Agency Value

[new_agent]

I am curious as to your opinions on placing a value on an independent agency. It sounds like generally they are valued at 1.5 - 2.5 times the commission. I was under the impression that the "commission" was P&C values and not necessarily Life. But I was told today that commission is revenues which include the annual average of life commission's received.

For example, if an agency receives $400,000 per year in P&C commission and on average produces about $100,000 in Life commissions. The agency revenue is $500,000 (value = $1,000,000). Or is the agency only worth $800,000?

 

[Guest]

There are still a number of factors that go into the value of the agency,

% that is commercial
% that is Personal lines, which also breaks into what percentage is sub-standard auto and what is preferred, I would probally pay a little more for a higher percentage of preferred than sub-standard percentage,

Life, well, how much commission are you getting for renewals?

Also, a small factor would be what carriers do you have access to?

Whats you loss ratios?

There is probaly a few more things to inject.....

 

[AgencyEquity]

There are still a number of factors that go into the value of the agency,

% that is commercial
% that is Personal lines, which also breaks into what percentage is sub-standard auto and what is preferred, I would probally pay a little more for a higher percentage of preferred than sub-standard percentage,

Life, well, how much commission are you getting for renewals?

Also, a small factor would be what carriers do you have access to?

Whats you loss ratios?

There is probaly a few more things to inject.....

Excellent points, there is a lot that goes into a valuation, I am not sure where the 2x figure comes from, but Agencies are now valued on EBITA, which is basically means that the valuation is going to based upon the net income of the agency and not the gross revenues (commissions). Also, a preferred book is worth significantly more than a non-standard book, not a just "a little more." The demand for a preferred book vs. a non-standard book is pobably 20 fold if not greater.

If you really want a valution, spend some money and get a professional valuation by someone who does insurance agency valuations on a regular basis. You will find a list of these experts on my site. Nevertheless, RBA brings some excellent points on the variables that make up the book.

 

[Guest]

what the hell is pobably?????

 

[ABC]

I smell Spam!

 

[djs]

If there are no significant trails on life policies, then I would exclude them from the valuation.

Now, realize, even with no trail commission, they have some value since it helps keep the client in the agency, but at the same time, diminishes the cross-sell value of buying the book, since they have obviously already been cross-sold.

Also, the value of an agency has NOTHING at all to do with what the commissions are. It has EVERYTHING to do with what someone will pay for it. They obviously will use commissions as a factor, but its only one of many factors. There is no single recipe for success.

Bottom line, you need that book to pay for itself in 3 to 5 years. You might be able to go to 7 years if you have had good retention, the book has had good retention, there is nothing foreseeable that will change retention ratios AND there is a reserve implemented for excessive cancellations in the first 6 months after the sale.

Problem right now is houses are still dropping due to foreclosures/short sales. I can't see paying a premium for a book that is potentially setup to shrink.

Dan