ACG - Agency Consulting Group


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


The health insurance industry has been in flux since the inception of the Affordable Care Act in 2010. The law and the health care industry continues to be ‘in play’ as insurance costs spiral upwards and the national political atmosphere uses Obamacare as a tool that may continue to change based on the political ‘winds’. The results of the fluctuations caused by the changing health care industry on insurance agencies have yet to be determined. Different scenarios could decimate the health insurance agency industry or could seriously boost its income generating potential because of higher health care costs for a much higher percentage of the population required to have health coverage. For this reason, while health insurance agencies continue to be perpetuated and change hands, the acquisition and perpetuation of health insurance businesses are seen at higher risk than life insurance agencies and Property/Casualty Insurance businesses.

These health agencies continue to change hands as generational and organizational ownership changes continue, and the value of their future earnings potential (their primary value statement) continues to be judged based on future projections of their historical trending of revenues and expenses. However, we see health insurance agency transactions following one of two directions to properly consider the risks associated with regulation that may deteriorate or improve this industry in the near future. Regardless of the direction of the health insurance industry, the results will be much clearer within five years.

First, if the value must be expressed as a prepaid option, the risk factors associated with the lack of stability of the future of the health insurance industry have increased dramatically, lowering the present value of these agencies’ future earnings potential. Uncertainty of the continued income stream for this line of business increases risk and lowers value.

A second option is being exercised when ownership transitions are smooth and can be paid over a longer term. The initial calculation of value is not negatively affected by the risk associated with the potential of future changes in the industry. However, a new factor is being inserted in the agreement of sale that holds back a percentage of the price (25% to 50%) for a two or three-year period. That remaining value is altered based on a change in actual revenue compared to the projected revenue upon which the valuation is based.

This method lowers the risk to the buyer from an unexpected decline in the health insurance market and also protects the seller from an artificially deflated value in the event of a positive change in the economic result of the health insurance market within a stated period after the transaction.

The value of the held-back part of the agency value remains stable as long as the revenue stream is not affected (in either direction) by more than a defined percentage (chosen by buyer and seller) in the period agreed upon for the hold-back. If the revenue stream is affected by more than the defined percentage (in either direction) during the selected period (usually 2 to 3 years), the remaining payout for the agency is altered by the ratio of the change (above or below the defined percentage). This would decrease the remaining payout to the exiting owners should the revenue fall below the floor and increase it should the revenues rise above the allowable ceiling.

Our goal with this ‘Hold-Back’ provision is to fairly treat the results of currently unknown changes to the health insurance industry between the time of the sale of the agency and the end of the selected period. Such an agreement ameliorates the effects of future conditions in the health insurance industry without degrading the value of a potentially valuable asset for a seller while simultaneously protecting the buyer from overpaying for a book of business that might deteriorate due to conditions out of the buyer’s control.

We know that a change in an industry like health insurance does not necessarily result in a negative impact on revenues and profits for these businesses. We have noted the rising success of many health insurance entities in the years since the ACA was enacted due to the inherent increase in interest and activity by both individuals and businesses as the result of the tax ramifications of the new law. Only time will tell whether the health insurance industry will be harmed or helped by the law and its changes resulting from the political atmosphere across the U.S.. These businesses still need to transition ownership and methods must be implemented to allow for fair exchange of value for these businesses for both old and new owners.


Present Value of Future Earnings based on historical trends of revenues and expenses = $750,000

2 Yr. Hold-Back = 25%= $187,500 subject to a 25% floor and ceiling.

Projected Revenue After First Two Years post-acquisition = $650,000 (Projection at the end of Yr. 2 after the sale)

Floor and Ceiling at 25% of Projection – Should revenues generate more than $812,500 (25% greater than Projection) or less than $487,500 (25% less than Projection) an adjustment will be made to the remaining ‘held-back’ payout equal to the ratio of actual revenue to the floor or ceiling below or above the projected revenue +/- 25%.

1. If revenue total at the end of Yr. 2 is $975,000 (20% higher than the $812,500 represented by 125% of the current projection at the end of year 2), the final payout will be $225,000 (20% greater than the $187,500 allocated hold-back).

2. If revenue at the end of Yr. 2 is $365,625 (80% of the “floor” revenue of $487,500), the final payment would be $150,000 80% of the allocated hold-back.

3. If revenues achieve between 75% and 125% of the projection at the time of the valuation, the held-back final payment remains stable at $187,500.