Once upon a time there were two agencies in the Midwest, each of similar size. One was a single location P&C and L&H agency near a city and the other was a multi-location rural agency spread over a hundred miles of farmland.
The city agency was almost 100 years old while the multi-location agency was the result of a merger of several young agents who felt they would thrive better together than apart.
Five years ago, the city agency was twice the size it is today. Its owners are all in their 60’s and 70’s; as are most of their employees and customers. The agency is well run, operating with a minimum staff and making a LOT of profit each year.
Five years ago, the second agency was several small agencies operating differently and struggling to survive. Once they combined, they found they had the scale to hire the right people and started marketing aggressively, acquiring agencies and re-investing all of their net income into the future of the agency. They make a moderate profit but are highly leveraged between their acquisitions and needed advertising, marketing and infrastructure aimed at growth.
WOULD YOU PAY THE SAME MULTIPLE FOR EACH OF THESE AGENCIES? IF SO, CALL ME – WE HAVE HUNDREDS OF MARGINAL AGENCIES WHO ARE STILL OF THE SIZE THAT THEY WOULD BE AVAILABLE TO ANYONE WHO HAS THE CAPITAL TO OVERPAY FOR DECLINING BOOKS OF BUSINESS.
Agencies have always been worth what a buyer feels he can earn over a reasonable period of time using the cashflow of the purchased agency to acquire it. Once that value has been determined, it is a very simple thing to convert the price offered into a multiple of (anything you wish to use). However, it is NEVER wise to assume because someone tells you an “average” multiple of commission, revenue, earnings, EBITDA – OR OF THE NUMBER OF CHAIRS IN THE BUILDING, that your agency or the next agency you wish to acquire is also worth that magic “multiple”. This ALWAYS results in either the buyer or the seller being cheated.
If the seller is being cheated, the buyer can easily pay for the agency (principal and interest) using the agency’s cashflow with plenty to spare every year of the payout. If the buyer is being cheated the “TELL” (for poker players) is when the buyer figures out that he doesn’t have enough cashflow in the purchased agency to pay for it and has to reach into his own personal or business assets to pay for the agency every month. The worst-case scenario is when the buyer doesn’t have enough assets to find the extra cash for the agency every month and ends up sending a “Dear Seller” letter to the former owner explaining that the agency doesn’t have sufficient net income to allow the buyer to continue to pay the seller that overly-generous price they negotiated for the agency.
The answer is to avoid any transaction in which a buyer tells you he will pay you whatever you want or a seller demands a specific multiple because he knows that “good” agencies sell for that price and his agency is better than “good”. Get a Valuation on YOUR agency to identify its value both to benchmark your available cashflow if you are a potential buyer of other agencies and to be ready when a potential buyer knocks at your door either with an offer that sounds so good that it’s hard to resist or on the very day that you are so fed up that you’ll sell to anyone who can “show you the money”.
And, if you are tempted by a cash deal or guarantees, remember that you may walk away with a bunch of money, but if you like your employees or customers, they may have to face a whole new regime when they get that first letter telling them that you’re gone and they can call someone a hundred miles away for service on their policies.