3 Reasons Why An Agency Valuation is More than a Number

Understanding your agency’s value is far more than a number. It is one of the best ways to work on your agency — not just in your agency.  A valuation is designed to uncover opportunities for resource reallocation, mitigation of risk, and you use the information included in the report to create a plan that will maximize your agency value.   In fact, a Fair Market Value Report for your agency may be one of the most valuable insightful tools that agency owners can invest in.  Traditionally agency owners have considered obtaining a Fair Market Value of their agency to support a transition in their agency – meaning the timing of obtaining the report has coincided closely with the impending external sale or internal transition. This philosophy limits both the flexibility and opportunities for the buyers and sellers of agencies because the no longer have time on their side.  I you understand that this report should be used more as a planning tool, you will greatly increase your ability to maximize your agencies value.

Reason #1 – Identifying Opportunities 

As part of a Fair Market Valuation, our team uses industry standards to create a proforma financial statement for your agency.  In English this means we look at all of the expenses in your agency, adjust your expenses for each category using standards that exist in our industry that have been established based on a percentage of revenue.  This exercise identifies areas of opportunity in the agency.  You will see where you are allocating too many resources and where you may have opportunities to reallocate resources in order to increase your growth and profitability of your agency.  Some of the most common areas of opportunity are:

  • Employee compensation
  • Marketing & Sales expense
  • Facility costs

Many agencies learn how their resource allocation compares to the industry standards and it spurs a conversation about the opportunities to reallocate those resources. Having this awareness and time to implement changes such as reducing your facility costs, investing in marketing and/or technology, or adopting a compensation strategy that aligns with the growth goals of the agency will increase the chances that the agency will be able to positively affect the value of their agency.  All of these changes require planning and time to implement properly, but the impact that they can have on an agency’s value is significant.  This means that agencies that realize and act on these opportunities will be more likely to maximize the value of their agency at the time of an external sale and also better setup the future owner for success.

Reason #2 – Identifying and Mitigating Risk

After we create the proforma financial statement for your agency we are able to calculate the EBIDTA (earnings before interest, depreciation, taxes and amortization) as well as the profitability of the agency.  At that point we focus on the risk factors that exist in the agency. The multiples that are applied to an agency are determined based on the agency’s risk factors.  While there are several risk factors to consider the number one risk factor in an agency is the concentration of ownership in one person, at or beyond the age of retirement with no plan for perpetuation.  Additional risk factor include growth, and other areas of high concentration and/or lack of diversification within the agency.   When an agency has a high concentration of their revenue tied to one singe account, one producer, one carrier or a particular niche the risk in that agency is much higher than those that are well diversified.  While many agencies are willing to accept these risks in their agency for various reasons,  few have a good understanding of what the existence of each of those risk factors translate to in terms of the overall value of their agency.  Here is an example:

There are two agencies that both write a $1M in revenue, have an overall EBIDTA of 22%  and an EBIDAT of 22%.  The difference between these two agencies lie in their risk factors.  Agency A is well diversified, and Agency B is not.  As you can see Agency A in the example listed below Agency A is worth 50% more that Agency B.

Agency A Agency B
Revenue  $1,000,000 Revenue $1,000,000
EBIDTA 22% EBIDTA 22%
Perpetuation Plan Yes Perpetuation Plan None
Growth 5% Growth Flat
Producers 3 evenly split Producer split 1 owns 80% of total book
Carriers 25% in each of their top 4 Carriers 80% with top carrier

 

Agency A Agency B
Revenue  $1,000,000 Revenue $1,000,000
EBIDTA 22% EBIDTA 22%
EBIDTA $ $220,000 EBIDTA $ $220,000
Multiple 7.5 Multiple 5.0
Agency Value $1,650,000 Agency Value $1,100,000

 

Understanding the risk factors in your agency and taking steps to minimize those risk can have a significant impact on your agency’s value.

Reason #3 – The Gift of Time

All of the insights in the world will do you no good unless you are able to take action, and time is the one factor in every agency that provides the current owner, future owner the flexibility to take the action necessary to maximize their agency’s value, create a plan for a smooth transition and thoughtfully implement that plan.  If you are considering selling your agency externally it is in your best interest to make the necessary changes to maximize the value of your agency by the time you wish to sell.  If you are considering an internal perpetuation, there are several factors that require time to resolve including the current tax structure of the agency, determining a buyout period that is reasonable for both the future owner, current owner and the agency overall.  Other considerations include client relationship transitions, carrier concentration considerations, operational responsibility transitions and investments to drive growth. With time on your side, the value of your agency can be positively impacted in a significant way. For more information about how the team at Ohio Insurance Agents can help you understand the value of your agency and grow your agency’s value please visit our website at www.Ohioinsuranceagents.com or contact Carey Wallace at (614) 552-3063

 

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