Standards & Guidelines For Appraising Insurance Agencies / Brokerages 2015
Balance Sheet Valuation
BALANCE SHEET VALUE
Many insurance agencies have two components of value, the value of their books of business and the value of their Tangible Net Worth (“TNW”).
TNW (also called Hard Net Worth) is calculated by taking the value of the agency’s total assets and subtracting the value of intangible assets and total liabilities (excluding those liabilities associated with the acquisition of a book of business). It identifies the value of an agency’s net worth (retained earnings, plus additional paid in capital) less its intangible assets (Treasury stock, notes or advances to Officers that are not expected to be repaid), and renewals and expirations (net of any debt associated with the renewals and expirations). Most insurance agency’s TNW defines the money invested in the agency since its inception plus its accumulated retained earnings.
Many insurance agencies have little or no TNW because they invest little in the start-up of the business and use all available funds every year toward expenses and owner’s income.
It is possible for agencies to have a negative TNW, whether through normal business procedures like repurchasing stock into Treasury Stock or through mismanagement of agency assets. A negative TNW would affect agency value in a stock transfer. Agencies that are fiscally conservative may have substantial and growing TNW as reserves available to invest in the growth of their business.
Appraisers should include TNW, as well as the value of the book of business in the calculation of the value of any insurance agency entity.