Several years ago, Sukay & Associates published a whitepaper on The Factors That Have Influenced Value. It continues to be our most successful publication as we continue to receive requests for it to be downloaded from our website. Although drafted many years ago, we have never added another Factor to the Whitepaper. I thought it would be interesting to review the history of some of our most successful deals and determine if there were some less than obvious factors that have impacted the valuations of prospective clients or the transaction value of our clients that have sold to a third party. As the title of the blog suggests, I came up with five additional factors that influence insurance agency valuations. They are:
Office Space and Rent
The amount of available office space and the amount of rent and timing of the lease can have a material positive or negative impact on the valuation. It may not seem obvious, but how could having too much space be a positive in a transaction? We had a client that operated out of a very attractive and high rent area. While talking to potential buyers, one buyer expressed a desire to move their existing local office into our client’s office space. Our client was able to receive a credit from the buyer for the space the buyer’s staff would occupy. They effectively sublet the available office space. The positive impact to the valuation was significant.
The flip side of this coin is that many buyers want sellers to consolidate their operation into their offices. If our client’s lease is expiring, this could lead to some significant savings and a greater transaction value. What happens if you just signed a 5-year lease in the last two years? The inclusion of the rent in the deal pro forma could have a significant negative impact on the valuation. Don’t worry, we have a solution.
First Impression
During the sales process, we will arrange meetings with potential buyers. These meetings are very important. They are similar to a job interview where each party is selling themselves. We have had several deals where the buyers called us after the meeting and spoke of how our clients made such a good impression. This isn’t an accident as we work very hard to prepare our clients for those meetings. The best example was Charlie Torsiello of Archer A Associates. Charlie made a great first impression. He was articulate, professional and concise. I am sure that the Archer transaction value was positively impacted by the impression that Charlie made during those meetings.
Age of Staff
One of my favorite experiences was working with a prospective client that tried to convince me that his agency was worth a premium because of the experience level of his staff. Generally, that is a positive factor. He knew the exact average years that his staff had worked for him. Upon further review, we determined that an employee had been with the agency for 64 years. Experience is wonderful, but at a certain point you have to assume that the employee will retire.
Quality of Technology
The level of technology is incredibly diverse in the insurance brokerage industry. We have had clients that have had very basic systems. We don’t ever begin an engagement with any expectations. When we get involved, we perform a very thorough analysis of the agency. We require the accumulation of a great deal of financial and customer data. Here is an example that isn’t unusual at all. The client runs a report of their book of business. When we receive the report, the total revenue on the report is half of the total agency revenue. After a thorough process to determine why such a large difference exists, the client is stunned about how incomplete the information is and how helpful the data becomes when it is reliable. We have found that the clients that have the best systems tend to be the most profitable and generate the highest premium.
Strong Support Person
We have found that the best agencies have that a non-owner employee who allows the owners to focus on strategic issues, new business and servicing their larger accounts. This person makes sure everything is running well. This person doesn’t not add value by their position, but by their ability to allow others to reach their full potential. If you can’t name that person in your agency, maybe you should start to look for them.
As positive as these situations may be, agency valuations are a very subjective exercise. Luckily, for agency owners, this is the best time ever to be valuing your insurance agency.
Insurance Agency Valuations
It is impossible to estimate the value of an insurance agency without performing a financial analysis. Earnings of the agency are the main influencing factor, however, there are several factors to take into consideration.
As a firm, we believe answering the question of “how much is my insurance agency worth?” 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.
