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When is a Smaller Agency Worth More Than a Larger Agency?

Author: Al Diamond 

A smaller agency can be worth more than a larger agency when it more profitable than the larger agency.

One of the first fallacies when agencies seek to grow through acquisition is that it is more attractive to purchase a larger agency than a smaller one. However, the nuances of agency acquisition require you to dig below the surface when measuring the value of a potential acquisition for you.

Over the years, Agency Consulting Group has encountered many agencies whose ongoing expenses are greater than the revenue stream. This can happen for many reasons, some reasonable and “fixable", others not so much. If you will be operating the agency in the same way as your predecessor owner, you may encounter the same problem. If you might have to increase some services or expenses, even a marginal agency acquisition might prove unprofitable for you. The “gamblers" among us who simply assume that they can operate an agency at less cost than the previous owners will “win" some of the time, and “lose" most of the time.

What an insurance appraisal specialist does is define an acquisition in specific terms of the buyer. That means that we look at every line of expense to determine where the buyer has excess capacity that can be used to make the acquisition more profitable. We look at the roles of every player in both the host agency and the agency being acquired and discuss who and how many staff members are needed in the acquisition to make it operate in a way desired by the acquiring agency.

We have a great deal of experience doing this after over 50 years in the industry and thousands of valuations, but many owners and principals who are knowledgeable with their financials can do the same thing. Design a pro forma budget for the acquisition and make it realistic. Value the acquisition based on how well you will do with the entity or the book of business AFTER you acquire it, not on how well it performed profits prior to your ownership. As you can imagine, if you buy an agency in a new geographic location and need to maintain that office, the entire staff and add to your computer system to manage it, the chances of you earning a great deal more than the seller, is dim. But if you buy an agency close to you and already have excess capacity in your location and with your staff, you can take the best of the staff members of the acquired agency, move their operation into yours and earn a great deal more money operating that book of business with yours than that out-of-town agent can earn by becoming your competitor.

By the way, don't assume you will cross-sell, grow more than the seller or retain better. That is a loser's proposition. Your real control is in the management of expenses more than the management of growth or retention.

Don't discard your pro forma budget once you buy the agency. It is not a “Wish List."  It is a deadly serious budgeting and management tool, without which even the best designed deal can become a profit drain on you.

What is the current “multiple?"

Multiple of what? Commission, Revenue, Earnings, EBITDA? This is a trick question poking fun at everyone who thinks they can use a simple formula applicable in all cases to guess the value of their business any more than guessing how much a 5,000 square foot building is in your town based on the average value of 5,000 square foot buildings all over the country.

Just as the occupancy, condition, profitability, location, and a thousand other considerations are important in determining the value of a building, the historical growth, customer and policy retention, make-up of the book of business, loss ratios, carriers, operating expenses, personnel, producers and production capability, and a thousand other considerations are required to determine the value of any insurance agency.

We would be happy to offer you a simple expression of your value after we actually calculate it. We can describe it in terms of a multiple of revenue or commissions or any other way you'd like to hear it. If your agency was $1 million of revenue and $900,000 of commissions and earned $150,000 (EBITDA) or $100,000 net earnings – and if we determined that the value of its future earnings potential under the circumstances of your valuation happened to be $1,500,000, we could express the value as 1.5X Revenue, 1.66X Commission, 10X EBITDA or 15X Earnings - or $60,000 per chair if you happen to have 25 chairs in your agency. But how silly would it be for an agent five states away from you in completely different environment from assuming that the same multiple would be a correct expression of that agency's value?

Over the next several months we will be publishing excerpts from the Standards & Guidelines of Appraisals for Insurance Agencies and Brokerages. A group of very qualified insurance agency appraisers have worked for several years to create a set of standards that can be applied to agencies and brokerages, retail and wholesale, small and large, and flexible enough to be able to be used under all circumstances.

These standards have been created and accepted by and subscribed to by the American Association of Insurance Management Consultants (AAIMCO). The full set of Standards and Guidelines may be found on AAIMCO'S website (  or by linking here. All agents are encouraged to read, download and print these Standards and Guidelines since these Guidelines will be used by qualified appraisers of insurance businesses. If you are valuing your business or are retaining the services of an appraiser who is not knowledgeable with the nuances of insurance agency valuation which is much different than other businesses, please forward these standards to them for their use.

Read the Standards and Guidelines, accessed by clicking here. They are important in realizing how to value your agency or any agency or book of business you might want to buy, sell, or with whom you might merge or associate in some way. We stand ready to assist you within your growth or succession or perpetuation plans to value agencies to make sure that if you are buying an agency, you will pay what it is worth to you with the understanding that you must make money from the investment. If you are selling, you need to know what your agency is worth under the specific circumstances of the sale to allow the buyer to make a profit, but not inadvertently cheat you out of the value you have built in your business over the years. If you have investors or new owners coming into your agency, you must get a value that provides both you and the new partner a legitimate return on your investment.

For additional information about Agency Values, please call us at 800-779-2430 or email me at

First Published: November 4, 2022

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Alexandria VA 22314
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