m&a advisor going over agency valuation with seller
5 min to read

What is the Purpose of an Agency Valuation?

Regardless of whether you plan to buy or sell an agency, getting an agency valuation is a smart financial move. When you know what your agency’s worth now, you can make more data-driven decisions about your company. You can take advantage of opportunities and you can better position yourself in the market.

Let’s look at the purpose of an agency valuation.

Understanding the Total is Greater than the Sum of Its Parts

Some agency owners may think they know the agency valuation on an ongoing basis by evaluating their profit margins but, as you know, this will only give you a piece of the story. Common methods like applying revenue multipliers can give you a ballpark for reference, but this isn’t a number that anyone should be “taking to the bank” or making major decisions on.

The value of an agency is more than the sum of its parts. If you’re considering buying or selling agency, you need to make sure you have a true agency valuation. Two businesses with very similar revenues can have very different values in the real world.

Agency valuation includes things like:

  • What lines of business the agency is in
  • Loss ratios within the company
  • Insuree acquisition costs
  • Retention levels
  • Cash flow

Getting a Value for the Intangibles

Getting a true agency valuation means that you measure the aspects of the agency that are hard to quantify. Just because you can’t easily measure these things, doesn’t mean you shouldn’t. Many of these intangibles can have a big impact on the value of your agency or an agency that you’re considering buying.

Some of the intangibles include:

  • History of growth in various markets
  • Potential for expansion into new markets
  • How your LOBs might complement another agency’s LOBs
  • Operational efficiencies
  • Investments in employee brand and education
  • Morale & Turnover
  • Management Experience
  • Niche specialties
  • Market trends and variables

Making Smarter Decisions About Buying and Selling

What’s your agency really worth the current market place? What’s it worth to a particular buyer? Should you buy another agency? Does the price they want for it align with what it’s really worth?

Agency valuation will help you answer these questions in very quantifiable ways. When you have a clearer fair market value, you can make the right decision for you and your agency.

Establishing Firmer Ground on Which to Negotiate with a Buyer or Seller

When you have a more thorough agency valuation, you will be in prime position when you sit down at the negotiating table. Rather than just having a loosely contrived valuation in your tool belt, you have a proper valuation of your agency or the value of an agency you plan to acquire.

With this value in hand, you can ensure that you’re getting the best deal and you’ll know when it’s a no-go and time to walk away.

Showing You in the Best Light to Lenders and Investors

When you need to raise capital or get a commercial loan, you need a real agency valuation to demonstrate that you and/or the acquisition is a good credit risk. You do this by appropriately evaluating both your market value an fair market value.

Lenders and investors need to see that you understand what you’re doing and have the in-house skills needed to help them earn the right return on their investment.

A thorough agency valuation gives lenders and investors get a better picture of the opportunity that you’re presenting to them.

Just in Case

Having a current agency valuation prepares you for the “just in case”.

Sometimes you never really planned to sell, but a fleeting opportunity arises. You’re ready. Other times the unthinkable happens: divorce, death or partner, lawsuit, major legislation shift.

In these cases, having a business valuation ready, will allow you to act fast to seize opportunities or mitigate damages.

Getting an Agency Valuation

Getting an accurate agency valuation will give you a better understanding of where you stand. With it, you can make more data-driven decisions for the future of your company.

But arriving at an accurate agency valuation requires significant skill and experience in the insurance agency valuation market. Working with an agency brokerage consultant is the smart choice. If you’d like to learn more about how we can help you obtain an agency valuation, contact us today.

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