In a recent seminar Ganis Consulting asked
agency owners to estimate the market value of an insurance agency with the following
characteristics:
Annual Revenue: $500,000
Lines of Business: 90% Personal Lines
Years in Business: 10
Amount of Debt: $100,000
No two answers were alike and ranged from $400,000 (1x revenue less the amount of
debt) to $1,000,000+ (at least 2x revenue). As acquisition brokers and consultants
to insurance agents, we see this misunderstanding about agency values all the time.
And the only acceptable answer that should have been given regarding the value of
a $500,000 personal lines agency in business for 10 years with $100,000 in debt
is this: It depends.
It depends on dozens of factors about the operations and finances of the agency
that weren’t even provided in the example and without those factors being known,
there is no way to establish a value for any insurance agency.
An Agency Valuation (or “appraisal”
or “assessment”) is the process used to identify, analyze, and summarize all relevant
data needed to establish a well informed opinion of value for insurance agencies.
Without a Valuation, the value of an agency can only be determined the same way
the seminar attendees did it; by guessing. Valuations look at all aspects of an
agency the way a buyer of insurance agencies would consider those same aspects,
by viewing each one as either a concern that could negatively impact market value,
or an opportunity that could positively impact value.
One example of this, using the sample agency above, is the annual revenue. The first
thing a buyer would consider when seeing revenue of $500,000 in a personal lines
agency, is how much of that revenue is from commission income, how much of it is
fee income, and how much of it is contingency or other income from ancillary sources
(e.g. vehicle registrations, tax services, motor club, etc.). And each of those
different types of revenue would impact the value of the agency differently, based
on how “sustainable” that type of revenue would be considered in the future. Also,
it is ultimately the net profit or cash flow of the agency that is going to be much
more important in establishing market value anyway, not the annual revenue.
Some of the other key contributing factors that are uncovered and documented in
the Valuation report include details about existing staff, concentration of primary
carriers, type of corporation and details about shareholders, existence of producers
and who owns their accounts, workflow and automation in use at the agency, and many
other “quality factors” that impact the value of an agency, too numerous to detail
here.
So why get a Valuation for your agency? Some of the more common reasons for having
an objective third party establish a value include:
- Distribution of assets for divorce, trust estate, or other legal matters.
- Documentation for a partner buyout.
- Justification of market value for the IRS or a lending institution.
- Presentation a seller can use to justify an asking price or a buyer can use to justify
an offered price.
- Outside opinion for a business transaction between family members.
- Just having an idea of what the agency is worth to decide if it’s a good time to
sell or a good time to address the issues that are impacting a lower value.
The last one is something all agency owners can benefit from, even if they aren’t
thinking about selling their agency for another ten years. The Valuation report
is going to point out all of the things in the agency that will likely hurt the
agency’s market value. By understanding those things now, agency owners can start
to address them and build more value in their agency long before they are ready
to consider selling.
An Agency Valuation is a great tool that agency owners can use in numerous situations,
but most importantly will ultimately help maximize the value of their business asset
by understanding all of the factors that are impacting that value.
Ganis Consulting specializes in operations consulting for insurance agencies and
brokering acquisitions between agency sellers and buyers. Visit them on the web
at www.ganisco.com or by calling
them direct at 800.528.1325.
TWG Capital specializes in funding
agency acquisitions and providing free book valuations for independent agents and agency
owners. For more information about obtaining capital, email
sales@twgcapital.com or call 877.894.2785.
For a free book valuation, click here.
To list your agency for sale in next month’s newsletter for free, email
marketing@twgcapital.com.