This question is one of the main reasons people call our office. In fact, we complete over 180 valuations of insurance agencies and brokerages each year for agency owners, buyers and lenders all asking for our professional opinion on agency market value. We are the most experienced firm in the nation when it comes to valuing agencies with under $5M in revenue, which is why the leading lenders in the insurance industry turn to us.
Not too long ago I had lunch with a former client. With the deal well behind us, he was in an exceptionally good mood and opened up to me. The conversation went like this: “Mike, when I called you three years ago I was ready to sell my agency for $4.5M. You got me $8.5M. Calling you was the best decision I ever made.” Needless to say, he paid for lunch, which of course I was grateful for.
Every agency owner has a perception of what their agency is worth. Sometimes it’s below reality; sometimes it’s above. Most of the time their perception is influenced by what someone tells them, typically a friend or someone else in the industry. We’ve had countless clients come to us after negotiating with a buyer where the buyer had just about convinced them that their below-market offer was a good one. I’ve had owners argue with me that they know their agency is worth some unrealistic number because a buyer had offered them that (although the buyer failed to close or later tried to renegotiate). An agency is worth the price that the highest bidder actually closes the deal on.
Who knows what your agency is worth?
The one that knows the answer to the question “What is an agency worth?” is the one that has their pulse on the marketplace. It’s not your accountant that has only been involved in one or two agency deals over the last decade. It’s not an individual buyer that only knows what they can afford to pay. It’s not even a friend that sold their agency, because their deal was unique, took place at a specific time and likely only involved a limited number of marketplace players.
The reason why we positioned our firm to be a resource to buyers and lenders is for us to keep our ear to the tracks. We see the deals the industry’s top lenders are funding and we see the deals a variety of buyers are doing. In addition to the two dozen or so sellside transactions we manage a year, in which we’re negotiating with buyers across the country, we have our hand in another 60+ transactions. No other firm in the country is involved in our volume of transactions and that was an intentional, strategic move on our part so that we can tell clients (including sellers, buyers and lenders) with confidence that we know the answer.
Who buys insurance agencies?
The answer is just about everyone in the industry is a potential buyer from licensed agents, to your local competitor, to regional and national firms, banks, and occasionally insurance companies. We have spoken and negotiated with just about every buyer type in the marketplace. Some buyers are what we in the M&A world call “financial buyers”, but most in the insurance industry are “strategic buyers”. Financial buyers generally pay the lowest price. The acquisition of the agency doesn’t provide them with revenue or expense synergies, so they focus on historic earnings and transaction terms. This group usually includes licensed agents and groups that don’t own other insurance agencies.
Strategic buyers include a more diverse group. It could be a competitor or firm not currently in your market area. The topic of strategic buyers is further complicated based on individual buyer’s debt structure and risk tolerance. By that I mean that a strategic buyer may have all the right motivations to acquire your agency but may lack the interest or risk tolerance to do so. We run into this frequently in sellside engagements when a client suggests a competitor could be a good buyer. After approaching the competitor, we quickly learn they don’t have the desire to take on debt for the acquisition, which is apparent from their low offer.
How do you sell your agency for the most amount?
This is the real question most clients have. The answer is that you have to negotiate with multiple, well-capitalized strategic buyers. If you negotiate with only one or two buyers, there is a very high likelihood that you end up leaving money on the table…and it can be significant. Don’t be dazzled by larger buyers that have done deals as many of them do not win in competitive bidding and their ability to consummate deals can change on a regular basis depending on their credit facility, equity structure and financial performance from past acquisitions. They won’t tell you the truth either!
Secondly, you have to prepare for the sale process. The worst mistake we see agency owners make is responding to a buyer’s solicitation when they are unprepared for the transaction process. The owner presents a limited amount of information in response to the buyer’s request, the buyer submits an offer, gets into due diligence and then finds details that were omitted and uses those details to renegotiate. That is a fact based on many years of experience. I would wager that 9 out of 10 deals initiated this way either get renegotiated or end without a deal being consummated.
So how do you find out what your agency is worth?
Call us. There is no need to guess on an answer. We’ll offer a free, comprehensive valuation of your agency. You’ll receive a detailed report performed by an experienced, certified valuation analyst. And when you are ready to sell, we will be your advocate and guide you through our professional sale process to ensure that you realize the highest market value for your agency.
Posted by: Michael Mensch, CBI, M&AMI and Managing Partner
Direct: (321) 255-1309