Defining an Agency’s “Corporate Culture” by Carletta Young

Most agents who have a valuation done know that the projected earnings of an agency form the primary basis of its value. However, most are still confused when they see a ‘Discount Factor’ imposed on the earnings stream before finalization of the agency value.

Two things form the Discount Factor, the Time-Value of Money and specific risks inherent in the agency that may cause a shortfall in the potential earnings stream. The Time-Value of Money is addressed in other articles. However, it would benefit all agents to understand how RISK is calculated for their (or other) agencies that are being valued.

Any of the issues listed below can either add or decrease risk in an insurance agency. To the degree that each is evident in the agency in question, you should identify the risks involved (+ or -) and use these to calculate your discount factor in addition to the time-value of money. While we use hundreds of component questions to evolve risk factors, the result of our analysis is to add or subtract risk to full earnings capacity of an agency.

These risk factors and the associated discounting that are done in an agency analysis or valuation are, by nature, subjective. However, your expertise in insurance agency operations and values (or that of the valuor that you choose) provides you with a unique opportunity to discount an agency’s value based on specific conditions within the agency that would increase the risks to growth, profit or continued stable operations. The objectivity is derived from the use of specific risks inherent to the agency in question, rather than the use of so-called “industry averages”. The value of an insurance agency is less controlled by the rest of the insurance industry than it is by its owners and employees or by a combination of current owners and employees combined with future owners and employees (in agency mergers and acquisitions).

How can we know this? Agency Consulting Group, Inc. has been analyzing agency performance for well since 1980. During that time we have gone from hard market through an almost-endless soft market and back to hard market performance. Many agencies have not survived the change in commission rates, contingencies, market availability issues and ‘market share’ pricing. However, many other agencies flexed to the changing conditions and continued to grow through hard and soft markets. These agencies had human assets and internal systems that made their future performance potential much less “risky” than the agencies that succumbed to the changing market conditions. During that period we were able to identify over 190 specific conditions (and still growing as we encounter new issues) that fell into 17 major risk categories (shown below). By adding or subtracting risk points for the presence or absence of risk in each specific category, we were able to actively construct agency risk-discounts based on the specific conditions of each agency studies.

Were we accurate on each and every risk factor? Probably not. But studying each risk factor gave us an excellent method of differentiating high-risk agencies from low-risk agencies and our assignment of risk as a result of our studies permitted us to assign a risk-discount factor that pertained to that specific agency within the universe of insurance agencies. The average risk-discount over our twenty years of experience was in the 10% range. However, the range of risk-discount factors that we have assigned has gone from 2% to over 50%. Remember this is only the Risk component and must still be added to the time-value of money to achieve the full discount rate.

Understand that a 50% risk-discount factor means that our analysis led us to the conclusion that there was a one in two chance that this agency could not support the future earnings stream that we established based on its historical performance and known conditions. The 2% risk-discount agency was so securely based that there was virtually no chance that it would NOT achieve its expected revenue stream in the foreseeable future.

Is this method infallible? Of course not. Who could have estimated the risk associated with 9/11? Is it accurate? Yes. Happily we have remained associated with many of our client agencies for twenty years and longer and have had the opportunity to view the progressive results of these businesses. The future earnings streams followed our discounted expectations unless new conditions were introduced into the mix that could not have been projected from historical data or the agency’s current condition (i.e. the death of a “healthy” 43 year old owner three years after the internal perpetuation of the agency). In those cases, we change the risk factors after condition changes and recast the value. That’s why so many agencies value themselves annually.

Here are Agency Consulting Group, Inc.’s 17 MRC’s (Major Risk Categories). Every individual risk factor applies to one or more MRC. The assessment of how much risk each factor bears in the individual circumstance is left to the valuor’s experience and knowledge of the agency. The complete list of risk factors cannot be published here due to space constraints. However, if you would like to see our complete risk factor list, there are three ways of doing that, 1) Wait for the publication of our upcoming book, “DE-MYSTIFYING AGENCY VALUATION, ACQUISITION, MERGER AND SALE” (to be published by IIABA as soon as I complete this, still growing, tome), 2) Send $25 to Agency Consulting Group, Inc. with your request for the Risk Factor List and Matrix, or 3) Assign us to value your agency.


1. Profitability

2. Revenue Growth

3. Account Concentration

4. Carriers and Markets

5. Compensation

6. Specialization

7. Retention

8. Performance vs. Industry

9. Organizational Structure

10. Succession Plan

11. Personnel Quality

12. Receivables

13. Training & Pro Development

14. Size and Stability

15. Liquidity

16. Automation and Other Agency Systems

17. Marketing & Sales