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Agency Value as Commission Multiples

Author: VU Faculty

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?"


Ask an Expert 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 a longer period of time?"

Ask an Expert Answers...Your amortization question is relatively easy to answer. However, the "agency value as a multiple of revenue" is a timeless question that still has no answer. Alas, but wouldn't it be nice if autos, homes, and agencies could be valued with precise, simple formulas? As several of our agency management faculty members indicate below, unfortunately that's not the case.

Faculty response...
Amortization in asset acquisitions was fixed at 15 years more than a decade ago by Congress and most buyers I've seen follow the law. Marsh-Berry  occasionally publishes the average price of the deals they've done on an EBITDA basis. I haven't seen one in a while, but since they do as many or more deals than most, it is probably the best data the industry has. Hales occasionally publishes something similar which is pertinent because their clients are so large and they seem to usually represent the buyer.

Faculty response...
Agency valuations are unique and there are no averages that can be applied to a specific agency because there are just way too many variables and not enough valuations, even over time, to provide a credible database that permits evaluation of each (sometimes interdependent) factor. You can check basic information and articles from sources like Agency Consulting Group, Marsh-Berry, and Reagan Consulting. For what it's worth, is a website with general information about business valuations.

Faculty response...
There are no magic formulas, but it seems that the most popular is the EBITDA which takes the pro-forma profit (what the bottom line could be if the owners didn't overcompensate themselves in salary and perks) times a multiple of 4 to 5 for good agencies, 5 to 6 for really great agencies, and who know what when someone really wants the acquisition.

Defining good: steady growth, good carriers, good mix of business, good employees. Great would be consistently profitable, experiences growth of at least 15% per year, good mix of carriers, with a book of business with commission mixed at 20% personal lines, 25% employee benefits, and 45% commercial.

On goodwill, see the following article.

New federal dictates mean goodbye goodwill amortizing
Boston Business Journal - April 19, 2002
by Michael A. Renzelman

Faculty response...
My stand on “multiples” of revenue, EBITDA, earnings, or number of chairs in the agency is that they all are equally invalid measures of value. Below is an example from the book I’m writing on the subject for IIABA.

Example One:

Let’s say Agency A was valued at $1,000,000 and had revenue of $500,000. That would meet the classic “2 Times” multiple that we have all heard about. Does that mean that "2 Times" is now the fair price for any other agency?

What if Agency A was a 50% PL, 50% CL agency owned by two thirty-five year old hard-charging salespeople with a young staff and double-digit growth and profit every year?  

Agency B, right next door, also generates $500,000 of revenue and was also 50% PL and 50% CL. It is owned by a 70 year old low-handicap golfer (because he plays virtually every day) who hasn’t sold a new account in years, trusts his staff to manage his office because he went to high school with most of them, and whose only problem is that it seems like one of his regular duties these days is attending the funerals of clients that he has known for forty years.

Agency C, down the street, sells only auto insurance and only to people who can’t get standard insurance on their own. They also have $500,000 of revenue.

Agency D, in an office building downtown, was built and grew to $500,000 of revenue by developing a single program for one niche specialty throughout the U.S.

Agency E, in a neighboring state, is a break-away agency from a large oil and gas specialty agency. They are now writing $500,000 of revenue in battle with their old company.

All of these agencies have the same revenue at this point in time. Do you really think that Agency B is worth "2 Times" just because Agency A was worth "2 Times"? Do you think that all five agencies are worth “2 Times” revenue because Agency A is? Do you think that YOUR agency is worth "2 Tmes" because either Agency A OR Agency B was valued at "2 Times"? 

As far as amortization of goodwill, agents no longer have a choice. The IRS dictates that insurance expirations are amortizable over 15 years, no more, no less.

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