New Year, New Opportunity to Focus on the Top 5 areas that will Improve the Value of Your Agency
As the calendar turns from 2023 to 2024, many of us undertake the age-old tradition of creating New Year’s Resolutions. In honor of that tradition, we have created the top 5 opportunities to improve your agency value as you solidify your plans and goals for 2024.
1. Revenue Growth
YOY revenue growth is one of the leading indicators of the health and success of any business. In the IA system, there are two primary ways to increase revenue growth – organic and acquisition. Both methods should be considered and have a plan and goals for how they are going to be executed.
In 2023, the IA system grew by 8.5%, and Best Practices Agencies grew by 9.5%. Given the increase in premiums throughout last year and expected in 2024, your agency should experience positive growth by just retaining your existing business and minimal new business growth efforts.
In addition to the organic growth experienced by IAs in 2023, there were over 800 M&A transactions reported in the IA system. While acquiring an agency is a significant undertaking, it is a proven method of growing agency revenue. If done successfully, the acquisition could be your quickest way to grow agency revenue. It has certainly been embraced in the IA system in the past 10 years with over 6,000 M&A transactions taking place during that time.
2. Retention
The agency’s YOY retention rate is another leading indicator of health. The IA industry benchmark is 90% retention rate. If your retention rate is lower than that, it is a red flag to any prospective buyer.
Focusing on how you can retain as many of your current clients will help preserve the value you have already built in your agency and give you a solid foundation to grow the value. Reviewing your current renewal policies and procedures, proactive and consistent client communication, conducting audits and spot checks with your team and focused training with your staff and carrier partners may help improve retention rates.
3. Carrier Concentration and Loyalty
In the current hard market, carriers are making difficult decisions to stabilize the financial strain they are experiencing from triple-digit loss ratios. Those business decisions include restricting new business, significant rate increases, changing their appetite on certain lines of business, reducing commission, and in some instances terminating agency relationships.
Having too much of a good thing can turn out bad if it spoils. Many agent-carrier relationships are getting stronger during this hard market, both are learning who their true partners are. However, many agent-carrier relationships are changing for the worse.
Assessing your current carrier lineup, ensuring that your book of business is properly balanced with your carrier lineup, and working on solidifying your carrier relationships during this time is critically important. It is easy to say the carrier never visits or reaches out to us, but you have to ask yourself how often are you proactively reaching out to your carriers. Every relationship goes two ways.
4. Profitability – Margin and Writing Profitable Business
The focus on profitability is twofold – improving your net operating profit and writing profitable business. First, we will review the agency’s annual operating profit margin. The average profitability margin for independent insurance agencies is approximately 25%. If your agency is operating at a higher margin, that is great, focus on how you can enhance it by 1 or 2 more percentage points.
However, if your agency is operating at a lower margin than that, then it is time to seriously consider what is impacting your profitability, particularly if you are preparing for an ownership transition in the next three years. In this instance, 2024 is the perfect time to focus on cleaning up your P&L and removing unnecessary business expenses. Agency value increases as the profit margin does. Aside from growing the revenue side of the business, there are several activities an agency owner can undertake to assess whether they could operate more profitability without sacrificing business. This would include reviewing staffing levels, travel and entertainment expenses, technology, marketing, subscriptions, facilities, and other expenses.
The second part of this point is focusing on writing profitable business, particularly with key carriers where you qualify for profit sharing. While much of the profit-sharing equation is outside of your control, you can implement policies and procedures in the office to ensure that your producers are prospecting business that fit the agency’s appetite, are mindful of where they are placing new business and doing appropriate field underwriting to know where a risk belongs.
Agencies average between 6 – 10% of their annual revenue from profit sharing. The profit-sharing models have become increasingly more complex and weighted towards growth. That being said, subscribing to the theory of growth at all costs could cost the agency dearly if the growth is unprofitable, burns your best carrier relationships, and costs you a portion or all of your profit-sharing bonus. Agencies looking to enhance value should consider the “growth with integrity” approach being mindful of hunting prospects that would be considered good risks for your favorite carriers.
5. Perpetuation Plan and Development of Next-Generation Talent and Leaders
One of the biggest risk factors negatively impacting agency value is the lack of a viable perpetuation plan and the failure to develop the next generation of talent. It is a major red flag to have an aging owner and lead producer in the agency looking to sell with a short window before retirement. These exits need to be planned years in advance to maximize value.
Hiring and developing the next generation is another activity that needs careful consideration and planning before executing but it can start with as simple as hiring a summer intern, proactively recruiting for talent even when you are not looking, and being intentional with identifying and developing the talent currently in your agency.
Agencies with perpetuation plans and next-generation talent can be worth as much as 25% more than those without.
If you are looking to grow your agency value in 2024, we encourage you to connect with Jeff Smith, JD, CIC at jeff@iavaluations.com so we can have a conversation about your situation and help set you up for success in increasing your agency value.
About IA Valuations and Agency Link – Founded in 2017, the IA Valuations team has performed over 250 valuations for independent insurance agencies across the U.S. Our advisors have 25+ years of experience guiding agency owners on maximizing their agency value, planning, and legal needs for ownership transition. In addition, IA Valuations has provided perpetuation planning, financial modeling, and business planning for independent insurance agencies. Finally, IA Valuations has advised dozens of agency owners on selling their agencies through our Agency Link process. Agency Link is a platform that connects buyers and sellers to further the growth and strength of the IA system. To learn more about IA Valuations, please visit IAValuations.com or contact@iavaluations.com.
The information provided in these documents is general, in nature and shall not be construed as personal legal, tax, or financial advice for your situation. Please contact@iavaluations.com to discuss your personal situation.
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