Standards & Guidelines For Appraising Insurance Agencies / Brokerages 2015
Appraisal & Insurance Terminology
Those outside the appraisal community who are not intimately familiar with insurance and appraisal terminology will find certain often misunderstood or incorrectly used words and phrases defined below, with comments that are applicable. Although sometimes slightly modified, some of the definitions have their basis in definitions adopted by the Business Valuation Committee of the American Society of Appraisers (indicated by “ASA” below).
Adjusted Gross Income (AGI) -- Gross Income includes ALL forms of income for an agency. However,one form of income, (a negative to income) Commission Expense, refers to commissions paid to the producing agent who owns or controls a client or account. This leaves only those commissions that are owned and controlled by the agency, and the net commissions retained by the agency on non-owned business placed with the agency. AGI refers to the Gross Income of the agency, less the Commission Expense paid out on non-owned insurance clients.
Adjusted Net Income -- For certain appraisal methods, it is necessary for an appraiser to adjust the financial statements of the agency to reflect only those revenue and expense sources that relate specifically to the operations of the agency and the production of income. As an example, if the agency is expensing three automobiles and two are used solely for personal use by family members of one of the owners, the expenses associated with the personal use autos should be expunged. An appraiser’s adjustments may often result in an adjusted net income amount that is greater than the business’ taxable net income.
Appraisal or Valuation vs. Evaluation (ASA) -- This is the act or process of determining value. Appraisal is synonymous with Valuation. Often this act or process is incorrectly referred to as an “evaluation”, which more appropriately refers to the examination of data.
Appraiser (ASA) -- This is a person who is qualified by education, training or experience to perform an appraisal of a business and/or its intangible assets. This is a commonly used term in the appraisal community and one with which most people can relate. It is preferable to “evaluator”, “valuer”, “valuator” or other terms.
Appraised Value (ASA) -- The appraiser’s opinion or determination of value.
EBITDA -- This is an acronym for “Earnings Before Interest, Taxes, Depreciation and Amortization”. Appraisers may adjust financial statements to exclude these elements in order to more realistically represent the cash flow to a buyer before payment of income taxes.