What is an agency worth?
Updated: Aug 23, 2021
What is an agency worth if it cannot even figure out its own revenue? That may seem like a silly or even stupid question. After all, who does not know their own revenue numbers? It turns out that when agencies submit their data to us and others for valuations and loans, quite often they give multiple answers regarding the amount of their revenue.
They "know" their revenue number, but in one spot they'll advise their revenue is $1 million, and in another document/answer box they will say it is $1.2 million, and maybe in another they'll show their revenue as $900,000. Or maybe they’ll start at $10 million, or perhaps, if they're a smaller agency and the first answer is $300,000 and the next is $250,000 and the next is $325,000. While they "know" their revenue number, their multiple answers do not inspire confidence on the part of anyone else.
This happens all the time with valuations and loans. Other notable and even more common key but unknown data points include producer compensation. Probably 75% of the data packages we see show two materially different producer compensation amounts producer by producer. For example, in one box the producers are shown to be making 35%, yet their actual compensation is 40% or even 70%. How much one pays producers can make a material difference in a valuation. It is not just the buyer, the appraiser or the loan officer who is left wondering what the true number is for producer compensation. They are also left wondering what the true expenses are and the true profits. Moreover, they're left wondering if any of the data is trustworthy. Untrustworthy data results in less valuable agencies.
People ask me all the time, "Are agencies worth X times?" My answer is, all else being equal, trustworthy agencies are always worth more than untrustworthy agencies.
It is amazing how bad basic data is at some agencies. In all probability 50% of the time the list of employees is not even accurate, and this includes agencies with less than 25 people.
The worst data is almost always found on balance sheets. For some unknown reason many agencies do not keep balance sheets. Given that by law 100% of agencies are subject to trust laws (all states are trust law states -- there are no exceptions), and in order to prove legal compliance one has to have a balance sheet, an agency that does not have a balance sheet is taking an exceptional risk. Sometimes though, the existing balance sheets are so horribly inaccurate that having no balance sheet at all might be better for the agency.
All that being said and with the dirty laundry hung, for most agencies, most of the time, these issues have no negative effect. Year after year they do fine because they don't use any of this data to manage themselves and no outside party looks closely at their books. But agency valuations are kind of like death and taxes, they are inevitable. An agency will need to be valued when it is sold, transferred to the next generation (unless you ignore the law), or money is borrowed against its value. When an agency needs to be valued and all these issues exist, the resulting process is going to be painful, frustrating, and damaging.
A really good solution, even if it is self-serving on my part, is to have your financials reviewed by an outside third-party who will look at them as if valuing the agency for sale, transfer or a loan against the agency, far, far in advance. Even better, have a comprehensive valuation of the agency performed far in advance of any changes in ownership or debt. It is important to hire an appraiser who specializes in insurance agency valuations and financial analysis because when you sell or when you borrow money from a bank that understands agencies, those people will know what to look for in the financials. Local CPAs and generalist practitioners do not know enough about independent insurance agencies to know what to look for in an agency valuation.
Then, if the data or financials are amiss, you have plenty of time to fix them before an actual valuation or loan request is needed. A side benefit is you may discover opportunities to improve your agency, make it more valuable and/or make more money when the sale actually occurs. The difference between the subtraction made for bad data and the addition made for improvements is often quite significant. Financial reviews or valuations are often one of the best investments owners can make.
NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.