REALISTIC AGENCY VALUATION:  A complex blend of art and science

What is your agency worth today? Perhaps there’s no more loaded question in the insurance sales world. But if your informal answer would include an “X times earnings” comment, you may not be operating in the current realm of reality. And I wouldn’t advise hanging the “For Sale” sign just yet.

 

Agency valuation is an individualized calculation, and as much art as science. However, a thorough estimate includes a number of common variables: financial performance, calculation of the many intangibles in the insurance business, economic considerations and actuarial computations. Even a veteran valuation expert’s work must be thoroughly reviewed to ensure it includes the unique characteristics of a total valuation package.

 

Benchmarking your firm’s value, whether done for M&A purposes or to resolve ownership questions, seeks to get at the core of your business – not an easy task in an industry where business has so many intangibles. In fact, the intangible value of an agency will far outweigh the tangibles. That’s why, unless an expert truly understands insurance, a multiple of earnings approach could produce a useless number.

 

Always be wary of a valuation service that offers the ability to drop your financials into a spreadsheet and come up with a number on the spot. That approach assumes your business is one of a large pool of homogenous businesses, which could not be farther from the truth. The key to your valuation lies in your firm’s uniqueness.

 

Factor Economic, Goodwill Value

 

Consider two areas that showcase an agency’s unique offering: economic value and goodwill value.

 

Economic value is calculated using quantifiable dollars. Each revenue stream, contract or distribution relationship has an associated value.

 

Recurring revenue and profitability are two primary indicators of economic value. Assessing the in-force business by policy year, persistency and future commission streams will demonstrate an ongoing or liquidation value to the owner. Profitability provides a window into how efficient you are, and if broken down into metrics like premium by headcount, product margins or internal growth rate, profitability reveals much about the proficiency of your staff. An efficient operation may be much more attractive to a buyer looking to integrate the firm into a larger entity.

 

Goodwill value encompasses so many areas of those tricky intangibles. While it’s more subjective, it is still critical to an accurate valuation. For instance, distribution relationships, especially those long held or exclusive, can add great value to a firm up for sale.

 

What’s your operating model? That also will have an effect on valuation. A boutique approach suggests more repeat business, better underwriting results and lower marketing costs.

 

Similarly, if your firm has high brand name recognition in your market, trade on that strength by addressing it in the valuation. Extra points if firm principals are industry leaders or the firm has a high civic profile; additional accolades if the firm has depth in management ranks, because that will provide a new owner more comfort that the firm’s stature can be maintained.

 

These intangibles should be leveraged in a valuation, because they show an agency that is a solid going-concern.

 

Conclusion

 

These are just a few of the many unique elements that need to be considered when valuing an insurance agency or brokerage. Be very wary of a web site or spreadsheet template that purports to deliver the substantiated value of your business. There can be much hidden value in an agency that would be lost if the process was reduced to the level of an automobile appraisal.

 

For realistic, certifiable results that you can take to the marketplace, work with an experienced industry professional and make certain you are including all operating facets of the business that will optimize your agency’s value.

 

Steven S. Wevodau is managing principal of WFG Capital Advisors in Harrisburg , Pa. He may be reached at 717-780-7800.