ACG - Agency Consulting Group


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


Every generation of agency owners try to identify the value of their agencies – for estate planning, for buy-ins and buy-outs, for mergers, acquisitions, sales and internal perpetuation. They simply want to know how much they can expect to receive for the value of their asset when it comes time to cash out.

And, in every generation, some professionals with lists of initials next to their names try to provide the simplification that the agency owners desire by offering various methods as a solution to the valuation dilemma.

The most incompetent pseudo-professionals simply state one or several multiples and would lead you to believe that if you have a business called an insurance agency, that this multiple defines your value regardless of the complexion, location, history, size, staffing, or customer base of your particular business.

The competent, but misled appraisers, who understand the methods of determining future earnings of a business to determine its value, still try to simplify the process by averaging the work that they have done to establish average multiples of a variety of measurements to try to help the agency owners determine their own values.

How much credibility would you allow me if I told you that every 3 bedroom house was worth $200,000? After all, if I’ve valued 10 or 100 or 1000 houses (properly) and the average was $200,000, would you feel comfortable buying your next house (or selling your current one) based on that valuation alone?

If not, why would you consider buying or selling an agency for two times (anything) based on someone telling you that it is an ‘industry average’ or an average of the transactions they have done in a year, five-year or ten year period? Who creates the industry average? We appraisers of insurance businesses certainly don’t share our results with each other? There is NO central resource for privately held business transactions in our industry and no one has the temerity to start one for fear of accusations of collusion. The only transactions that are readily available are those of the major publicly held companies who purchase $10 million and $20 million revenue (not premium) firms and above in which the price is made public (but not the conditions affecting the price that certainly changes the net value of the business being transacted over time).

We are Expert Witnesses on the subject of agency valuation as well as on other topics of insurance agency norms and common practices. When we encounter accountants or appraisers in courtroom situations, we can quickly discount those claim to valuations based on multiples is simply “industry averages” taken from articles published by others. When we encounter agency valuation professionals who understand the nuances that could make your $1 Million agency worth $400,000 or $4,000,000 but still try to oversimplify their results by multiples, we simply ask them how a single multiple addresses issues like:

Personal Lines and Small Commercial agencies vs. Specialty and large lines agencies

Agencies in which several accounts (potentially related to the agency owner) comprise high percentages of agency income.

Agencies that are consistently profitable and growing vs. agencies of similar size who are stable, stagnant or shrinking or who overspend their revenues annually.

Agencies whose owners are the primary relationship manager for the majority of its specialty accounts vs. agencies whose owners are drivers and managers but whose customer base forms relationships with producers and other agency staff and would stay regardless of the continued presence of the current owners.

Realistically, the professional appraisers will take every one of these (among several hundred other factors) into consideration when creating a potential future earnings stream and a Risk Discount to apply to those potential earnings when creating a proper valuation for an agency. This process takes time and a great deal of data and questions and answers with the agency principals. Simplifying this process into a single or series of “multiples” does a disservice to the agency force because they might actually believe that a 1.75 or 2 times multiple would work as well as the valuation process, itself.

They will not. Valuations created by the multiples averages of revenue, net income (profits), earnings, or EBITDA (Earnings Before Interest, Depreciation and Amortization) are VALUATION VOODOO. Valuations done properly may be defined as a multiple for simplicity, but must be created by actually doing the work of revenue and expense trending and risk analysis to create the Future Earnings Potential that forms the basis of all proper valuations.

If you have a valuation done on your agency, demand to see the actual work effort and the assumptions made by the appraiser as a part of the published appraisal. If any of that work is defined by a multiple (instead of defined by the work effort and converted into a multiple), decline the valuation. If audited by the IRS, they will likely ask for the proof of that multiple. If you or the appraiser can’t provide that proof, they will invalidate the valuation and demand a different value for tax purposes.

We charge fairly for our valuation services. Many appraisers charge much more but few can afford to charge less because we do so many every year. But be warned. If any accountant or appraiser charges you more than a few hundred dollars for his time to provide you with a letter indicating that your value is defined by a certain “multiple” of some financial factor, you have been sold the equivalent of a bottle of Valuation Snake-Oil.