WHAT IS AN AGENCY VALUATION?
An agency valuation estimates the Fair Market Value of your business at a point in time. Valuations for different purposes determine different dollar values. The same agency may have a variety of values depending on the circumstances. It is expected that the value of a business due to the unexpected death of its principal will be different than the value of the same business as a “going concern” with the owner both healthy and intent on continuing his career.
HOW MUCH IS YOUR AGENCY WORTH? ONE TIME? ONE AND ONE-HALF TIMES? TWO TIMES?
During the last twelve months Agency Consulting Group has been involved in agency transactions which, if converted to a multiple of revenue, would have ranged from .75 times revenue to 3.25 time revenue. It’s amusing to convert a complex set of pricing formulas into a simple multiple of revenues–amusing, but not accurate.
Guessing that when you retire or if you die, you or your family will get some magical multiple of revenues will either cheat you out of the just value of your agency or will shock you when you are offered a price far different than your guess.
The value of an insurance agency in its simplest terms is its sustainable future earnings power under the specific circumstances that generate the valuation. Whether the agency maintains its current owners, perpetuates internally or perpetuates externally, its value can only be determined by a pro forma estimate of its continued earning power under each circumstance. An agency generating $100,000 of earnings on $1 million revenue is worth no more than $100,000 each year in real payments if the revenue and earnings capacity is expected to remain stable in the future and the business continues on its current course with its current owners. Remove or change any of its current conditions (owners, location, growth, profitability) and the value changes accordingly. For this reason, a simple multiple of revenue formula is insufficient as a value calculator.
When Agency Consulting Group is asked to formulate a value in terms of a multiple of revenue, we create the appropriate Fair Market Value and simple divide it by the agency’s revenue base. Does it form a qualified basis for estimating other agencies’ market values? Of course not! But many agency owners are simply looking for and easy measurement of their agencies’ values. Who is qualified to perform Agency Valuations?
WHY DO YOU NEED A VALUATION?
Every closely held agency needs a valuation of the business on an annual or bi-annual basis.
Going concerns with stable ownership should have an on-going stream of valuations to support the owners; estate plans. The Internal Revenue Service tends to more readily accept estate valuations that are the latest of a regular chain of valuations of the business. Estate planning is easier when the agency owners are cognizant of the on-going value of their businesses as a large part of an estate.
Agencies planning internal perpetuation need valuations to support stock sales. If that internal perpetuation involves gifting to family members, a valuation is particularly needed to avoid taxx ramifications of intra-family stock exchanges.
Valuations are required in mergers, acquisitions and sales. Imagine this real situation:
Three years ago two agencies decided to merge. The agents had known each other for years and both complained of how hard the agency business had become. One was double the size of the second. Avoiding the cost of valuations (and due diligence), they simply decided to value their businesses by the revenue bases of each business. Unfortunately the larger agency was 80% personal lines with a large support staff, a fir debt-load and more expenses each year than revenues. The smaller agency was 80% commercial lines with a small staff and not debt and strong cashflow. The smaller agency provided strong profits to it’s owner every year. After the first year, the former owner of the smaller business found that his profits disappeared into the expenses caused by the merged organization. He was getting little value from the merger. After two years he decided he’d had enough and wanted to break apart the merger.
We only became involved after the attorneys split the business by the stock value. We were able to prove that the smaller agency was worth more than the larger one by virtue of its earning ability compared to the other agency. However, the court ruled that regardless of how much the agencies were “really” worth, the agency owners agreed to the original merger value without fraud or malice — just ignorance.
The result? The smaller agency owner got his business back and must pay the other owner monthly payments for the next three years for the difference between his book of business and the value of the stock due to the faulty valuation method used in the original transaction. — By the way, they are no longer friends.
The lack of a valuation was very, very expensive for this owner. If you are considering buying, selling or merging a Fair Market Valuation can support your decision or correct a potential critical error before it is made,.
HOW ARE VALUATIONS DONE?
The process is simple, but the exercise is rather complex. In order to value your agency we construct a pro forma of your agency’s expected performance in the future based on your historical performance and any changed or changing conditions and circumstances surrounding the valuation needs. The best example of the process is in a valuation for acquisition purposes. In order to estimate the value of an acquisition target to your agency, we would translate it revenue and expense history into it’s potential financial performance as a part of your agency. We would reduce certain expenses that would be saved in a consolidated operation (rent, administrative staff, etc.) and add any expenses that would be added as the result of the acquisition (i.e. employee costs, insurance costs). The resultant amount expresses the value of that acquisition target specifically to your agency and condition. If another agency wished to purchase the same target and keep it open as a branch, the value of the target agency may be less than it is for you. Since you would generate more cashflow from the acquisition, you could afford more for the business and still profit quickly from the resulting organization.
HOW MUCH DOES IT COST?
An agency valuation performed by Agency Consulting Group will cost between $2,500 and $4,500, depending on the size of the agency (revenue) and the complexity (number of locations and corporations). However, once you are in the system, re-valuations take much less time. The annual re-valuation cost is only $1,000.