Insurance agency valuation is not as complicated as it seems. Today’s dynamic insurance market is ripe with buyers chasing opportunities to acquire agencies, inspiring some owners to ask the question: What is my insurance agency worth?
The answer is not so simple. Certainly, the acquisition market in the insurance industry is hot right now—and that’s helping to drive up prices and give insurance agencies the confidence to proceed with an exit plan that ends with an external sale. But there’s a bit of an optical illusion with the buying activity vs. an agency’s true value. The prices you hear may not equal the value of your agency. And, value is a variable number: It’s a math equation with lots of factors, including whether buyers are internal or external.
So, why is valuing insurance agencies important? Firms can improve their business operations and make the most of today’s market, whether that means capitalizing on opportunities to sell to forthcoming external buyers, or organic growth to create more value internally so the business can profit and perpetuate. That’s why understanding insurance agency valuation methods and how the valuation of an insurance agency works is important.
Strategy First – Your Insurance Agency Valuation will Follow
Before jumping into the actual insurance agency valuation process, the first step in succession planning (whether that’s to sell externally or perpetuate internally) is to define your strategy. Do not allow a valuation to drive your decision. Instead, determine what path you want to take your agency—set the end goal—then create a plan to maximize the value of your firm. After that, consult a trusted insurance advisor on the internal versus external value of your firm.
Do some soul searching and consider what you actually want to do with the business. Do you hope to perpetuate the agency internally and pass on the legacy to another key leader or family? Do you want to maximize the return on a sale to an external buyer and “cash out?” (Recognize, you’ll likely still be involved during the ownership transition—selling to an outsider doesn’t usually mean collecting a check and walking out the door.)
The best method for insurance agency valuation begins with having the right growth strategy in place. Take a good hard look at where your business operations stand today. As MarshBerry notes, “If you run your agency like it is for sale, you win whether you sell internally or externally.” What are you doing to drive profitability? Are you challenging your people to improve production? Do you have a sales culture? Are you actively engaging leaders in ways for them to acquire ownership? Is there a plan so they can acquire stock, or are you holding on to the lion’s share, resistant to sell it?
Asking these critical “strategy” questions is important because your firm will likely not get the valuation you hope for if everyday business operations are on autopilot. If your goal is to maximize agency value—and it should be—then you first must look inside and make business changes to improve profitability, sales performance and recruiting; all of which will help with the value of your insurance agency.
So, what exactly is a fair market valuation—and why does value look so different when you’re considering an external vs. internal buyer/market?
The latter point is what confuses many owners, even those who have been in the business for decades. It just doesn’t make sense, right? Why is an insurance firm valued at a higher price for an external buyer than for someone who’s been working at the agency for years and wants to become its owner?
First, looking at internal and external insurance agency valuations side-by-side is like comparing apples and oranges.
There are different variables involved in determining the fair market value for these two audiences. The end goal is different, as well as the strategic planning required to prepare for the sale and the valuation.
The discrepancy between external and internal value is referred to as the valuation gap. Traditionally, owners preparing to sell to an outside buyer may make changes to their businesses that they might not ordinarily execute in order to help drive up the value. Their moves are focused on improving the proforma and income statement. The changes are not centered on creating a sales culture, for example, or recruiting young talent to take the firm to the next level. The motivation is to get paid more at the time of sale, so these moves are financially focused and not always the best decisions for the long-term health of the firm.
When the buyer is internal, an owner probably will not make sweeping changes designed to pump up profit or drive up the agency price. In fact, the owner may get a valuation on the business as it stands; and many businesses can stand some improvement. If the agency has been getting stale, and the owner has neglected to take proactive steps to drive growth, sales, or recruiting, then the value will likely not be as high as expected.
In addition, for strategic reasons or because of access to inexpensive capital, external buyers can often afford to pay a higher multiple on the profit, than those internal buyers that need cash flow to finance the debt that enabled the transaction.
Therein lies the gap between external and internal value, both the level of profitability and the multiple a buyer can, or will pay. Owners can help to try and close this gap and improve internal value by going back to the strategy and continually working to improve operations and growth.
With a pool of willing buyers casting lines in the insurance industry today, agency owners are wise to ask how a fair market value is determined. What factors play into the price a buyer will pay?
Valuation is in the eye of the beholder. When you ask “What is my insurance agency worth?” There is no one objective answer. It’s the price at which a business could change hands between a willing buyer and seller, with no external pressures. That’s why a fair market value is different from sales price. An external buyer may have strategic motivation for paying more; an internal buyer may not have the ability to pay what an owner wants; and there are countless other variables that figure into what a buyer will actually pay. But as for fair market value, these “pressures” are stripped from the equation, and what is left is a number that’s subjective and impacted by a firm’s position at a given place and time.
Your predetermined strategy becomes the game-changer in an insurance agency valuation. In our experience, no matter your buyer, if you dedicate time and resources to improving your business operations with a mind toward its long-term health and success—and not just how it looks on paper—then its value will escalate.
Agency and brokerage owners dedicate their careers and make sacrifices in life to grow their businesses and help them succeed. Keep that momentum as you near the finish line, whether that’s an external sale or perpetuation. By doing so, you’ll help to continue to improve the value of your firm – and what you’ll take to the bank.
If you have questions about Today’s ViewPoint or would like to learn more about the value of your firm, please email or call Wayne Walkotten, Executive Vice President, at 616.723.8372.