This article was written by David Tralka, president and CEO of InsurBanc, and originally published by Insurance Journal.
Whenever agency principals get together, the topic of agency valuations is sure to come up. Someone will start talking about an agency that sold at an unbelievably high multiple. Pretty soon, everyone’s nodding their head and saying there’s a killing to be made selling your agency.
These types of discussions tend to be long on conjecture and short on facts. They remind me of the stories fishermen tell about the big one that got away. Rarely does anyone know the actual price that was paid for an agency. And even if they do, that doesn’t mean yours will sell for the same amount.
As we start a new year, let’s all resolve to more fully appreciate what creates agency value and how markets determine price. Mergers and acquisitions may still be going strong, but the steady increase in interest rates is likely to act as a governor on prices going forward. So if you really want top dollar for your agency when it’s time to sell, you need to realistically take stock of your firm and not let those dollar signs go to your head.
There are different ways to look at value. Some buyers pay attention to revenue multiples, essentially commission income. Others look at EBITDA (earnings before interest, tax, depreciation and amortization), or cash flow.
I’ve always felt the revenue approach is flawed because it doesn’t take into account the cost of generating income. If you’re spending a dollar to make a dollar, that’s not a very efficient operation. The cash-flow model is a better indicator of the quality of an agency’s earning power. That is, your agency’s value comes from your ability to drive sustained cash flow over time.
Regardless of how you measure value, higher-performing agencies will always sell for a premium. It’s no different than when the best maintained house in the neighborhood goes on the market. You know it’s going to sell for top dollar.
Which brings me to another point: The market is the price at which a buyer is willing to pay a seller. You may think your fixer-upper agency is worth a lot more, but if no one wants it at that price — well, it’s not really worth that, is it? Those high prices you keep hearing about are usually when a large strategic buyer has purchased an agency because it folds nicely into its portfolio. They may not apply to your situation.
So how do you increase value so you will get the highest price possible? Here are six tips:
1. Find out what your agency is really worth.
Hire a professional to help you assess your firm’s value. This will give you an objective starting point for improving your agency.
2. Build value in your agency.
Invest in new office systems and improved servicing. Hire top talent; add producers. This is called organic growth, or sweat equity, and it’s the best way to increase the value of your firm.
3. Buy something.
You can also grow inorganically by acquiring a book of business or merging with a smaller agency. Look for opportunities that make strategic sense and that you can afford.
4. Become more efficient.
Not every revenue dollar is equal. Look for income streams that don’t cost as much to support. Consider ways to automate processes and streamline marketing and servicing. Reduce unneeded expenses. With each business decision, ask yourself: “How does this affect my cash flow?”
5. Groom your successor.
Have a plan for how you will transfer ownership.
6. Don’t wait.
Time is a big factor in creating value. The more time you have, the more value you can create. Ten years is a good window. Don’t wait until you’re ready to retire.
Country-club multiples, as I like to call them, are fun to talk about — but they should never form the basis for determining the value of your agency. Resolve to get real about the worth of your agency in 2019. Don’t let opportunity slip away because you failed to build value in your firm.
Gain an unbiased understanding of your agency’s value using OIA’s Valuation Services.