For a long time, my father wouldn’t buy life insurance. No matter how smart my Eastern European father was or superstitious, he feared that is he spoke or acted in a way pursuant to the death something might happen. I later found that this form of superstition is common and shared by many people, not just those from Eastern Europe. It is the reason that many, otherwise responsible people, don’t have life insurance. They fear that if they discuss death in any way, that it might happen to them.
For decades we have been suggesting to agents that they have valuations performed on their business. The reasons are certainly valid. For most, their business represents the greatest or one of the greatest assets they own. If they are to retire someday, they should expect and plan for the value of their agencies coming to them in the years after retirement, no different than the value of their other assets, hard and soft.
Yet many agency owners refuse and somewhat fear to find out what their business is worth. They fear the calculations may not value the agency as they hoped or desired or required in order for them to live a comfortable lifestyle in retirement. But even if that is the case, if you have from three to 15 years left in your career, you have time to adjust and create the value position needed in your agency to sponsor your retirement.
Other agents assume that their business is worth a “Magic Multiple” of revenue, earnings, or EBITDA and that all agencies are worth that “Magic Multiple”. Of course, the smart agent knows that a $1 MM agency that loses money each year, has shrunk steadily from $2 or $3MM in the past, writes marginal business (high loss ratio and low retention) is not worth the same as another $1 Million agency that has been growing by double digits, maintains low loss ratios and high customer retention of a strong, standard mix of personal and commercial lines. Yet the experts will banter about the “Magic Multiple” as if future earnings potential has less to do with value than a multiple. We have debunked that theory (link to Debunking Agency Multiple article) and would like to move beyond the actual value and into why it is important to do a valuation on your agency TODAY!!
1. Whether you are first generation and have built your agency with your bare hands or bought the agency in order to support your family and build the asset for the future, you must realize that every agency has a residual value that someone will inherit or buy.
2. Even if you have invested sufficiently to not need the value built in your agency, you certainly won’t simply lock your doors and close your business upon retirement, will you? And, whether family, friends or strangers, we have found through bitter experience that the value placed upon a business is directly linked to the price paid for it. Give it away and the buyer will see little value in the asset while someone who pays the correct price will value the business as much as you. They have ‘skin in the game.’
3. The buyer may be your children or staff or someone you don’t even know yet. But if something happens to you and there is a prolonged period during which your agency operates without the benefit of an owner, its value will quickly deteriorate. Your clients, loyal to you, will no longer have you around and will dissolve into other insurance providers. There is little loyalty to an agency. The loyalty is to owners, producers and, in some cases to staff members. They, too, will find other avenues for their work efforts if ownership transition is not speedy. The lack of security will tempt the best of your staff away first, leaving only the mediocre and staff members whose inertia overcomes their fear of the future without you.
4. If you are smart enough to plan for your future with life insurance and long term care insurance, why wouldn’t you include your primary business value in your asset base? For the business owner, it is as much a part of your asset base as any investment or property. An agent would never consider giving away an investment or property, but we have encountered more than a few who were willing to give away their agencies.
5. Many agents have identified family, staff or others as their perpetuators. Both the current owners and the perpetuators must understand the value of the asset that will be coming to them. In the old days, a buyer (even a son or daughter) would have to go to the bank and get a loan for the value of a business to buy that business from the last owner. The only beneficiary to that transaction was usually Uncle Sam and the local tax authorities. The asset was purchased with after-tax dollars by an individual (couldn’t be written off) and was also subject to tax (Capital Gains and others) for the seller. And the final stroke was the usurious interest rate charged by the third party for the use of their money. Today, we can establish a plan of action that will return much more of the value of the agency to the owner using tax-beneficial methods to transfer those assets and the owner, himself, could enjoy the benefits of the interest on a long-term payout (instead of a bank). In the past the detrimental tax burden and interest burden was necessary for the owner to be assured that he would receive his just value. Now we have the Liquidity Audit that can assure a seller of the buyer’s ability to continue to make the payments and, if not, the agency may be seized and re-sold to satisfy the seller. The seizure of an agency is a very rare occurrence, but the audit process (regulated by an outside party) gives the seller ‘sleep insurance’ that he will not get a letter someday telling him that no further payments can be made.
We encourage you to consider getting a valuation on your agency this year. It can be done at any time in the year. The cost is much less than most agencies expect (because we do so many each year and have written our own valuation programs). The process is unobtrusive simply requiring completion of a questionnaire about the agency, the collection of five years of financial history and availability of the owner to answer questions as we input the information. Call us 800 779 2430 if you would like to us to provide a valuation for your agency.