Strategic Resources for Your Insurance Agency

Why an Agency Valuation is Important to both your Business and Personal Financial Planning

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Insurance agency owners spend years building their businesses. They can measure success year-to-year by looking at their bottom lines. However, getting a true picture of the state of the agency requires a professional agency valuation.

The most common occasion for a valuation is when an owner is preparing to sell the agency. However, Jon Persky of Optimum Performance Solutions points to other times where it is needed, such as when the owner is applying for loans, performing estate planning, or determining how much life insurance to carry.

Trevor Murgio of Merger & Acquisition Services agrees. A valuation can help owners identify key business drivers. “They can also use it to benchmark themselves against other agencies in their region and nationally,” he adds.

Agency valuation experts use several methods to determine value. “The methods that a valuator utilizes should be based upon the purpose for the valuation and specific characteristics of the company,” according to Michael Mensch of Agency Brokerage Consultants. Many experts believe a multiple of Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) provides the clearest picture of agency value.

Persky uses multiple methods and takes an average of the results. Dan Menzer of Optis Partners calculates the discounted cash flow of the agency's projected future earnings. He also applies the publicly traded brokerages' valuation multiples to the agency. The two results are weighted based on several factors, then averaged together.

Mensch says that the purpose of the valuation can affect the calculated value. “A valuation for a divorce typically requires calculation of a fair value, which will be less than fair market value and more so than strategic value,” he says.  “The weighting of individual valuation methods will differ, as will the underlying assets and cash flow, based on the purpose.”

One thing the experts agree on is a common misperception that owners have. The belief that applying a multiple to of revenues to determine value is mistaken. Two agencies with the same revenue may have very different values. Marc Greene of General Insurance Brokerage cites differences in carrier mix, lines of business, loss ratios, retention, and free cash flow as reasons for the variation. Menzer adds that differences in working capital, growth history, operational efficiency, and expense levels can also impact the relative valuations.

Murgio notes that agencies with niche business “almost always trade at a premium.” Also, “The capabilities of the agency will play a strong role in its valuation. Does the agency act more as a pure distribution source, or do they provide other value-added services to their carriers, such as claims, billing, or underwriting?”

Agencies looking to increase their value should focus on profitability. All of the experts agree that agencies should focus on personnel costs. Persky recommends streamlining workflow as much as possible and cutting expenses. Menzer suggests consolidating premium volumes with fewer preferred insurance carriers to enhance contingent commissions. Murgio says they should seek out missed opportunities for growth, such as cross-selling.

Greene says the presentation of the agency's financial information can effect valuation. The information, he says, must make sense and reflect the agency's business model. “Often times, unadjusted financial statements and lack of third party carrier verification can stop a deal from moving ahead.”

Persky found this to be true with one agency. The owner had what he thought was a good offer, but Persky found that he the owner had not presented the agency well. By drilling down into the income statements, Persky was able to show the agency's true story. The final selling price was 40 percent higher than the original offer.

When should agencies get an expert valuation? Murgio believes it should be at the beginning of the valuation sales process, to maximize the sale price and get the best sale terms. Also, “Any time a third party wants to know the value, then you likely need to have a valuation completed,” says Mensch.

Persky thinks it should be done annually if multiple partners are involved. Menzer says, “If there is any type of internal ownership transition event occurring, it should be done based on an independent third party valuation.” 

In the end, says Mensch, “The most important time is when an owner is contemplating selling.”

Looking to start an Agency? Get detailed information by reading our Guide to Starting an Insurance Agency

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