In bad times and in good times, most owners of independent agencies expect and desire to one day perpetuate or sell their agencies. In many cases, the agency represents a very large, if not the largest, component of the owners’ asset base and an important part of their retirement benefits.

You’ve heard us (and many others) say that “MULTIPLES” were as inaccurate method of determining agency value as it would be to try to sell your home for a multiple of your investment in it. But over the years many agents continue to try to establish a ‘rule of thumb’ multiple to try to establish the value of their agency in a transfer to another owner. Most times, they are either cheating themselves or the potential new owner of the agency. Once you have established your agency’s value it is easy to convert that number into a multiple (of commissions, of revenues, of EBITDA, or of anything else you care to use). But it is never valid in the other direction, attempting to establish the value of one agency based on a multiple built on other agencies values.

Recently, however, actions of many courts regarding the impact and enforceability of Non-Competition Agreements and Non-Piracy Agreements may make any concept of agency value a relatively moot point.

The Basis of Value

The basis of value of an agency (or of any business) is actually relatively simple – TO WHAT DEGREE CAN THE BUYER BENEFIT FROM THE ACQUISITION OF THE AGENCY? The “benefit” that a buyer achieves is the financial benefit over time that he expects to achieve from the acquisition. That financial benefit is the amount of actual (after tax) earnings the buyer can expect to make as the result of the acquisition of the seller’s agency.

So every buyer tries to calculate the economic benefit of an acquisition. Many buyers, internal and external, use the services of Agency Consulting Group, Inc. to calculate these earnings potential through our Agency Valuation service. We look at every line of revenue and every line of expense to determine how much more money the buyer can expect to make as the result of the acquisition. Because we do so many valuations and mergers and acquisitions, our estimates of value have proven to be quite accurate.

The buyer has to determine how long he is willing to give up those additional earnings to pay the seller. Whether the seller holds a note or the buyer borrows the money and repays a bank, the buyer’s cost is based on the additional value to the buyer over the period during which he is willing to allay that benefit to pay the seller.

If a buyer finds that he could generate $200,000 each year in additional after-tax earnings from the purchase and is willing to give up those additional earnings for four years, he could afford to pay the seller $800,000 for the transfer of the property. After the purchase period, the buyer will enjoy the economic benefit of the acquisition.

The Changing Face of Agency Value

The basis of both the value and the cost of an agency transfer is difficult to calculate but easy to understand considering the explanation above. However, the key ingredient is the maintenance of the book of business that is being purchased.

How many acquisitions would take place if there were no expectation of the retention of the books of business? This is why non-standard agencies whose business churns very often have a lower value basis than standard insurance agencies. The only non-standard agencies that maintain a high value are those who have marketing and advertising methods in place to generate continuous strong growth even considering the relatively low retention expectations.

One of the key indicators of agency client retention is Employment Agreements and Producer Agreements in which the employees and producers acknowledge that the books of business for which they are responsible belong to the agency. The agency maintains the carrier contracts and relationships, has the systems and ‘brick and mortar’ locations and, most importantly, the service and administrative staff to support the client after the sale. Whether the Non-Competition and Non-Piracy clauses are specific or are implied in the hiring process (stated in employee manuals), the expectation of agency ownership of client relationships is the primary basis of value of an insurance agency.

Would you buy and agency from an owner when you know that every producer and/or employee could leave and take any clients with them to their new employer?

Using A Non-Competition Agreement Against An Agency

Every year we see more courts ignoring the ownership of clients by agencies in favor of trying to establish a “rule of thumb value” to these non-competition agreements in support of compensation for the theft of accounts. Unfortunately, the agents are often their own worst enemy when they establish a value to the loss of business within the Agreements.

When a Non-Competition Agreement ties a specific number or multiple to the value of lost accounts, you have established the MAXIMUM penalty for the loss of the accounts. Courts can and do force negotiations lowering that maximum based on any number of subjective issues that occur in every such dispute.

The Real Value of Damages

In actuality, damages in the event of the theft of accounts from an agency should be determined by several categories of loss:

1. How much agency profit would be lost for the expected remaining lifetime of each lost policy or client?

2. How would the loss of the clients taken affect the value of the agency should you need or desire to sell the agency?

3. Most agents acknowledge that much of their growth comes from referrals. How many referrals will you lose by not having that client base and what is their future value if a book of business (your clients) is taken from the agency?

Lifetime Studies

A lifetime study determines the average life of an agency’s policies and/or clients. Before the change to 15 year amortization of goodwill by the IRS, values of agencies included lifetime studies in order to justify amortization of goodwill as a legitimate expense to an agency based on the average lifetime of policies within that specific agency. This was a MUCH better and more justifiable (to the IRS) basis of amortization than any industry averages.

While this is no longer necessary in agency valuations (since we are all forced to amortize our acquired books of business over 15 years), it is still a valuable thing to know in support of the value of your book of business if some of it is “stolen” from the agency by a former employee.

Two simple calculations can be made to ascertain average lifetime of clients. Both are based on the original effective date of the policy (the Original effective date, not the date of any change of carrier, cancel/rewrite, or reinstatements). An Active Lifetime is defined by the average lifetime of all policies currently active in the agency. An Inactive Lifetime is defined by the average life of policies that have left the agency (for any reason). If a policy leaves and then returns, he moves back from the Inactive to the Active Lifetime lists.

Inactive Policy Lifetimes

It is important in many ways for an agency to know the average lifetime of its dead accounts. Doing this study has led to many agencies implementing Recovery Marketing Programs (call us for more information – 800-779-2430) that re-markets to dead accounts over an extended period to win them back. Regaining lost clients is always easier and more efficient than soliciting new clients. You will never know more about potential new prospects than you already know about clients who you have insured for many years. Their data in your files does not “stale” for several years and recovering these valuable assets can generate many thousands of dollars of income.

It is not unusual for Inactive Policy Lifetimes to be relatively low. We already know that the first few years are the most tenuous for clients with an agency. If you don’t establish strong relationships, the same motivators that cause the client to move to you can be used to move the client away from you. That is why it is so important to use the first few years to build strong relationships between the agency and the client on a number of levels (not just through the producer).

Active Policy Lifetime

While the lifetime of your dead accounts can be verified as a stable average for your agency, the lifetime of your active accounts is, hopefully, a fluid and growing number. Whatever the average life of Inactive Accounts, it is not uncommon for Active Lifetimes to double or triple that number and continue to grow. Once a client has formed a strong relationship with the agency (in reality or perceptually) only a major change in perception would cause the client to leave you. And, if you are doing your job properly communicating with your clients, you would know that there was something wrong and would do something to respond and solidify the relationship.

Here is where the theft of accounts most disturbs a client/agency relationship.

A producer leaves. The day he leaves (or within some period of time thereafter) you get Broker of Record letters from some of your clients naming another agency as the BOR. It happens to be the agency that hired your former employee. Another possibility is that the producer just starts “picking” clients with whom he has been familiar and solicits them away from you without even the benefit of a BOR.

Either way, you contact your attorney and file for a restraining order claiming that the producer is “stealing” accounts for which he had confidential information gathered while employed by you. He claims that the clients have every right to be insured wherever they want. You agree but point out that the producer had access to information confidential to your agency for which you paid his compensation in expectation that he would honor that confidentiality. Even stronger is a contract in any form in which the employee agreed that the clients belonged to the agency.

At this point the relationship between your agency and the clients that the producer has solicited is damaged beyond repair. His claim is that it is the clients’ right to choose their agent. It is your contention that the right of the client is not abridged and that the only prohibition is that of your former employee to assume those clients for a reasonable enough period of time adhering to an agreement or enough time that the confidential information to which he had access is no longer current enough for him to replicate your file without active solicitation of the client.


Imagine a farmer hiring a farmhand to tend his herd of dairy cows. The cowhand tends the existing herd and enhances it as new calves are born. The herd responds to the cowhand even though it (including the calves) “belongs” to the farmer who hired the farmhand.

If the farmhand decides to leave and takes part or all of the herd claiming that there were no fences in the pasture and the cattle could have wandered off to any land they desired to graze, isn’t he still “stealing” the cattle from the farmer?

Yes, they could certainly wander off on their own and it’s the farmer’s responsibility to replace the cowhand and keep the herd together. He can’t blame his former employee if the farmer fails to replace him and lets the cattle wander off as they grazed.

But the case in point isn’t the accidental wandering of the cattle. It is the purposeful theft of the herd by the former employee.

The key isn’t the wrongdoing. A court can decide whether a theft took place or not. The key to damages is for how much the cowhand is responsible as the result of his wrongdoing.

If he could simply return the herd, the extent of damages is limited. However, if he takes the herd in such a way that they can not be returned (i.e. he takes them directly to slaughter), then the extent of damages is much different.

The former employee shouldn’t be able to rationalize a limited damage estimate by claiming that most of the cows that perished on the farm died during their first year of life. That shouldn’t matter since all of the cattle taken were alive when stolen. Yes, a few could have perished in their first year, but we can determine the percentage normally lost each year through the farm’s retention records (and adjust for those expected losses).

The farm’s records will determine the current average and maximum lifetime of cattle on the farm. The future value of the stolen cattle BEGINS with their productivity (profitability to the farmer) for their remaining expected lifetime. This implies that any living calf or cow taken from the farm would have lived AT LEAST as long as the average lifetime of the cattle on the farm (with an adjustment for a percentage expected to perish early using the average lifetime of deceased cattle as their lifetime productivity expectation). All cattle already over the average lifetime would be projected to live to the current maximum lifetime (the average lifetime of the 10% oldest cattle on the farm).

Once the damage is estimated based on the lifetime profit expectation of the stolen cattle, the second level of damage must come from the expected offspring of the cattle taken. The farmer expects a certain percentage of his cows to produce offspring that will also create profit streams for the farm that the theft and destruction will eliminate.

A third level of damages involves the value of the cattle once their productivity ends to the farmer. At the end of their productive lifetimes, the farmer would have sold the cattle and gained a further terminal profit from them.

A final level of damages involves the diminished value of the farm, itself, due to the reduction of the herd due to the theft. Should the farmer need to sell his farm, he will no longer be able to get the same price as he would have received had the herd remained intact. We understand that the farmer is not obligated to sell his farm. The farm’s value has, nonetheless, declined as the result of the theft of a part of his herd. The other level of damages addresses the lost income potential of the farmer assuming his continued operation. This measure of damages considers the immediate reduction in value as the result of the action of the former employee.

A Better Alternative

An agency must make clear to every employee that the agency’s value is resident in its client base and that the employee is being hired to enhance or maintain that book of business on behalf of the agency. Whether that statement is made in a letter signed and acknowledged by the employee at the outset of his employment, is a part of the employee manual that every employee receives (and signs for) when employed, or is resident in an Employment Agreement or Producer Agreement within the Non-Competition or Non-Piracy section of the agreement, it is a defined agreement between the employee and the employer.

Do NOT state the value of an clients lost through wrongdoing. Stating the value of clients limits your loss and will be used by courts who seek the simplest solution to the damage problem, not the total damages done to your agency.

Instead, you should indicate the levels of damages that will be used in the event of a wrong-doing by the employee. In this way the employee has acknowledged both the fact that taking accounts is wrong AND how damages will be calculated in the event of a wrongdoing.

Call us to review your current agreements within our GPP Analysis (Growth, Productivity and Profitability) of your agency (800-779-2430). This is an automatic part of our analysis as is the analysis of the compensation models for both your production and non-production staff and management.

We cannot control the human behavior traits of most courts who wish to side with the individual over an organization. However, our courts are still grounded in the concept of legally binding contracts. If you prepare your agency appropriately you will never need to enforce your agreements because they will be so clear that your employees will not be tempted to steal your business if they move on to another job. But if they do decide to defy your agreements by taking your only source of value, your clients, the courts will have less latitude to decide in their favor if the agreements are extremely defined in the ownership issues and the ways of adjudicating loss if a wrongdoing is done.