It would be hard to deny that COVID has not had a significant impact on all of our lives. We have addressed how the pandemic might impact the valuation of agencies. The first obvious impact is how it will impact agency clients and their ability to remain in business. We have tracked the revenue of several agencies on a month to month basis in 2020 versus 2019. The results of those reviews have been inconsistent. We expected to see revenues of an agency with a commercial book of business decline. The largest agency that we track that fits this profile has seen an increase in revenues. We would expect to see a personal lines agency have a more stable revenue base. In fact, we do not expect to see a decline in the revenues of a personal lines agency in Florida as the market remains strong and premiums on existing clients have risen significantly.
The second possible impact on agency valuations is that we could see a reduction in deal multiples. We have had discussions with several parties and the consensus is that the demand for agencies is keeping the multiples at historic levels.
The third possible impact is how potential Buyers might structure a deal. Transactions are normally based on a multiple of historical revenue or earnings. Without knowing the extent of the impact of COVID on future revenue or earnings, we expect that Buyers will become more conservative on the percentage of the transaction value paid at Closing.
Sukay & Associates gets involved in a variety of subjects that interest agency owners. If we could only discuss one topic with potential clients, they would almost unanimously want to discuss the value of their agency. We are asked this question all the time. It would be nice if there was a simple method used to value all agencies. The reality is that few agencies are alike. As a result, the value of agencies will vary widely.
Our initial response to this question is that it is impossible to estimate value without performing a financial analysis. Earnings are the number one factor influencing value. The value of an agency is a factor of the earnings of the agency times an earnings multiple. Frequently, an agency owner will focus on the multiple. We try to have a discussion on the earnings. Once we establish a baseline earnings, the discussion then switches to the earnings multiple.
Agency multiples are based on a variety of factors including market influences. Just like the stock market where the value of a company can go up or down even though the earnings remain constant, agency multiples fluctuate. We will save the discussion on market influences for another day.
Value is also dependent on the purpose of the valuation. The most common and most recognized value is the value that an agency owner should expect to receive from an independent third party. An agency would have a separate value if the valuation was performed for the purpose of an internal perpetuation or the valuation of shares for an Employee Stock Ownership Plan (“ESOP”). In this discussion, we will focus on the value that an agency owner should expect to receive in a sale to a third party.
In order to establish an estimation of an agency’s value, we have established a series of “Factors that Influence Value.” These factors include:
- Size of the agency
- Age of the owners
- Type of business
- Owner involvement
- Growth rate
- Profit margins
- Specialty lines of business
- Geographic location
Complimentary Agency Valuations. No strings attached.
As Financial Advisors who represent insurance agencies and brokers in business transactions, one commonly asked question we get is
“How much is my agency worth?”
It is 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.
It is impossible to estimate the value of an insurance agency without performing a financial analysis. Earnings of an agency are the main influencing factor, however, there are 9 factors that we take into consideration.
As a firm, we believe in answering the question above is our responsibility and the foundation of a great working relationship – even if that is in the future. Because of this, we unlike most firms, offer free insurance agency valuations for those who qualify.