risk vs reward
7 min to read

Value Drivers in an Insurance Agency

In the last few months we have been completely inundated with valuation work for principals, banks, and buyers – part of the reason why I haven’t actively been blogging.  Right now, we are averaging about 5 reports a week and have had to hire a few more staff to keep up with the pace.  By now, everyone should have heard that we are in the most active M&A market in a long, long time.  You should also have heard that valuation multiples are at a historic high with nearly no ceiling left – any higher and deals will cash flow negative after debt service.

8 Factors That Drive Value in an Insurance Agency

Our team has also been assisting with 3 or more M&A transactions per month, which likely makes us one of the top agency/broker M&A firms in the country.  My point being that we have about as good of an understanding of agency value as any one. So what drives value in an insurance agency?  I’ll break it down to eight categories that we evaluate as well.

1. Revenue

The key value in an insurance book of business lies in the recurring nature of the revenue.  Buyers evaluate revenue streams on risk – agencies with smaller accounts that have higher persistency rates and require less “touches” are lower risk than the opposite and hence command a higher value.  Revenue with larger regional and national carriers is also of higher value because buyers can typically increase their compensation as they grow in size.  Additionally, having revenue concentration with a half dozen companies is of more value than when it is spread evenly across many companies because it is less work to transfer the book of business and is easier to manage.

2. Earnings

Regardless of what people in the industry quote as purchase price as a multiple of revenue, all buyers are looking at their potential return on investment and equity, which ties to cash flow.  One agency operating at a historic 35% EBITDA margin is more valuable than another that has been operating at a 20% EBITDA margin.  While a buyer could certainly cut expenses to improve margins, doing so always comes with a risk of losing revenue, so having a track record of profitability increases the perceived value.

3. Clientele

Most buyers are looking for the golden goose type clientele – customers that have assets and a need for multiple lines of coverage.  More policies and higher premium yields more revenue per account.  Customers that are of low to average means, whether personal lines or commercial, are more likely to shop their insurance and require handholding than those unaffected by rate cycles.

4. Personnel

Nearly every agency owner we speak to relays the challenges they have in finding good staff or producers because any one that is good typically already has an employer.  Agencies that have tenured, experienced, and productive staff that are compensated at a market rate are of higher value than those that don’t.  One way to know how good your team is lies in your ability to step away from the business without chaos following.

5. Agreements

Priority #1 for agreements is making sure that your staff and producers have all executed employment agreements that include clauses for non-solicitation, non-piracy, etc.   For additional information on this topic, see my prior post.  If you have not, give me a call as I may have a trick that could help you overcome a deficiency.  Secondary to employment agreements are other long-term obligations such as leases and advertising contracts.  It is typically best not to enter into long-term contracts as you lead up to a sale of the agency, as buyers may not want to assume them.

6. Growth Opportunities

From a buyer’s perspective, growth opportunities lie in two areas (1) organic, such as cross-sell opportunities, and (2) scalability, based on the current marketing and sales processes.  For a buyer to see an organic growth opportunity, it must be obvious such as a monoline homeowner’s book built on a strong realtor referral network.  Scalability should be obvious in the agency’s historical growth trend.  We have evaluated hundreds of agencies over the years, and likely less than 5% genuinely have a readily scalable business model.

7. Geography

Realtors made famous the statement “location, location, location”.  Location matters in insurance too.  Agencies in high population and/or high-income demographic markets sell for higher multiples because there are more local buyers and better opportunities for growth.  Large brokerages in small markets even often sell at lower multiples than small ones in high population areas.

8. Markets

I have made mention of the value of having revenue concentrated with preferred carriers.  Here I am speaking of the quantity and quality of the agency’s direct appointments.  Having direct appoints is obviously preferred to placing business through brokers, since the policy has to be resubmitted each year and compensation is less.  While aggregators and cluster groups have become popular due to the challenge of agencies obtaining appointments, such relationships create difficulties in a sale.  Most aggregators have break-up clauses and fees detailed in their agreements.  Many also make it difficult for a buyer to assume the book of business, which can devalue the book or turn off buyers.  Review your agreement and make sure you understand how the break-up process works.

While I haven’t necessarily given away the secret as to what an agency is worth, the intention was to drive home the point that buyers evaluate opportunities on a risk/return scale.  Overall, agency value multiples are up about 25% from where they were 3+ years ago due to the high demand.  As an owner, you have no influence over market multiples.  All you can do is work to reduce perceived risks and increase profitability as you prepare for a sale of the business…that and hire an experienced advisor to assist you with the sale, so the agency is marketed to multiple, strategic buyers, which ensures that you receive the highest value.

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