In today’s post we discuss the fall of several stocks and explain why it is best for insurance agency owners to sell their businesses when things are going well.
There was some surprising news last week when it was revealed that the stocks of thirteen large companies in the Standard & Poor’s 500 have fallen considerably, which is expected to have a knock-on effect on corporate profitability. These include gold producer Newmont Mining, travel website TripAdvisor, video-streamer Netflix and e-commerce company Amazon.com. According to a USA TODAY analysis of data from S&P Capital IQ, published on April 14, 2015, their stocks have either decreased or come to a complete standstill since the market peaked on March 2, 2015. Interestingly, this was after the stocks had soared 20% or more up until that day. It seems that investors have become more cautious in the lead up to the release of the first-quarter earnings results. What is most shocking is that even the market itself has fallen. The Standard & Poor’s 500 was 2.8% on March 2 but it has since decreased to 1.2%.
Company owners are probably scratching their heads wondering what went wrong. In the case of Newmont Mining, they were having one of their best years ever when it all came to a screeching halt. Shares had soared 37% higher between January 1 and March 2 but are now down 13%. This was a result of the sudden strengthening of the dollar, which reduced gold prices and meant that consumers were less likely to purchase gold as a means of financial safety. Similarly, TripAdvisor has seen their stocks fall sharply. Company shares had been up 22.2% at the end of February but fell to 8.4% on March 2 and have remained at this level. Even successful online retailer Amazon.com’s stock is experiencing difficulty. It started the year on a high and its stock was up 24% on March 2. However, it has remained stagnant since then as investors expect the company to post an adjusted loss of 18 cents a share.
Like most things in life the market is extremely unpredictable. It could very well happen that the stock of these companies will greatly improve very quickly once the market settles down. Nevertheless, in the meantime investors will remain vigilant and this will bring down the value of these thirteen companies. This is what the company owners dread the most. They want above all else to keep their successful reputations.
Insurance agencies are more the most part, small independently owned companies. The question is, Does the value of these agencies go up and down or remain stable? Since there are only a few publicly traded agencies, this question can’t be answered. Does the value of these agencies go up and down as a result of changes in the stock market, because of the market’s opinion of the industry as a whole or because of events at that specific agency? The answer is yes to all of these questions.
We believe that agency owners often have unrealistic views of the value of their agency. If they agency is worth $5 million, they think it should be worth $6 million. We like to ask for the reasons behind their assessment. Their opinion is often based on a feeling rather than on hard facts. I don’t want to burst everyone’s bubble, but not every agency is worth three times revenue. In fact, there are only a few agencies that can achieve that value. Those agency are either very large, have extremely high profit margins or they have allowed the buyer to consolidate their operation and take significant actions to reduce costs.
There are two things we want you to consider. The first is that valuations change constantly. The single largest factor is the profitability of the agency. The second factor is the appetite for independent agencies. It’s the basic law of supply and demand. Don’t be fooled into the fact that your agency will always retain its’ value. If you want to agency to be more valuable, there is a simple formula. Grow the agency and enhance the profit margin.
