In the 200+ valuations that the IA Valuations team has performed, pinpointing and recognizing the red flags has become an essential step in the process to maximize an agency’s value. In general, agency owners are not aware of the internal factors that are stunting their growth and limiting overall value. In this article, we will examine and breakdown a few red flags that often get overlooked in the day-to-day operations of an agency in the independent insurance industry.
Personal Lines Concentration
Agencies with a high concentration of personal lines minimum are at risk of disruption and commoditization. In today’s market, the ability for customers to shop around at their convenience increases the risk for agencies. With such a heavy concentration of personal lines, a change in the market, or an increase in prices with a carrier can influence a vast portion of an agency’s book of business.
Our experts recommend a 50/50 split between personal and commercial lines, or at least as close to that as possible. However, an increased sales focus on the commercial lines book of business is the first step to mitigating the risk.
Narrowly Held Ownership
This fact has become redundant with our articles. This is one of the most common factors we see in agencies of every size. In many cases, 1-2 owners nearing retirement age hold up to 100% of an agency’s stock. This enhances agency risk because, when the time comes for these owners to get out, they have significantly reduced their options for perpetuation.
To mitigate this risk, agency principals should consider expanding stock ownership opportunities for key employees before they approach retirement age. Creating a perpetuation plan and starting early is extremely important in a smooth and successful transition, and will make the lives of the owners and new ownership much simpler.
Age of Ownership
Risk also applies to the age of the owners. When ownership is held by those nearing or at retirement age, there is an increased risk to the agency. The best action to mitigate this risk, similar to narrowly held ownership, is to have a perpetuation plan in place. This is going to yield the best outcome for the agency overall and ensure client retention as ownership expands to the next generation.
This red flag we’ve identified in an agency’s operation boils down to knowing your numbers – or lack thereof. Working with an advisor or CPA on a regular basis to have a full, comprehensive understanding of exactly how much revenue is coming in is crucial. This, in turn, will help you understand the expenses that your agency should have. Every year, agencies are faced with new challenges and opportunities, such as investment in new producers or technology, which will ultimately alter the expense number. But the true message is to be aware of agency expenses.
In some instances, agencies with fantastic revenue and commission numbers think they are growing at a rapid pace, until they take a look at their expenses and realize that they have overspent or lost control of their expenses. On average, agencies should aim to have their revenue greater than their expenses. As stated earlier, spending more money to improve the staff, technology, culture, etc. is an essential part of growing an agency, but having the knowledge of the agency’s finances is a key step to eliminating this and other red flags.
If any of these stand out as something that is impacting your agency, please reach out to me at firstname.lastname@example.org so we can discuss how IA Valuations can set your agency up for success.
About IA Valuations and Agency Link – Founded in 2017, the IA Valuations team has performed over 200 valuations to independent insurance agencies across the U.S. Our advisors have 25+ years of experience guiding agency owners on maximizing their agency value, planning, and legal needs for ownership transition. In addition, IA Valuations has provided perpetuation planning, financial modeling and business planning for independent insurance agencies. Finally, IA Valuations has advised dozens of agency owners on selling their agencies through our Agency Link process. Agency Link is a platform that connects buyers and sellers together to further the growth and strength of the IA system. To learn more about IA Valuations, please visit IAValuations.com or email@example.com.
The information provided in these documents is general in nature and shall not be construed as personal legal, tax or financial advice for your situation. Please firstname.lastname@example.org to discuss your personal situation.
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By: Luke Hippler, MBA