Do you have a plan for increasing agency value?
If I could tell you how to sell your house for 57% more than current average market price, I’d have your attention.
If I could tell you how to increase agency value by the same amount, would you want to know the secret?
Current Trends in Agency Valuation
Many sellers are rudely awakened when they get an offer from an acquirer. “That can’t be right!” they protest, and “Joe got X when he sold a few years ago.”
Joe may have gotten a good multiple, but his agency was probably different in many ways. What did Joe do right to increase the worth of his agency? Some of the factors could include: location, mix of business, and the operations and sales staff, but in this post we’re going to focus on one aspect that virtually any agency could use to increase their multiple.
The days of selling your agency at two or two and a half annual retained commissions are long gone. Unfortunately, agency principals remember those simple formulas, and thus radically overestimate the value of their agency.
Current practice for agency valuation is a bit more complicated than the old model. According to Brian Deitz of Reagan Consulting, and as presented at the Best Practices Symposium earlier this year, a better way to calculate agency valuation is to use agency earnings as the base. This number is commonly referred to as EBITDA, or earnings before interest, taxes, depreciation and amortization. If you don’t know your agency’s EBITDA, your accountant or CPA should be able to provide you with it fairly easily.
According to the latest Best Practices report, average agency valuation for agencies that are generalists at time of sale is 5.8 times EBITDA. For simplicity, we will use retained commissions, since most principals have a pretty good handle on this aspect of their agency.
Although not as accurate, the average agency sells for 1.15 times retained commissions. That number should be a real wakeup call. The asset that you are building in your agency may be worth quite a bit less than you think.
Even worse, some more aggressive agencies aren’t looking to buy your book. They fully intend to take it away renewal by renewal when the business is most vulnerable. And it is most vulnerable right AFTER you sell, and the buyer hasn’t had a chance to cement the personal relationship with the customer yet. What’s the multiple for business that doesn’t renew? A big fat ZERO.
Increasing Agency Value: What’s a Principal to Do?
According to the same presentation, agencies that specialize in one or more niches and receive at least 30% of their revenues from those specialties have a 57% greater multiple at time of sale. That’s right, agencies sell at a multiple of 1.80 times their revenues (as compared to 1.15 times) if the agency specializes.
Why is an agency that specializes in one or more niches worth more to a buyer?
There are a number of reasons specialization is increasing agency value:
- Organic (natural, not due to acquisition) growth is higher for agencies that specialize
- Prospecting is more efficient
- Better and more relevant referrals
- Hit ratios increase due to expertise and experience
- Profitability increases
- Better carrier and underwriter relationships
- Servicing staff understands the needs of the customer segment
- Productivity is higher because much of the learning curve is eliminated
If your agency is aggressive, well-managed, and focused on a number of niches in which you do well, you will probably be courted by similar agencies. And when they buy your agency, they will have a plan in place to keep all your business. They aren’t in the habit of doing a whole lot of work for business they won’t keep.
Myths and Legends
Some agencies have stumbled into specialties and niches almost by accident. One account begets another and the producer and agency start to better understand the class. Relationships are forged and improved with underwriters, and they are off.
Other agencies believe that specialization won’t work for them. There are a number of myths that perpetuate those beliefs:
Myth: Specialization is only for large agencies.
Truth: 39% of agencies with annual revenues of less than $ 1.25 Million have specialties.
Myth: Specialization limits producers.
Truth: Specialization supports production, and often leads to faster success.
Myth: My carriers don’t support specialization.
Truth: While unique offerings for a niche can add benefits, most opportunity comes from agency staff learning the niche.
If you want to generate the best return when you sell your agency, and want to generate some additional commission income in the years between now and when you sell your agency, now is the time to specialize. If you are already specializing in one or more niches, think about how you can replicate that success, either yourself, or with another producer in your agency.
Here’s to increasing agency value every day!