You may have heard that agencies should sell for 2 X revenues. That may be true for some agencies, but it doesn’t tell the whole story.
Back to the Basics
A savvy investor knows that value is unique to specific buyers. That is, each buyer will value entity cash flows differently, depending on their outlook for growth, their cost of capital, and, (this is a big one) the level of cash flows necessary to generate and support the projected revenue levels. In summary, value is dependent on expected future cash flow considering the inherent risks in generating those cash flow.
Insurance agencies are subject to risks relating to the overall economy and specific risks their insurance carriers are exposed to. Sustained economic growth in 2018 and year-to-date 2019 bode well for the Property and Casualty market. The rising economic news has continued to expand both the personal and commercial insurance lines. Natural disaster losses in 2018 and year-to-date 2019 are considerably lower than 2017, which globally ranked the third most expensive year ever for the insurance industry. These factors, higher premiums and lower losses, contribute to higher insurance agency commission revenues.
Cash Flow Vs. Revenue
However, comparing two agencies with the same level of revenues, the one with lower operating costs (i.e. operating more efficiently) will be rewarded with a higher value and multiple. Operating efficiency translates into higher levels of cash flow to the owner which results in a higher entity value. So even though studies point to agencies selling for 2 X revenues, any buyer of your agency is going to look at what falls to the bottom line, not the top line, before making an offer.
What You Can Do To Increase Value
Many experts have increased their forecast probability for a slowdown in the economy due to uncertainty about trade negotiations with China along with rising interest rates that could slow housing construction and business expansion. These factors have the potential to weaken renewals and new policies issued, decreasing your top line. Agency owners should take time to address areas of their operations with the goal of doing more with less. Talent and technology are the key to creating efficiencies in your operations, increasing cash flows over the long-term, which adds value to your agency. Keeping your workforce engaged and challenged is a win-win situation.
Although revenue multiples are a convenient barometer of the overall market, they are not reliable as an indicator of your agency value. Focusing on increasing cash flow through top line growth and reducing overhead costs are a winning strategy for increasing agency value. Feel free to contact us for additional information on agency value and the current market.
Do you know the value of your husband´s policy?” the life insurance salesman asked his client. “What do you mean?” countered the woman. “If you should lose your husband, what would you get?” asked the salesman. The woman thought a minute, then brightened up and said, “Probably a poodle.”