The value of an insurance agency represents the likely potential earnings that will be generated by the agency for the person or entity creating the valuation. That’s why it is likely that different buyers, sellers, and perpetuators will likely have differing values based on the conditions unique to each.

—A buyer intending to close the acquisition’s location and utilize only the assets needed to properly retain the book of business will reflect lower costs associated with the maintenance of the agency but will necessarily assume attrition, rather than growth in the book of business. This will likely generate a larger initial profit but declining as the normal or abnormal attrition reduces the size of the book of business purchased.

—An agent seeking estate planning values or an internal perpetuator will likely continue the management and growth path of the agency (both revenues and expenses) as historically proven. The value will prove the future earnings potential of a Going Concern over a period of time that the valuer deems appropriate.

If a valuation is being done for internal purposes (ESOP, Estate Planning, buy-in or buy-out of partners, internal perpetuation) the Fair Market Value of the agency as a Going Concern will likely become the useful value of the agency.

If a valuation is being done for an external perpetuation, acquisition, merger, or sale, the PRICE will be determined, first by the likely earnings potential of the agency to the person conducting the valuation (the FAIR MARKET VALUE) and then other factors will be considered that may enhance or reduce the value to achieve a PRICE appropriate to the transaction. For instance,

— If the valuation for acquisition will remove a viable competitor and avoid a more aggressive competitor from entering a market as well as increasing economies of scale (already a normal part of any such valuation process), the buyer has reason to enhance the PRICE beyond the agency’s stated value. That difference (between the price and the value) becomes the buyer’s true investment, requiring additional benefits (i.e. reduced pricing pressure and retention losses because of the elimination of the competitor, or additional growth from the newly acquired staff) in order to rationalize why the buyer should spend more money for the agency than the likely earnings value over a reasonable period of time.

— If the agency’s owner has passed away and it faces certain deterioriation, the pressures of reducing values will result in a cost to a buyer that may be less than the value of the agency’s potential earnings under normal circumstances. The buyer should calculate the potential attrition loss (net Retention Rate in our valuations) to estimate the lower price potential to acquire the business.

—If the buyer is entering a market and must choose between creating an organization and purchasing an existing organization, the costs of creating that organization (personnel, location, carrier contracts) must be considered in addition to the normal earnings potential of the acquisition in question.

The appraiser’s responsibility in creating a fair value for an agency is to properly estimate the earnings potential and risk factors for discounting those earnings potential. The result will tell the client how much they can pay over a reasonable period (or finance) with cashflow expectations from the agency’s expected operation under the circumstances of the valuation.

If negotiating for a sale or purchase, the additional factors that either confirm the valuation as the FAIR PRICE for the agency or determine that a value greater than or less than the Fair Value of the agency should be negotiated must be determined by the client or consultant responsible for the negotiations of price and terms.