An agency’s value can be an ambiguous figure often inflated in the minds of agency owners. It is frequently overlooked as long as book size is growing. Owners who are not planning to sell usually have number in their heads, but many neglect to take the time to delve into the actual valuation. However, its value goes beyond getting a good sale price. The agency valuation can not only be used to secure financing for sudden opportunities, but, more importantly, it provides a roadmap for strategic planning and growth. Understanding an agency’s value can identify potential risks and vulnerabilities that could change its worth over time.
The first step to increasing an agency’s value is understanding its current value. A variety of factors are taken into account for establishing value including growth, profitability, and financial security. MarshBerry, an M&A advisory firm, reported that in 2014 the average Base Purchase Price increased to 7.14 times EBITDA with a range from 5.9 to 7.81. EBITDA is a widely accepted measure of profits which stands for Earnings Before Interest, Taxes, Depreciation and Amortization. By removing operating expenses from the revenue and excluding the administrative expenses, it provides an accurate picture of how an agency is performing. Whether you utilize retained commissions or agency earnings (EBITDA) as the base, the same principles for increasing value will apply.
Average Value = 7.14 x EBITDA
EBITDA = Revenue – Expenses (excluding interest, taxes, depreciation, and amortization)
If you can remember back to your basic algebra, you’ll know that to increase the value you would need to increase the EBITDA base by either increasing revenue or decreasing expenses.
Most companies find it extremely difficult to cut operating expenses, so the only other option is to increase revenue. As we all know, the two biggest factors that contribute to revenue in an insurance agency are growth from new business and reoccurring revenue from retaining customers. Here are 3 proven ways to increase your base and, more importantly, sustain that increase.
- New Business Growth – The need for growth in the agency, as well as with each carrier, is well known. Many agencies focus on acquiring new business as a way to drive value, but neglect to account for the cost of acquisition for each new customer. Leveraging cost effective alternatives to traditional marketing, such as email or social media, is one way to reduce expenses without risking additional new business opportunities.
- Agency Retention – One of the quickest ways to increase the value of EBITDA is through increasing agency retention. Reoccurring business doesn’t need to take into account acquisition costs, so the revenue drops directly to the bottom line for an agency. Even a one to two point increase across the agency as a whole can have significant ramifications on the overall value. As an independent agency, you provide significant value in the choices of carriers that you represent. Frequently, this value is not fully communicated to the insured who goes shopping at renewal rather than providing you the opportunity to save the business. Communicating with every insured at renewal provides an agency a way to discuss any changes fully manage the renewal conversation.
- Policies Per Customer – Adopting a specific agency wide strategy for cross selling monoline customers works to both increase your retention and the value. It is common knowledge that the number of policies per customer directly correlates with the length of time the customer remains with your agency. Utilizing email marketing to educate monoline customers on the benefits of having both home and auto policies written with the same carrier can make a large impact.
1. (2015). 2014 insurance agency transaction multiples. The Deal Maker’s Dialogue, 6(2).
2. Duhigg, Charles. (2012). The power of habit: Why we do what we do in life and business. New York: Random House.