Why Don’t You Know Your Insurance Agency’s Value?
Not Just for the End of Your Career
What is the value of an independent insurance company? In this article, the author shares the reasons—other than for transactional reasons—for knowing the value of an independent insurance agency.
Over the past several years, I have worked with many agency owners across the country helping them understand the value of their agencies. It is some of the most rewarding work I have ever done, and I have learned a lot about agencies and agency owners because of this work. The independent insurance channel has an estimated 36,000 agencies and has remained incredibly stable over the past 15 years. Independent insurance agencies have attracted private equity interest due to their unique stability, incredibly high retention rates, and profitability. Over 80% of independent insurance agencies have annual revenues of $1.25M or less, and many are led by a single owner. The Weighted Average Owner Age has remained around 58 years old, which means that over half of these independent insurance agencies will be facing an ownership transition in the next 5–10 years. There is a common perception among agency owners that you only need to know the value of your agency when you are getting ready to sell or retire—that is 100% false. Through hundreds of conversations with agents, I have put together some of the most common reasons why so many agency owners hesitate to start the process of knowing their agency’s value.
Time
So often I hear, “I have been meaning to do this for years, but I could never find the time.” Time is the number one reason given why agency owners do not know the value of their agency. I know agency owners are busy and wearing many different hats. Their focus is on taking great care of their clients, building a great team, and running their agency. Far too often, taking care of the tasks that are time sensitive leaves little time left over to get to the things that do not have to be done. The thought of gathering information needed for a valuation report for your agency may seem like a daunting task given the system limitations or flexibility. Putting off knowing the value of your agency may be one of the costliest decisions an agency owner can make because you lose the gift of time. Investing the time to know your agency’s value is critical to you as it will provide you with insights and opportunity to reallocate resources, invest in growth, and, ultimately, increase your agency’s value over time. Without that insight you could be missing opportunities; the long-term impact of which can be significant to you and your agency. I recognize time is valuable and work hard to streamline the process and information needed to provide agency owners with the information and insights they need to plan for their agency’s future.
Assumed Agency Value
Many times, agency owners share that they already know the value of their agency: “It’s one and a half times revenue, right?” or they share what they know about the last few agencies that they know who sold. This is a common mistake that many business owners make by assuming that their agency and situation is the same as their peers. The truth is all agencies are not created equal. When revenue is used as the only factor in valuing an agency, many of the key components of that agency are missed. It does not consider the performance of the agency in the form of growth, or the risk factors that are present in the agency due to poor diversification or concentration in key areas such as large customer accounts, key salespeople, carrier partners, and a particular niche of business. Those agencies that are better positioned for future growth, have stronger carrier partners, have superior processes, systems, are well diversified, and have marketing in place that are driving better performance and profitability, run the risk of being undervalued if the only factor that is considered is their revenue. There are many factors to consider in valuing your agency; and using only revenue or other examples of transactions is not a good reflection of your situation, timing, or specific strengths or weaknesses.
Fear
The last factor that prevents agency owners from taking the step to know their value is best described as fear. Fear of the unknown is difficult and applies to a few areas. First, no agency owner wants to learn that their agency’s value is not what they think it is or assumed it would be. Second, in many cases, the thought of starting the process by getting a fair market valuation feels, to many agency owners, like the beginning of the end of their career. So many agents have worked their entire lives in their agency and the thought of retiring is hard to imagine. They cannot imagine what they will do, and so it becomes scary to even start the process. I cannot tell you how many times I have heard, “I’m not ready to retire.” or “I’m not sure what I would do in retirement.” This feeling is completely understandable; for many, the agency is their life’s work, but it is the worst thing they could do for their agency.
What many agency owners do not realize is that knowing the value of your agency is important long before they are ready to retire. Each agency is unique so assuming the value is a dangerous practice that could be very costly, and finally knowing gives you the power to change and improve the value. In this process, agency owners learn far more than a number. They learn about important benchmarks that can impact how they think about allocating their resources, the risk factors inside their agency and what they can do to mitigate them, and, most importantly, the actions that they can take to increase their value. Going through this process gives you the insight you need to make informed decisions about running your agency. As experts, it is our job to move our clients past these inhibitors so they have the information they need to make informed decisions about their future. Waiting too long can be a very costly decision as there will be no time to utilize the information and maximize the value of their agency. To learn more, visit www.agency-focus.com.
Carey Wallace has a BA in Finance from West Virginia University and has over 20 years’ experience as a CFO focused on small business and mergers and acquisitions. In addition, she founded and served as the first CEO of IntellAgents, a data-analytics company focused on independent agents. For the past four years, Ms. Wallace has focused on providing valuation and business consulting services to ensure that agencies have the information and support needed to successfully perpetuate their agencies to the next generation. Helping independent insurance agents win is her passion, and she continues her consulting work at AgencyFocus, LLC, her newly formed organization.
Ms. Wallace can be contacted at (614) 675-2674 or by e-mail to carey@agency-focus.com.
