Skip to main content

Influencing the valuation of your insurance agency

By August 3, 2020Blog
Influencing the valuation of your insurance agency

Influencing the valuation of your insurance agency

What is the value of your agency?

The better question to ask is how you can influence it, rather than looking solely at price.

Many transactions are not published, so it is likely only the highest price subset of transactions is used to generate those averages, pushing them higher than what the average agency is worth. So, this is not the complete picture.

The valuation you are likely seeking is the external value, not the internal value. The gap can be considerable, but for purposes of this discussion, the internal fair market value is out of scope and applies to valuation for internal perpetuation plans.

When it comes to external valuations, there are a lot of things to consider that impact your value, with two of the largest factors being your agency profile and the intentions of the buyer post-closing.

No matter who the buyer is, what they are buying is future cash flows of the agency. In this regard, large, highly profitable, high growth agencies, with strong production teams, programs/niches, and an attractive business mix in a major metropolitan area will garner the highest purchase price. Those characteristics provide the buyer with the most predicable stream of future cash flows and a management team to build around.

In today’s hyper competitive marketplace, there are a couple dozen private equity backed buyers driving upmarket prices and expecting a high rate of return. It is what they will do post-close that can have the greatest impact on your agency.

If you are narrowly defining value as the pure dollar amount you will receive, it is important to understand that all offers are not equal.

If you could invest in a fully liquid stock index and return double-digits, there is no prudent investor willing to acquire an asset like an insurance agency for that same rate – they need more to attract their capital. And odds are they will find a way to get it.

That context is important because if one buyer is willing to pay you 9x and others are willing to pay you 7x, it isn’t because the high bidder is being altruistic or is willing to accept a lower rate of return. It is because they plan to make that investment meet their return requirements. That means what they plan to do to the agency to secure their required rate of return could impact you and your agency through staffing changes, location moves, technology implementation, and strict business planning.

What KAI brings to the table:

As a buyer, at KAI we believe that autonomy, service, and support bridges independence with security and outweighs price. We seek owners that want to remain engaged in the perpetuation and growth of their agencies while seeking a partnership that brings them added resources to compete, sell, win, and service more business.

If you are retiring and do not care what happens to the agency, a high return may be worth it. If you are looking for a partnership and wish to stay engaged, ask yourself if chasing that high bid is worth the trade-off.

If you are interested in learning more about a KAI partnership, click the Join Us section and fill out your interest.