Similarly, the agency that sells for a huge premium may be the beneficiary of a very aggressive buyer with a specific need or desire to be in a certain marketplace, a seller willing and able to make significant expense reductions as part of the acquisition, or a combination of both. For example, a seller’s business that is being absorbed into the buyer’s existing facility and staffing workload provides the buyer with an unusually high marginal profit, and thus the ability to pay what appears to be a very inflated price.
The point is that making direct comparisons to actual transactions can be very misleading without knowing the full set of facts and circumstances for both the buyer and the seller. For this reason, using a FMV study provides a much more consistent assessment of value over time, without undue influence from these unique situations. FMV reports must be prepared by independent advisors or consultants, and will provide the appropriate revenue and earnings valuation multiples for the business.
Without a formal independent valuation to provide the basis of revenue or earnings multiples, agency principals should go through the process of determining Pro Forma revenue, expenses and earnings. To estimate the BEV, multiply their Pro Forma profit by 4.5 – 5.5, an estimate of the range of earnings multiples for a typical agency. A separate analysis of the balance sheet also needs to be completed to account for the full value of the business. This is an extremely simplistic approach because it does not take into consideration any of the risk attributes of the business, historical or projected growth or any of the other factors considered in a full fair market valuation, but it may provide an indication for curiosity purposes only.
Checking the value of the business is similar to reviewing the annual statements from your outside investment portfolio manager – it’s something that needs to be done, but generally with an eye on the long-term. An insurance agency generally represents a significant portion of an agency principal’s overall net worth and should therefore be reviewed on a periodic basis to be able to measure and evaluate the impact of internal decisions made and external factors outside of your control. The estimation process discussed above can provide an indication of the value of the business, but it’s the FMV review that provides the most accurate analysis of the business.
Dan Menzer is a principal with OPTIS Partners, LLC (www.optisins.com), a Chicago and Minneapolis based investment banking and consulting firm providing M&A, valuation and strategic consulting services to firms in the insurance distribution sector. The author can be reached at 630-520-0490, firstname.lastname@example.org