When does agency value begin to carry a level of importance instead of being a ‘footnote’ in your business life?
Most agents are too busy making a living and putting out fires to worry about the value of their agencies. The value is only important when we die or if we’re ready to sell the agency! Most of us consider ourselves in the prime of life, certainly not worried about the esoteric “value” of a business that is making us a living every year.
The average of insurance agency owners increases every year. One day you are busily taking care of your clients then, when your 50th, 55th, or 65th birthday celebration happens, you realize that, like it or not, you’re no longer a ‘spring chicken’ and you have more years behind you in your career than in front of you. Suddenly the value of your business asset becomes a higher priority!
Birthday progression and cakes that look more like brush fires than birthday celebrations every year are the easiest and most pleasant reminders that your agency value REALLY MEANS SOMETHING. A worse indicator that you should be paying attention to your agency’s value occurs when friends of yours – contemporaries – start retiring or dying. THAT WILL SHOCK YOU AWAKE! Even worse is that first major illness that either you or a loved one experiences that is God’s way of telling you there are more important things in the world than coming to work every day.
The simplest definition of AGENCY VALUE:
At some point every agent will consider what his asset is worth — now and for the future. And, “No, Virginia, there may be a Santa Claus, but there is no standard multiple that properly defines the value of any insurance agency.” The stories you’ve heard about 1.5 times, 2 times, or more is fiction. Someone has actually determined how much they can earn from an agency and defined it (backwards) in terms of a multiple (of something intelligible to the audience) to make it easier for an owner to understand. And, in its simplest terms, that is exactly what the value of your agency is, the earnings potential over a reasonable period of time for the person doing the valuation (whether that’s the existing owner or someone looking to purchase an agency).
If you are in your 30’s and 40’s and just getting into agency ownership your major awareness is that the agency that you are building will someday have a value that can provide you and your family with a more comfortable future. You need to determine the on-going value of your asset for purposes of estate planning while you and your family are still young.
If you are in your 50’s it’s time to posture your agency for a time in the future that you either internally or externally perpetuate your business either when you retire or while you are still young and vigorous enough to enjoy the fruits of your labors without necessarily stopping working. You may not be ready now for (or ever want) the rocking chair or golf clubs every day but wouldn’t it be nice (while you are still working) to have that nest egg mature and throw off money for you to invest or spend?
If you are in your 60’s or later, you have a more serious and pressing issue. You are ten or less years away from wanting or needing to retire and you have built an asset the value of which you must identify to determine how and what you are going to do with it. I have met many agents who have made their fortunes and careers without the need for the value of the agency. That value will accrue to their beneficiaries, families or next generations of owners. Yet, without knowing the value of the agency you may be passing more taxes and liabilities than assets to generations to whom you think you are performing a favor.
Whether or not you are ready or serious about selling or perpetuating your agency, I recommend that you either create your own valuation or assign us to identifying the value of your agency – NOW while the pressure for taking action may not be imminent. The cost is not high and annual valuation updates are minimal compared to the pressing need that will occur if something bad happens that requires an immediate valuation.
Agency Consulting Group, Inc. values agencies annually for internal purposes (estate planning, key man insurance, buy/sell agreements, partnership values and buy-ins, ESOPs). If you’d like to do it yourself, we even have a tool that will allow you to estimate your own value. Call us and we’ll talk to you about the best way to value a Going Concern.
Perpetuation plans that transition ownership from one generation of owners to another also requires regular valuation. Both old and new owners become very aware of the ingredients that increase or decrease the value of the business.
Partnership retirement and funding those buy-outs require valuation ahead of the buyout to properly assure funding options.
Of course, acquisitions, mergers and sales of agencies seriously require third party valuation to assure both buyer and seller of the value of the asset under the specific circumstances of the transaction being considered.
Call Al or David at 856 779 2430 and we’ll be happy to discuss your particular situation and how best to determine the value of your business.
I’ve never seen a headstone that read “He Was A Great Insurance Agent” and working every day until he’s 90; is not a testament to hard work, it’s a definition of someone who didn’t plan his life very well.