For Sale for Insurance Agency Buyers?
Insurance Agency Buyers, what is the best insurance agency type to buy? Standard or Non Standard?
The reasons can be many. For example, if a buyer is looking to fill a quota or increase a certain book
of production count, standard versus nonstandard agencies would come into play.
So, if a buyer is looking to acquire an agency with more of a preferred book,
this marketplace would not fit their interest.
This is because the buyer may need to increase premium with a certain carrier,
one that has more of a preferred agency background.
The nonstandard agency may not hit this target due to the lack of a preferred base.
However, if a niche area was needed to fill in agency production,
this nonstandard agency option would definitely be in the lineup.
It can fill the lag of production in a specialty or niche insurance group, such as dealership insurance agencies.
Market Diversification? – Agency Market Reach
Another reason is, if a buyer may be looking to diversify their product reach so,
do not discount your agency if you are a nonstandard one.
If you can show:
- good loss reports,
- decent size residual book of business,
- with a good employee base, you might have the golden ticket!
Insurance Agency Location – Market Pull
Also, keep in mind, that the location of the agency is also another reason or factor in your
buying decision process. This is because depending on
the business’ physical location, you may attract other buyers.
These new Buyers may be perfect to fill in any gaps in key production areas.
So, if you do have a retail insurance shop, you may want to consider expanding that market online.
It will enhance your location territory and attract brand new users to your online store as well.
You can funnel other lines of potential buyers on both fronts.
Agency buyers, plus insureds looking for a local insurance agent. So, why not capitalize on both channels
A myriad of Questions – Insurance Agency Overview
So, as you can see, there are different questions that you need to run through your mind,
because more than likely, they will be considered in the process
of buying and negotiating if you decide to sell.
So, for example, what type of coverage is most of your agency book made of?
Here are a few to add to the list:
- Is your book made up of personal lines coverage mostly,
- or full coverage policies,
- or just the standard liability policies?
- Are these policies bundled or packaged with other product types?
- Any other services provided in your agency, like vehicle registration services?
- Are there any additional agency fees tagged on outside of commission earnings?
- What top carriers are you placing your lines of business through?
- Are they direct carriers or through a general agency?
- What is the average policy life cycle of a client?
- The loss ratio of the book, on a rolling 3-year period at least.
- Itemized for each product line. For example, nonstandard insurance book, preferred book, benefits book, commercial book.
- Age of Book and Agency?
This is when the age or length of the actual agency comes into play.
For example, if an agency just started less than a year ago,
the chances of having a smoother sale would be less than an established agency.
You can understand why. There is no track history for a buyer to measure future
success as a starter. Plain and simple. Everything leads back to this reason.
How can you predict future profits, if you cannot measure past results?
So, as you can see it becomes a very thorough checklist that a seller must incorporate into this process.
But this checklist is not final, it is a work in progress.
Conditions might change, and parties may disagree on the final terms.
Anything can happen with these types of deals.
Nothing is set in concrete until signatures are confirmed, and money exchanged.
The General Rule of Thumb
Yes, most owners do know about the general rule of thumb when it comes to valuing their insurance agency.
This formula is a quick method of adding a number to
your earned commission and whahlah, there is your valuation number.
Regardless, the multiple numbers in the equation, this is not the best way to determine the
value of anything. This is because this final number does not factor in any external
conditions that may affect the actual worth or value of the business.
As an example, what if a firm that was determining the value of their
business had an outstanding debt against the business.
In addition, to this debt, what if each year the business was slowly losing money and employees.
If you were a buyer unaware of the backstory on this sale, you may
just pay the valuation number, figured in by “multiple” times the earned commission amount.
This, however, could be detrimental to a buyer who is unaware of these
external conditions affecting the actual value of the business.
The actual valuation of a business must consider everything involved in
the process, to be accurate in the total assessment of the number.
This is only fair to the marketplace, and statutory law,
also may dictate the standard of value that must be used.
Agency Rule of Thumb Limitations
The limitations of the rule of thumb theory assume that uniformity of the businesses
exists within an industry. This generalization fails to account for the differences involved in the process.
The differences in this equation are what count.
Just for illustration purposes, let’s say you have 2 firms looking to sell their business.
If both firms have the same revenue amount, would it be safe to say they have the same value?
Before we answer this question, let’s ask a few questions of our own to determine the answer.
Q & A – Valuation
For example, a great starting question would be, “how was the revenue amount for the following year?”.
This way you can see if the business is on the incline or decline.
Another question to better answer your initial question would be, how’s the debt ratio.
If the business is taking on higher debt levels, then this eats away from the value of the business.
Also, are there any current or pending lawsuits for the business?
Any open lawsuits can comprise the value of the business, not to mention the legality of its operation.
There are other considerations to consider.
For example, how is the workforce? If you are a prospective buyer of the business,
this question is important to you.
You may want to have a smooth transition and maintain the current workforce.
However, if the current workforce has been diminishing or the work morale down,
you need to know about this before you purchase.
This is an important internal factor that can cause concern and affect business value.
Numbers don’t Mean the Same Value
So, let’s try this again, do you think a firm is worth the same if one firm has no debt,
a happy and growing workforce with an increasing revenue base from a firm who has
more debt than revenue, a declining workforce and outstanding tax notices.
The answer is clear and straightforward. Therefore, this rule of thumb formula is not
the best measure for determining the value of a business.
As you can see, there are far many more components to this valuation equation than
just multiplying a number to the base commission earned.
As you can see, there are limitations to this equation method.
- risk factors,
- profit margins,
- and the bottom line, balance sheets
So, do not blithely utilize this method in any situation where the real value
for the business matters. You will be terribly disappointed.
This is because this equation fails to see that values can differ.
This may be no surprise to most,
but others may not quite understand the entire picture.
Insurance Agency – Subjective Valuation System
This is because a business valuation system is subjective. Therefore, in some cases
2 appraisers are brought in using the same exact method.
Plus, these two appraisers have access to the business reports entirely to review and conclude.
The end numbers should be close, thus having 2 appraisers’ asses
this valuation process is beneficial for all parties involved.
The appraisers will ask a series of questions to help better determined the value of the business.
Some questions will be asked to see if the whole business entity will be involved
in the final number, or, if only a partial interest of the business or book of business.
If the whole business entity was being included in this number process,
it would include the value for the operation of the business.
Book of Business?
This operation is also known as the “book of business”.
This is considered including the tangible net worth from the balance sheet.
If only a portion of the business were to be valued, then discounts would need to be considered.
These discounts would be for lack of control over the marketability or premium control.
There is a percentage that is calculated for these discounts so, you will want to refer
to your business broker for further information and market guidance.
Standard Value of Measure
Another external condition to consider and establish is the standard value.
- This standard value is determined by the fair market benchmark.
- This valuation standard is used mostly for this type of equation.
- There are other standards available. Some of which are Hypothetical Value and Investment Value.
Agency – Actual Business Value Determined
This is the process where the actual value is determined, exciting stuff.
After all the initial orders are in an affair, the appraiser
will focus on specific components of the work project.
It will be their task to review the financial records of the agency.
This review will include looking at current industry standards and compare them to historical trends.
This is where the age of the agency becomes a major player.
You can only compare historical data if you have a past to compare it too.
In some cases, a brand-new insurance agency may want to sell their business.
But, it is very difficult with little traction or track history to compare.
Historical Trends and Reporting
Looking at past and current trends and analysis,
helps to provide insight into the strength of the financial backbone.
It also will reveal any weaknesses the business may be susceptible too.
There is a form that is produced and generated to help
determine the truly sustainable profitability of a business.
This form is commonly referred to and known as “a pro forma financial statement”.
The keyword in this mix is sustainable. This will ensure future profits,
or at least a consistent return on an agency’s investment.
Closing Review – Appraisers Assessment
In this review, the appraiser should review the operation of the actual business.
This evaluation of the business would expose strengths and weaknesses
within management and the internal communication system.
The production reports and sales reports would also be factored into the valuation process.
This would help determine how productive the staff is for the profile of the book and business.
Once all these reports and documents are reviewed by the appraiser,
a valuation method to calculate would be used to place a value on the business.
In most cases, the normal method would include, price to earnings ratio method,
Discounted Future Earnings Method and Capitalization of Earnings Method.
Tangible Net Worth
If you are an agency owner, then you probably understand that any excess cash or hard assets
like a building structure, would increase the value of a business, and in return lower the debt ratio.
Although, some items are listed at the time of the balance sheet, or are just not fully understood.
In some cases, some items are not even known that they should be factored into the balance sheet.
Once all these items are factored incorrectly into the balance sheet, and adjustments are made,
the business’ tangible net worth is determined.
This is processed by subtracting the liabilities from the assets column.
This number, regardless if it is negative or positive, is combined to
the actual value of the business operation or book of business.
Now that you have explored the
different insurance agency types, you can begin your next phase, discovering new business opportunities!
Find a business broker near you. They can help walk you through the process, and ensure
everything on the back-end of the deal is in order!
Building relationships are, the key to building lasting business ventures!