ACG - Agency Consulting Group

The PIPELINE

A national monthly newsletter for agency principals dedicated to agency management topic

ANNUAL COMPOSITE GROUP ISSUE - THE RUSH TO SELL IN 2012

ANNUAL COMPOSITE GROUP ISSUE

THE RUSH TO SELL IN 2012

We don’t even know if the Capital Gains Tax provided as part of the Bush Administration tax cuts will be allowed to expire 12/31/12 as planned by the Obama Administration. There is a chance that political pressures may cause an extension to gain more votes by each before the November elections. However, failing a last minute extension long term Capital Gains tax will rise from 15% to 20% January 1, 2013. And Obama-Care is adding another 3.8% tax on the Capital Gains as well.

IF YOU SELL YOUR AGENCY FOR $1 MILLION JANUARY 1, 2013 INSTEAD OF DECEMBER 31, 2012 YOU WILL PAY $200,000 IN CAPITAL GAINS IF ALL OF YOUR SALE PRICE IS SUBJECT TO CAPITAL GAINS INSTEAD OF $150,000, A 33% INCREASE IN TAXES FOR WAITING ONE DAY TO SELL YOUR BUSINESS.

IN ADDITION AS OF JANUARY 1, 2013 YOUR CAPITAL GAINS WILL BE SUBJECT TO 3.8% “MEDICARE CONTRIBUTION” AS LEGISLATED BY THE NATIONAL HEALTH CARE REFORM LEGISLATION (OBAMA-CARE). THAT’S ANOTHER $38,000 OF TAXES FOR WHICH YOU ARE NOT OBLIGATED IN 2012 ON THAT $1 MM OF CAPITAL GAINS.

That’s a 58.7% increase in taxes for those of you calculating the tax differentials. Obviously the result is that many agents who intended to sell their agencies in the next six to twelve months are accelerating their plans and this has resulted in a jump in mergers and acquisitions.

We are seeing that this will affect the Composite Group next year, but has not generally affected agency sales and acquisitions in the 12 months between third quarter 2011 and third quarter 2012. Knowledge of these changes may motivate you to take action on your own valuation, merger, acquisition or sale, call Agency Consulting Group, Inc. at 800-779-2430 to see if this is the right move for your agency.

Meanwhile the agency business is slowing improving in almost every region of the country.

Revenue growth for each group reflects growth as average size in the last 12 months vs. average size in the prior year:

Group 1 (< $1 Million) +8.4%

Group 2 ($1 MM-$2MM) +2.4%

Group 3 ($2MM-$3MM) +2.3%

Group 4 (>$3 Million) +6.1%

This growth is after a few stable years and several declining years.

More importantly the Gross Profitability Relativity that measures total funds available to owners is increasing (see Table 2 for historical comparison). We don’t establish much credibility on the growth of pure agency profit because they can be manipulated. However, the combination of compensation, perqs and profits that create Gross Profitability Relativity determines how much is available to the agency owners to take or build their asset equity. This last year the smaller agencies, who had been suffering years of decreasing Gross Profitability finally saw increases in excess of the larger agencies who have been enjoying Gross Profitability in the 40+% range.

Growth of Gross Profitability

Group 1 3.9%

Group 2 1.4%

Group 3 -.5%

Group 4 0%

The number of personnel continues to decrease slightly (see Table 3) in all market segments and productivity continues to rise. Raw productivity (Revenue per Employee) that were in the mid-$60,000 range in 1987, the year that we first started studying these measurements reached over $100,000 in al categories in 2011 and now ranges from $107,441 (Group 2) to $128,089 (Group 4). We, as an industry, are twice as productive in terms of revenue per employee as we were 25 years ago. Credit much of that increase to technology and that trend is expected to continue unabated. In our consulting visits to agents throughout the U.S. and brokers in Canada we are seeing a growing number of agencies topping $200,000 revenue per employee.

As our employees are becoming more competent and handling larger volumes, their compensation has increased as well (105% more compensation per employee as 25 years ago). Most importantly, the Spread, the difference between Rev/Employee and Comp/Employee has risen 57% in the last 25 years. This means we have 57% more revenue available to overhead and profit.

For those naysayers who claim that the insurance business is a poor way to earn a living and a poor investment, these statistics prove otherwise.