When you think about mergers, acquisitions or selling a business, it’s hard not to think about numbers. If you hear about the sale or purchase of a company on the news or imagine selling your own business, your mind is immediately drawn to the headline numbers. You ask; ‘How much is it worth?’ or ‘What is a fair valuation?’
What you can learn
Numbers can teach us a lot about our business and about the potential value in a sale. However, as an agency owner approaching the sale of the business, getting caught up in numbers can be dangerous. Beyond the valuation, owners get drawn to other figures like tax rates or market conditions. The recent severe weather on the East Coast is expected to force a further increase on Property and Casualty rates, rates that increased by 3% in December, according to some reports.
Increasing premiums is good news for agency revenues, which makes it good news in the eyes of many sellers. More revenue means a greater valuation, or at least that’s the theory. In reality, any prospective buyer will factor increased premiums into the valuation. Buyers work hard to define the value in an agency, so they will adapt their strategy to fit market conditions. That knowledge doesn’t stop owners looking to the market when deciding when to sell.
The 5% increase in the Capital Gains Tax rate in December 2012 was another number that encouraged a lot of owners to rush out and seek advice about selling before the tax deadline. We even heard tell of a few brokers encouraging owners to push deals through before the end of 2012.
A full year later and we can see that the numbers didn’t have the effect those owners, or brokers, expected. New figures suggest that sales of businesses, of any kind, increased by 41.7 percent in the third quarter of 2013 over figures from the previous year. In all the rush to beat the tax deadline, there weren’t as many deals done as there were last year when there was no tax change due. Clearly the numbers weren’t an indication of huge opportunity.
Don’t ignore the numbers
This is not meant to suggest that you ignore the numbers entirely. It is vital that agency owners understand their market and stay on top of financial trends. However, we have encountered owners who focus entirely on those numbers, without considering the other factors involved in selling your agency.
When you sell your agency you will discuss your future role, you will decide on the future of your employees and you will create a long-term plan for your existing client book and product offering. If you go into that negotiation with multiples, market conditions or the valuation as your only concern it will be difficult to come out with a rounded deal.
Successful deals
The lesson here is that the most successful deals are mutual agreements between two parties who find a shared vision of the business’ future. These deals are not financial jousts that offer the best deal to the one who makes the smartest use of the numbers. The numbers are an important part of selling your agency, but there are other vital factors involved. When you consider selling your business, make sure you understand all of the important factors, not just the headline numbers.
The Value of Your Agency
As a firm, we believe an accurate valuation is part of our responsibility and the foundation of a great working relationship – even if that is further in the future. Because of this we, unlike most firms, offer free insurance agency valuations for those who qualify. Click below to apply!
