assessing risk of insurance agency
5 min to read

Insurance Agency Valuations: Assessing Risk Factors

Agents reach out to us on a regular basis and ask: “what multiple are agencies going for?”  I had someone just last night message me through our website chat bot.  He or she wanted a quick answer about the current multiples.  I responded that it’s not a simple answer because there are a lot of factors that drive value in an insurance agency.  I offered to speak on the phone and provided my email address.  Whomever that person was, they didn’t seem pleased with the response and exited the chat dialogue.

Let’s draw the comparison to someone calling your office and asking for an immediate answer on what their premium would be.  With a few minutes of questioning, I’m sure that most agents could give an estimate to a client prospect.  That guess would likely be +/- 20% of the actual premium, depending on how many questions the person was willing to answer and how truthful the prospect was with their responses.

Comparatively, we certainly know the market well enough to do the same.  How meaningful would it be to have a number that is +/- 20% though?  If you are thinking of selling the agency, would you take 20% less than it’s worth?  If you are thinking of buying an agency, would you want to pay 20% more than it’s worth?  Probably not!

Whether someone has hired us for a valuation because they are contemplating selling, buying, or lending money on an acquisition, it is important that we be thoughtful in our assessment of the market value because it has a monetary impact on multiple parties.  Yes, the agency’s gross revenues and profit are important, but there are many risk factors that are considered during the valuation process.  I have even touched on this in the past but let me go into more detail.  For our valuations, we consider 15 different risk factors.  Those include:

  1. Geographic location
  2. Revenue persistency
  3. Revenue diversity
  4. Quality of the book of business
  5. Carrier relationships
  6. Growth trend
  7. Profitability of the business
  8. Ease of management transition
  9. Administrative, sales and support staff
  10. Customer demographics
  11. Marketing and sales processes
  12. Organic growth opportunities
  13. Contractual agreements
  14. Automation and record-keeping
  15. Longevity and company branding

We score an agency in each category as compared to industry peers.  For example, an agency in a major metropolitan area will be of higher value than one in a small, rural town, so the score in the category “geographic location” will be much higher for the first agency.  As another example, an agency with a 95% client retention rate will be of higher value than one that has a 65% retention rate so the first agency would be scored much higher in the category of “revenue persistency.”

In our evaluation process, each of the 15 categories is weighted based on their relevance to what drives market value.  For example, how long an agency has been in business is of lower importance to a buyer than something like the quality of the agency’s book of business, so “longevity and company branding” is weighted lower than “quality of book of business” in the final cumulative score analysis.

Obviously, the scoring is subjective since it is based on the valuator’s opinion, but we have evaluated over 1,000 agencies, so our base of reference is extensive.  Additionally, we pull statistics from other sources such as the Big “I” Best Practices Study and the National Alliance’s Growth & Performance Standards and incorporate those into our assessment.

The Bottom Line

Valuing an insurance agency is more than just applying a multiple of revenue or EBITDA.  As with underwriting an insurance policy, a proper evaluation looks at a variety of risk factors that influence the value in the eyes of the marketplace.  Agency owners should regularly examine their operations to reduce their risks in these fifteen categories.  Doing so will help you build a better agency and one that will be worth a lot more money when you eventually exit!

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