Standards & Guidelines For Appraising Insurance Agencies / Brokerages 2015
USE OF MORE THAN ONE METHOD
Only under very limited circumstances should an appraiser utilize only one method for appraising a book of business. Should this become the case, a well-documented explanation should be included in the appraisal report.
When using more than one method to value a book of business, each method should be weighted against the others for appropriateness to the agency situation and circumstances.
A NOTE ABOUT THE “MULTIPLE OF COMMISSIONS” RULE OF THUMB
For decades it has been a common practice among insurance agents to express the perceived value of their agencies or books of business in terms of a “Multiple of Commissions”. (Example: An agent may feel that the agency or book of business is worth “1.5 times” the commissions that are written by the agency.)
The Multiple of Commissions is not an appropriate method for placing values on agencies. It gives no consideration whatsoever to the adjusted profits and cash flow of the agency. For instance, if two agencies each have $500,000 in commissions, but Agency A has $100,000 of profits and Agency B has $200,000 of profits, using the Multiple of Commissions method, both agencies would have the same value. Of course, simple logic and common sense dictate that Agency B would always be worth more to a buyer because it generates greater profit.
Even though the Multiple of Commissions rule of thumb is widely used in general discussions regarding agency values, that does not make it a correct measure of value. Knowledgeable appraisers of agencies agree that the best method of valuation is based on adjusted earnings and cash flow. The use of Multiples of Commissions (or of any other measure) should never be used in formal appraisals.