it was too little and too late. If you are set on using Oak Street, don’t just assume you have to accept their terms. Try to also get at least one other loan proposal from another lender.
Please message us on Facebook (https://www.facebook.com/unusualinvestments) or email us at moneyface AT unusualinvestments.com ( AT = @) if you have any other feedback on any of these lenders, or if you are a lender and want to add or correct anything. If you are thinking about purchasing an Allstate book of business, we can also put you in touch with one or more actual Allstate agency owners to talk to you about their experience.