The appraisal of an insurance agency is not as complicated as it seems. Today’s dynamic insurance market is full of buyers looking for agency acquisition opportunities, inspiring some homeowners to ask: How much is my insurance agency worth?
The answer is not so simple. Certainly, the market for acquisitions in the insurance industry is active at the moment, and that is helping to raise prices and give insurance agencies the confidence to proceed with an exit plan that ends with an external sale. but there is a bit of an optical illusion with the buying activity versus the actual value of an agency. the prices you hear may not match the value of your agency. and value is a variable number: it’s a mathematical equation with many factors, including whether the buyers are internal or external.
So why is it important to rate insurance agencies? Companies can improve their business operations and make the most of today’s market, whether that means capitalizing on opportunities to sell to upcoming outside buyers or organic growth to create more value internally so the business can turn a profit and perpetuate itself. That’s why it’s important to understand insurance agency valuation methods and how an insurance agency valuation works.
strategy first: the valuation of your insurance agency will follow
Before jumping into the actual insurance agency valuation process, the first step in succession planning (whether to sell externally or perpetuate internally) is to define your strategy. don’t let a valuation drive your decision. Instead, determine which path your agency wants to take, set the end goal, then create a plan to maximize the value of your company. After that, consult a trusted insurance advisor about the internal versus external value of your business.
do some soul searching and consider what you really want to do with the business. do you hope to perpetuate the agency internally and pass on the legacy to another key leader or family? Do you want to maximize the return on a sale to an outside buyer and “cash money out”? (Recognize that you’ll likely still be involved during the ownership transition: Selling to a stranger doesn’t usually mean cashing a check and walking out the door.)
strategy is a game changer in insurance agency valuation: is your agency handling a tough negotiation?
The best approach to valuing an insurance agency starts with having the right growth strategy in place. Take a hard look at the current situation of your business operations. As Marshberry points out, “If you run your agency like it’s for sale, you win, whether you sell internally or externally.” what are you doing to drive profitability? are you challenging your people to improve production? Do you have a sales culture? Are you actively engaging leaders in ways for them to acquire ownership? Is there a plan for them to buy shares, or is he holding on to the lion’s share and resisting selling?
Asking these critical “strategy” questions is important because your business may not get the valuation you expect if daily business operations are on autopilot. If your goal is to maximize agency value, and it should be, you must first look inward and make business changes to improve profitability, sales performance, and recruiting; all of which will help with the value of your insurance agency.
how do you rate an insurance agency? understand fair market valuation
So what exactly is a fair market valuation and why does value look so different when considering an inside or outside buyer/market?
This last point is what confuses many owners, even those who have been in business for decades. It just doesn’t make sense, does it? Why is an insurer valued more for an external buyer than for someone who has been working in the agency for years and wants to become its owner?
First, looking at the internal and external ratings of insurance agencies side by side is like comparing apples and oranges.
There are different variables involved in determining fair market value for these two hearings. the final objective is different, as well as the strategic planning necessary to prepare the sale and the valuation.
The discrepancy between the external value and the internal value is called the valuation gap. Traditionally, owners preparing to sell to an outside buyer can make changes to their business that they wouldn’t normally make to help increase value. its movements are focused on improving the pro forma and the income statement. the changes aren’t focused on creating a sales culture, for example, or recruiting young talent to take the firm to the next level. the motivation is to get paid more at the time of the sale, so these moves are financially focused and not always the best decisions for the long-term health of the company.
When the buyer is internal, an owner is not likely to make sweeping changes designed to increase profits or increase the price of the agency. In fact, the owner can get an as-is valuation of the business; and many companies can support some improvements. If the agency has become obsolete and the owner has not taken proactive steps to drive growth, sales, or hiring, the value may not be as high as expected.
Furthermore, for strategic reasons or because of access to cheap capital, outside buyers can often afford to pay a higher multiple of earnings than internal buyers who need cash flow to finance the debt that enabled the transaction.
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Therein lies the gap between external and internal value, both the level of profitability and the multiple a buyer can or will pay. owners can help try to close this gap and improve internal value by going back to strategy and continually working to improve operations and growth.
How do I determine fair market value for my insurance agency?
With a pool of buyers willing to queue in the insurance industry today, agency owners should ask how a fair market value is determined. What factors influence the price a buyer will pay?
The valuation is in the eye of the beholder. when you ask “what is my insurance agency worth?” there is no objective answer. it is the price at which a company could change hands between a willing buyer and a willing seller, without outside pressure. that is why a fair market value is different from the sale price. an outside buyer may have a strategic motivation to pay more; an inside buyer may not be able to afford what an owner wants; and there are countless other variables that influence what a buyer will actually pay. But when it comes to fair market value, these “pressures” are removed from the equation and what you are left with is a number that is subjective and affected by where a company stands at a given place and time.
Your default strategy becomes the turning point in the valuation of an insurance agency. In our experience, regardless of the buyer, if you spend time and resources improving your business operations with its long-term health and success in mind, and not just how it looks on paper, then its value will increase.
Agency and brokerage house owners dedicate their careers and make life sacrifices to grow their businesses and help them succeed. keep that momentum going as you get closer to the finish line, whether it’s an outside sale or a perpetual sale. By doing so, you’ll help continue to enhance the value of your company, and what it will take to the bank.
If you have questions about the current point of view or would like more information about the value of your company, email or call wayne walkotten, executive vice president, at 616.723 .8372.
