Even though it is rarely the ultimate deciding factor in the sale of an insurance agency, the final valuation is the one factor every owner wants to know about. Owners ask us how much we think the agency is worth. They ask how they can increase that number and they ask what might happen to drive it down. All of these are natural questions because, no matter what other factors are involved, the final valuation will always be important.
While we always advise clients that the valuation is in their hands, there are external factors that will affect revenues or multiples and therefore alter valuations. Let’s take a look at the most common external factors and how they could be affecting values right now.
The Economy
The economy will naturally affect the value of any asset that you sell. Values will generally be higher in a strong economy and lower in a weak economy. While we are still recovering from the damage done by the global economic crisis, it’s hard to tell what will constitute a full recovery.
However, without descending into an economic debate, there are signs that we are moving in the right direction. Last week, the Business Roundtable, a group of top CEOs, announced an increase in their CEO Economic Outlook Index from 79.1 to 84.5 . The index, based on the opinions of 120 CEOs, indicates growth with any reading over 50. An increase indicates further confidence from the countries top brass.
The Market
‘What about the market?’ is a common question among our clients. The conventional wisdom is that selling in a hard market, when premiums and therefore revenues are higher, is the best way to maximize value. We don’t necessarily agree, but I’ll get to that.
As it stands, the market is still defined as ‘firming’ but it can’t really be called a ‘hard’ market. According to Swiss Re, premium growth will rise to 3.4 percent by 2015; meaning the slow firming of the market is likely to continue in 2014 and the ‘ideal’ ‘hard’ market is still a little out of reach.
Tax
This time last year there were plenty of agencies scrambling to sell before the end of 2012, not because they felt that was the right time, but because of a planned increase from 15% to 20% in the Capital Gains Tax. The change in the tax rate would have reduced the net proceeds if the sale occurred after December 31, 2012. In any event, a sale in 2012 would not impact the net proceeds in any earn out since those proceeds would have been received after that date and taxed at the higher capital gains rate.
This year, there was no such change planned and the resulting activity leads us to the last point on this list.
None Of The Above
The tax changes vastly increased the number of deals done at the end of 2012. As we approach the end of this year, the difference in the net proceeds realized by sellers in 2012 versus 2013 was not as stark as expected. The buyers were just as aware of the tax changes as the sellers. As a result, offers were adjusted to ensure that sellers realized the comparable net proceeds in both years.
That’s where these ideas of good or bad times to sell fall down. Buyers are smart people who follow and analyze all of these trends too. As such, valuations will always reflect the relative economic environment and multiples are often adjusted to reflect those market factors. The truth is, while the number value can be affected by external factors, the actual value to the owners remains constant. That value is in making a deal that secures the future you want and linking up with the right buyer. You can do that at any time, as long as you are ready to sell.
What is the Value of Your Insurance Agency?
As financial advisors who represent insurance brokers in business transactions, we are commonly asked one question “How much is my agency worth?” It is the one topic that each and every agency owner wants to discuss. It would be nice if we had one simple answer; unfortunately, there is no simple answer. Click below to download our comprehensive whitepaper which details “The 9 Factors That Indicate Value”.
