Standards & Guidelines For Appraising Insurance Agencies / Brokerages 2015
USE OF MULTIPLES
Over many generations, agents have been prone to using multiples (of revenue, of earnings, of EBITDA, of commissions, etc.) to express their agency’s value. However, it is not appropriate to assume one agency’s / broker’s multiple (of anything) applies to any other agency.
It is important to note that one of the first steps in beginning to value an agency is to create Proforma Pre-Tax Earnings based on known changes that will result from the activity that necessitates the valuation. This compilation is generally known as a Proforma Income Statement. The basis of value against which premiums or discounts are applied (see section on Premium and Discounts) is, in fact, the total earnings potential for the number of years that the appraiser is willing to give up the agency’s earnings potential to the seller or financier in order to purchase the agency. In most cases, we have found that this is from three to seven years. However, every person valuing an agency has a different need or assumed expectations of earnings. That is why the same agency might be valued be worth different amounts to different buyers.
NON-PIRACY / NON-COMPETITION AGREEMENTS
A well written agreement between an agency and its employees and independent contractors (including producers) results in a stronger and more defined relationship for all concerned. Such a written agreement regarding their conduct in the event of termination of the relationship increases the value of the agency, and the lack thereof tends to diminish an agency’s potential value.
Non-Piracy / Non-Competition agreements can range from providing that the agency owns all business, to the producer owning all business he/she develops, to each party having a percentage ownership in business generated by the producer. If no agreement is in place that addresses the ownership of client relationships, and the duration of time for which parties may solicit and accept business from the clients in question, the parties ownership rights are questionable, which can seriously affect the value of an agency.