A sale of an insurance agency will result in the owner having to deal with some difficult challenges. These challenges are present in different forms. We would like to focus today’s blog on the value of a producer’s book of business. Although we are very good at answering questions, we have never been able to solve the puzzle of how producers view ownership of their book of business. We would equate producers to quarterbacks on a football team. There is no doubt that they are highly important, most often the most important member of the team. However, they are only one part of the team. It takes many other parts to make a winning team.
Producers should have a non-solicitation agreement that prohibits them from soliciting any client of the agency for a period of time if they move to another agency. This agreement also most likely states that the agency owns the book of business. We often hear that a producer intends to take a position with another agency and then move the business after the waiting period has expired. This is often an idle threat since the producer accepts a great deal of risk that a significant portion of the business will stay with the agency. Here is a common question that we receive from major producers:
Question:
I am a producer in an agency and I have a book of business where the revenue exceeds $1.0 million. What is the value of my book of business and should I be entitled to a portion of the sales proceeds?
Answer:
No. However, there is a maybe attached.
A Buyer’s View of an Agency
An agency with revenue in excess of $1.0 million usually has an owner that is producing the majority of the business and some support personnel that allows him or her to continue to focus on producing new business. They also usually have brought on someone in a production capacity and have mentored them to eventually take over the agency upon their retirement. There are also the relationships that the agency has with the carrier partners and the appointments that they have to place business for their clients.
There is little question as to who owns the book of business because the agency owner is usually responsible for the client relationships.
A Buyer’s View of a Book of Business
We would consider a producer with a book of business of $1.0 million to be very successful. We see renewal commissions rates for books of business this large ranging from 25% to 50%. A producer with a $1.0 million book of business deserves to make a very good living.
Let’s assume that the producer has a renewal commission rate of 40%. In almost every deal, the buyer will want to reduce the commission rate down to a more market rate. In our example, let’s assume a renewal commission rate of 25%. They have a two year non-solicitation agreement. The agreement is also assignable to a third party. Is the producer entitled to a portion of the Purchase Price?
In this example, the buyer and seller need the producer to agree to execute a new Producer Agreement since they intend to materially alter the terms of the existing agreement. Why would the producer agree to reduce their compensation without any consideration? In our example, the EBITDA of the agency was increased by $150,000 from the reduction in commissions paid to the producer. If we assumed a 7.5 multiple, the Purchase Price was enhanced by $1,125,000 due to the change in commission rates. We would contend that it would be necessary to share a portion of that benefit with the producer.
Let’s next assume that the producer’s agreement does not need altered and that it will be assumed by the Buyer. Is the producer entitled to some consideration?
The first question we would ask is about the size of the book of business compared to the size of the total agency. If the agency is $20 million in revenue and the producer has a $1.0 book, it would be viewed differently than if the agency revenue had $2.0 million in revenue.
The next question is how likely is it that the producer could move the business to another agency with little or no interruption of service to the client. Some of the problems we see are that producers usually have an inflated idea of how much can be moved to another agency. They also don’t take into consideration that many larger agencies do not pay as high of a renewal commission rate. Commission rates do vary but we would view any renewal commission rate in excess of 25% as above market. The math is simple. If they were able to agree to move the business to another agency at a 40% commission rate and only retained 50% of the business, it would result in the same compensation as if they stayed and received only a 20% commission rate.
Many producers come to us and ask for our help in either selling their business or helping them move to another agency because they feel they are not getting fair value for their book with their current employer. For the most part, we tell them that unless the situation is dire they should stay were they are and work out something with their current employer. It is usually less disruption for them, the client, and the current employer.
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”.
