Although we are best known as a consulting firm specializing in growth and profit strategy development and implementation, most agents know that Agency Consulting Group, Inc. also has a very active valuation practice.
While every agency should know its value, a relatively small number actually identify this important measurement until it is time for a change in ownership. So we are never surprised when good, strong, professional agency owners call us inquiring about valuation methods. Most still cite “multiples” of some derivative as an understood value even though they are certainly intelligent enough to realize that no two agencies likely bear the same value even if their income sizes are similar. They simply have no other frame of reference to judge their own value.
I’m afraid that the situation becomes even more confusing when we suggest that the value of the agency depends on who is valuing the agency or the purpose of the valuation. Agents would like to have a clean and simple way of judging their estimated or exact value. When they ask me to simplify the method for valuing their agencies, I cite the Antiques Roadshow as an example of why this is impossible.
Last week we saw a table appraised on the Antiques Roadshow that was purchased at a yard sale for $25 valued at several hundred times that value on the show. As far as the seller was concerned it was an old table that was worth $25. The buyer saw a potential in the table that he would have paid as much as $50 for it. The appraiser identified it as a Haywood Wakefield table worth several thousand dollars “to the right buyer”.
Similarly, an insurance agency will have different values based on who is valuing the agency and the purpose of the valuation. To begin, we must understand that the value of an agency depends on the earnings potential (profit potential after taxes) from the agency to the person or entity valuing the business entity.
If you can earn $1,000,000 over a reasonable period of time (as defined by the valuer), the business is worth no more than $1,000,000 to that person. After all, would you buy any investment opportunity for more than you could reasonably expect to achieve in returns on that property?
O.K, with that being said, let’s get on to the “Who” and “Why” of valuations.
WHO IS VALUING THE AGENCY:
If the valuation is done by the current owner for estate planning, the owner intends to continue to operate the agency and would like to validate an amount of insurance on himself/herself that would provide a fund for the owner’s family in the event of the owner’s unexpected demise. The earnings potential the agency owner is estimating is that which the owner would be likely to enjoy over a period of time that he wishes to protect his family. If he can “earn” (as defined above) $100,000 a year and wishes to give his family 10 years of protection (after which he would likely retire and sell the agency), the proper value and insurance amount is $1,000,000.
If the same valuation is done by an internal successor for succession planning by the agency’s next generation of owners, (family or staff) the “earnings” potential could be the same as that of the current owner or may change based on the plans of the new owner(s). If they intend to continue the operations similarly to that of the former owner, then the trended history of growth and expenses would likely be continued into the future and the earnings capacity can be judged based on continuing those trends. Of course the time line would change to the time the new owner would need to pay for the agency (to the current owner or to a financial institution). So if the agency is to be paid for over five years, its value would likely be the equivalent of five years of earnings. However, if the new owner had definitive plans for growth or expense change that differed from the historical trends, the calculation of earnings potential may change to include the new growth and/or expense expectations. After all, with notable exceptions, any business will only pay for itself with monies that can be earned from the business, itself.
If the same valuation is being done by an outsider for an acquisition, a new feature must be considered, the economies of scale that has made the acquisition market so strong for the last several decades. A strong agency with space and personnel may not need the acquired agency’s location, all of its staff, or some of the other redundant expenses that all agencies routinely experience (automation, professional fees, bookkeeping/accounting departments, etc.). The savings to an acquiring agency could make the target agency much more valuable to acquire than it is to internally perpetuate or as an on-going business to its current owner.
These are only three of many potential types of valuers that could be valuing the same agency and reaching different values for the business entity.
What’s the purpose of the Valuation:
The “Standards And Guidelines For Appraising Insurance Agencies And Brokerages,” a publication of AAIMCO (The American Association of Insurance Management Consultants) and available at no cost from AAIMCO (www.aaimco.com ) or from us (info@agencyconsulting.com or call 856-779- 2430), lists the following common reasons for valuations/appraisal:
Sale
Merger
Acquisition
Divorce
ESOP
Loan
Estate Planning
Involuntary Conversion
Agency Perpetuation
Other purpose
AAIMCO had to include the generic “other” purpose because the team putting this document together found no fewer than forty other purposes for which agents have requested valuations.
Each of the above purposes carries conditions that change assumptions of earnings according to the specific reasons. In addition, some valuations are calculated as Fair Market Valuations while others are necessarily “Going Concern” valuations, each of which has different components, as do Asset Valuations and Stock Valuations.
This article was not meant to teach you valuation methodologies. It is meant to show readers and all agents to whom these documents are distributed that agency values in terms of “multiples” are over-simplistic. Any agency value may be viewed in terms of multiples of revenues, commissions, earnings, or EBITDA – once the dollar value is known. However, it is NEVER appropriate to use the multiple generated for one agency for another any more than it is appropriate to assume that every building in town is worth $1,000,000 because one building in town was sold for that amount. Every agency is unique in terms of its owners, staff, clients, and business mix. Valuation CAN certainly be done and should be done for every agency. However, it should surprise no one when multiple values are presented by different valuers and/or for different reasons, each being different from the other.