In a recent seminar we asked agency owners to estimate the market value of an insurance agency with the following characteristics:
Annual Revenue: $500,000
Lines of Business: 90% Personal Lines
Years in Business: 10
Amount of Debt: $100,000
No two answers were alike and ranged from $400,000 (“1-times revenue less the amount of debt”) to $1,000,000+ (“at least 2-times revenue”). As acquisition brokers and consultants to insurance agents, we see this misunderstanding about agency values all the time. And the only acceptable answer that should have been given regarding the value of a $500,000 personal lines agency in business for 10-years with $100,000 in debt is this: It depends.
It depends on dozens of factors about the operations and finances of the agency that weren’t even provided in the example and without those factors being known, there is no way to establish a value for any insurance agency.
An Agency Valuation (or “appraisal” or “assessment”) is the process used to identify, analyze, and summarize all relevant data needed to establish a well informed opinion of value for insurance agencies. Without a Valuation, the value of an agency can only be determined the same way the seminar attendees did it; by guessing. Valuations look at all aspects of an agency the way a buyer of insurance agencies would consider those same aspects, by viewing each one as either a concern that could negatively impact market value, or an opportunity that could positively impact value.
One example of this, using the sample agency above, is the annual revenue. The first thing a buyer would consider when seeing revenue of $500,000 in a personal lines agency, is how much of that revenue is from commission income, how much of it is fee income, and how much of it is contingency or other income from ancillary sources (e.g. vehicle registrations, tax services, motor club, etc.). And each of those different types of revenue would impact the value of the agency differently, based on how “sustainable” that type of revenue would be considered in the future. Also, it is ultimately the net profit or cash flow of the agency that is going to be much more important in establishing market value anyway, not the annual revenue.
Some of the other key contributing factors that are uncovered and documented in the Valuation report include details about existing staff, concentration of primary carriers, type of corporation and details about shareholders, existence of producers and who owns their accounts, workflow and automation in use at the agency, and many other “quality factors” that impact the value of an agency, too numerous to detail here.
So why get a Valuation for your agency? Some of the more common reasons for having an objective third party establish a value include:
- Distribution of assets for divorce, trust estate, or other legal matters.
- Documentation for a partner buyout.
- Justification of market value for the IRS or a lending institution.
- Presentation a seller can use to justify an asking price or a buyer can use to justify an offered price.
- Outside opinion for a business transaction between family members.
- Just having an idea of what the agency is worth to decide if it’s a good time to sell or a good time to address the issues that are impacting a lower value.