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Valuation

Improperly valuing an agency for sale or purchase can cost hundreds of thousands of dollars. Relying on commission multiples as a valuation tool is a complete waste of time. This section of the VU research library provides practical information on what should and shouldn't be used to determine agency value, tips on how to hire a consultant, and a four-part tutorial that outlines 12 reasons YOU should not sell your agency.
When buying or selling an agency, is the value based on what the agency made in the past or what it will earn in the future? A recent call illustrated the common fallacy attached to agency valuation…
If you have a valuation done on your agency, demand to see the actual work effort and the assumptions made by the appraiser as a part of the published appraisal. If any of that work is defined by a multiple (instead of defined by the work effort and converted into a multiple), decline the valuation. If audited by the IRS, they will likely ask for the proof of that multiple.
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.
I was recently reviewing an article from 2005 by Hales & Company regarding how many sellers leave a lot of money on the table because the seller does not understand EBITDA. That point was true then and it is even more true now. Some points sellers need to know…
Most agents understand that the value of their agencies lie in the value of the book of business – the future revenues and earnings derived from policy renewals and to collecting commissions and fees from those accounts. Any sale of an agency will be, in great part, the “soft” value of future earnings. However, if an agency is sold as a corporation instead of being sold as a book of business, the value of the agency’s balance sheet must be included in the valuation of an agency.
Whether you should or should not emphasize market value over intrinsic value depends on your position and the market cycle. As a seller in good times, the market value will usually be your best deal. The only exception to this is the really good agency. A market value may rarely adequately capture the true value of these agencies’ cash flows and risk. Internal perpetuation is almost always the best course for maximizing their value. If you are a buyer, a brutally honest intrinsic valuation is the best way to manage your risk. Market value should be entirely secondary.
Have you ever bought or sold an agency? Did you use a consultant to structure the deal or did you do it yourself? If the latter, there's a good chance you might have left a considerable amount of money on the table and didn't even know it. Good mergers and acquisitions consultants don't come cheap but, in this article, Howard Candage explains how a consultant will usually save you money far beyond his or her consulting fee. If you're thinking about buying or selling, you MUST read this article!
Have you ever bought or sold an agency? Did you use a consultant to structure the deal or did you do it yourself? If the latter, there's a good chance you might have left a considerable amount of money on the table and didn't even know it. Good mergers and acquisitions consultants don't come cheap but, in this article, Howard Candage explains how a consultant will usually save you money far beyond his or her consulting fee. If you're thinking about buying or selling, you MUST read this article!
Have you ever bought or sold an agency? Did you use a consultant to structure the deal or did you do it yourself? If the latter, there's a good chance you might have left a considerable amount of money on the table and didn't even know it. Good mergers and acquisitions consultants don't come cheap but, in this article, Howard Candage explains how a consultant will usually save you money far beyond his or her consulting fee. If you're thinking about buying or selling, you MUST read this article!
Have you ever bought or sold an agency? Did you use a consultant to structure the deal or did you do it yourself? If the latter, there's a good chance you might have left a considerable amount of money on the table and didn't even know it. Good mergers and acquisitions consultants don't come cheap but, in this article, Howard Candage explains how a consultant will usually save you money far beyond his or her consulting fee. If you're thinking about buying or selling, you MUST read this article!
The time comes in every agent’s life when he considers cashing out. This can be for any number of reasons such as the desire to spend time with friends and family, for health reasons, or even just the desire to do other things. He has built his career selling and servicing insurance and has made a good living doing so - but every agent has (or should have) considered his business like a herd of dairy cows.
We are currently assisting one of our clients in an acquisition. The target agency appears to be a good fit with our client. The agency wants to sell to our client. But, for some reason, the acquisition target is reluctant to provide any detailed data for analysis and due diligence in the formation of a fair and cogent offer by our client.  The target agency has sought our client’s offer with little or no solid data.  Has this ever happened to you?
No agent wants to consider divorce as a reason for valuation. However, divorces do occur to some agents and the agency business sometimes does become a part of the marital asset considered within the divorce. In various states, the separation of Professional Goodwill from Enterprise Goodwill has significantly altered the permitted agency value in divorce situations. It is incumbent on agents to understand how agency valuation differs in divorce situations from those for estate planning, partner acquisition, loan substantiation and mergers, sales and acquisitions.
Two things are going on in the insurance marketplace. First, agencies are continuing to be bought and sold. Second, carriers are abandoning some agencies or even lines of insurance in some states. What happens when both of these come together? For example, you're buying an agency and learn that it's losing an important market. How does that affect its value? Here's how....
The Agency Consulting Group provides many valuations each year for independent insurance agencies throughout the United States. For some agencies it's a one-time occurrence while, for others, its an annual event. However, agency valuations are rarely obtained simply to satisfy an owner's curiosity about the value of his business. Every valuation has a purpose and we'll explore some of these in this article.
How much is your agency worth? One times commission? One and a half times? Two times? During the last twelve months Agency Consulting Group has been involved in agency transactions which, if converted to a multiple of revenue, would have ranged from 0.75 times revenue to 3.25 time revenue. It's amusing to convert a complex set of pricing formulas into a simple multiple of revenues -- amusing, but not accurate.
Question: 'Are you aware of any agency acquisition multiples resource? Multiples of pre-tax profit, revenues or EBITA? Also, have you seen any published materials on what agents are doing on average with respect to amortization of goodwill in acquisitions? Does everyone just go for the fastest or do agents spread it over longer?'
Agency owners and managers often face seemingly simple questions (for example, 'How much should I pay my producers?'). Identifying the solutions though is complex and unique. Simple, boilerplate solutions do not exist. Successful agencies will invest the money, time, and effort to find the solution for THEIR agency, not some other agency's solution. Here's how....
An agency owner at a big state conference was telling everyone in earshot that his agency was now worth 3.0 times revenues because he just got an appointment from 'ABC' company. 'ABC' company, as part of their sales pitch to agencies, suggests, or at least the agency owner inferred (and I've heard others infer the same regarding the same company), that with 'ABC's' contract, his agency will increase in value to 3.0 times revenues! Let's do the math....
This is, by far, the most common question we are asked at individual client agencies and during Q&A sessions at conferences and seminars in which Agency Consulting Group is involved. Every year we provide a general answer in the pages of our newsletter, The PIPELINE. For the past five years, agents haven't liked the answer. The value of the average agency has declined from 25% to 50% (or more) in recent years.
The differences between 'purchases' and 'mergers' is so great that one is forced to wonder how they became so closely related in agency management literature. The two activities are fundamentally different in almost every respect. The motivations in the case of a merger are usually different from those in an agency purchase. In addition, the valuation procedures are, or should be, different. The end result is clearly different.
Insurance agencies have their own unique business attributes. For appraisal purposes, these attributes do not “fit the mold” that is used by the business appraisal community in general. Part of the reason for this is that the major asset owned by an insurance agency is an intangible one that is unique to insurance agencies. In few other businesses can the owner create a salable asset using simply “a pen and a promise”. This paper explains more.
Business values are very often expressed as a multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation, Amortization). People use EBITDA because intuitively, valuations makes more sense if they are expressed as a function of earnings rather than sales or assets. EBITDA though has several serious drawbacks. This article discusses the reasons why EBITDA should be nothing more than one of the tools used to determine agency value.
Many of us use outside resources from time to time and, as there are often questions about getting the most from external suppliers, I thought some comment might be in order on how to make the best use of the relationship. As both a consultant and a company that uses outside support occasionally, I think about this a lot. So I put together some questions you may want to ask yourselves to make the process more effective.
One time. One and one-half times. Two times. Multiple of commissions. Multiple of revenues. Multiple of earnings. Do any of these so-called benchmarks and “thumbnail measures” have any bearing on the value of your or any other independent or captive, retail, or wholesale P&C or L&H insurance agency? The answer is both YES – AND ABSOLUTELY NOT!
Agency owners are often desperate for a simple, quick answer. Unfortunately, they inevitably pay for their haste. Voodoo valuations are powerfully attractive. They offer a quick and cheap way to pacify an agency owner’s curiosity and worry. Voodoo valuation are not easy to recognize and are often disguised as legitimate valuations. Here are a few keys to recognizing voodoo valuations....
A water bottler prices each bottle at $1. But what if the water is transported to the middle of a desert in which there is NO other source of water...is the bottle still worth only $1? If the water comes from a spring that is readily accessible for free to the locals, will they pay $1 a bottle? Agencies are like water and here's why an agency is worth different amounts in different valuation scenarios.
Half or more of all mergers and acquisitions result in decreased values of the combined entities. How can that happen? Here’s a recent example in which we were called upon to value a combined operation after an acquisition....
The question of why and how to select an outside consultant often arises in small closely-held companies like insurance agencies. There are five reasons to use a consultant and four rules for selecting a consultant. If your situation doesn't fit one of these five reasons, you probably do not need to hire an outsider to help you. If the consultants that you interview fail any of the four tests, look for someone else.