Would you run your business without balancing your checkbook? If not, how can you run it without knowing how much value you could get for your business if you died, if you could no longer perform as an agent or if you retired from the business?
If you simply “presume” a value based on a fictional “multiple” of something (commission, operating income, total revenue, EBITDA, etc.) you (or your heirs) may be in for a pleasant surprise or for a rude awakening when the offers arrive that are very different from each other or from what you were expecting.
You see, there is NO accurate multiple that defines the value of any agency in the U.S. There are too many factors that differentiate every agency from every other agency and affect the agency’s value. We have over 200 different factors that are considered when performing an agency valuation. What we’ve found over 50 years of agency valuations is that every agency in the U.S. is UNIQUE. That’s not a bad or good thing, it just IS! So, when we’re acting as an Expert Witness on agency valuations in federal or state courts we are often asked, “Why can’t we apply some kind of “average” to express any insurance agency’s value?” Our answer is synopsized as follows:
Let’s say there are two agencies a few blocks apart in a medium sized city. Both generate similar, $1 Million revenues. Is it fair to either agency to use any standard multiple to express the value of either of them?
The first agency is owned (and manned) by owner and staff in their seventies and has a clientele of similar ages. Five years ago, their revenues were over $2.5 Million, their clients are dying and retiring and have not been replaced because the agency owner spends more time in leadership, civic and recreational pursuits than they do selling insurance.
The second agency is owned by a group of 30-yearolds who split from a large agency several years ago to start their own business. They have grown from zero to $1 Million in five years. Their staff is of similar ages and all are pursuing growth full time.
Without even knowing their mix of business and the quality of business (their overall loss ratios by line of business), would anyone offer the same value amount to both agencies? Add in the mix of business (Agency A has 30% non-standard, 60 % Personal Lines and 10% small commercial lines while Agency B has 60% commercial lines, 20% L&H and 10% Personal Lines) and the agency loss ratios (Agency A averages 60% – 65%/yr while Agency B is averaging 45%) makes the differentiation even more dramatic.
This is the reason (along with almost 200 more potential value factors) that no standard or average works to express a value for an insurance agency.
So, once the agent understands that any standard multiple would either cheat the buyer or cheat you, the seller, or your estate (if it came to that) it becomes even more important to create an accurate valuation estimate whether for insurance purposes if you plan to continue your agency for a long time or for short term retirement planning or immediate crisis management.
Those agents in their thirties, forties and fifties are far from retirement and are looking forward to buying agencies or books of business, not necessarily selling out. However, those agents in their prime ownership years are also “targets” of other, larger agencies who would love to buy, merge or otherwise form associations that would benefit them and the target agency. They will offer seemingly large prices for good, profitable, growing agencies. But without a valuation you don’t know if those offers are strong, fair or slim.
Agency owners in their sixties and beyond have thought about potential retirement. They may not have spoken to anyone about their considerations, but the continuing stresses and pressures will cause ALL agents to have thoughts of cashing out at one time or another. When we create agency valuations, we always use three or more valuation methods to identify the Going Concern Value of agencies that wish to continue, Investment value for agencies who will bring in new partners to eventually take over the business and Fair Market Value if the agency is acquired without the existing owners and is absorbed into another agency. One or more of these options have been considered by most agency owners and knowing the value of their agencies under different circumstances is important to the Strategic Planning of agency owners.
Please call us to discuss a valuation for your agency. Do it today, because we get too many calls, too late to help an agency maximize its value or set and achieve goals of succession and perpetuation to the next generation of owners in an agency. An agency value deteriorates quickly once a key owner passes away or suffers any type of crisis that takes the owner out of the role of primary leader.
The cost of a valuation is very reasonable considering the complexity of valuation process. And, after the first valuation, we will have all the data in our system for your agency so annual re-valuations are only a fraction of the cost of the initial valuation. That’s why so many multi-owner agencies get annual re-valuations to update stock values for another year.
Knowing your value is like knowing that you have enough in the bank to pay your bills and sponsor the agency’s initiatives and growth.
Please call Al Diamond, 856 779 2430, al@agencyconsulting.com ; www.agencyconsulting.com for more information and for a private, confidential discussion.