Why Agency Owners should Utilize an Agency Valuation as a Business Planning Tool

In today’s business climate, agency owners can no longer afford to use revenue multiples to understand agency value. The exact calculation of agency value requires a much deeper dive into the numbers, employees, and operation to get an accurate assessment of an agency. Understanding agency value is essential for M&A opportunities, perpetuation (both internal and external), business planning, and the overall health and well-being of your agency.

If you are putting off getting an agency valuation, you should understand that the longer you wait, your agency could potentially decline in value until it is time to sell or make an important business decision. A valuation allows you to gain a comprehensive understanding of your agency’s value and make the appropriate decisions to continue to grow.

According to the Big I Best Practices, there are multiple ways in which an agency can create value, which include:

· Strong leadership and management

· Top-performing producers, sales process, and sales leadership

· Gaining competitive advantages (better employees and culture, better reputation, innovation)

· Effective operations, efficient processes, and customer service

· Superior ownership, perpetuation, and a sustainability model

· Successful acquisition strategies

In order to achieve any of these listed above, an agency looking to create value should begin with a valuation. A valuation will allow you to build on your strengths, address your weaknesses, identify operational inefficiencies, and make decisions on potential investments for the future.

What better way to become a superior agency in the insurance industry than knowing exactly what you are worth in the market? It is a critical piece of knowledge enabling you to create value and grow.

The EBITDA multiple decreases as age increases for the agency owner

Next, getting a valuation early and often will have significant long-term benefits for agency owners. The average age of an owner getting a valuation for their agency is 58.7 years of age. At that point, the agencies could have lost significant value because of the older the owner, the lower the value of the agency.

Our data shows that owners in their 40s have the best potential for a higher EBITDA multiple, and as a result, the best potential for a higher value on their agency. The statistics tell us that younger agency owners who use the valuation as part of their business planning will see a significant increase in value versus their older peers.

Agencies that use valuations for business planning purposes are seeing a 2-year growth rate of10.2%

Additionally, agencies that use valuations as business planning tools, see a greater return on investment. From the valuations we have done in the past, we see that agencies that have business planning in mind, have higher revenue growth. These agencies with a business planning mindset have enjoyed an average two-year growth rate of 10.2%.

As you can see from the graphs, not only does the owner’s age play a factor, but using your valuation to drive growth can also play a significant role in increasing your agency’s value.

To illustrate the benefit of using a valuation as part of your business planning, consider this example:

Consider two seemingly identical agencies, however, the one agency has a much higher EBIDTA multiplier, due to valuation business planning services.

There are two agencies: the Miller Agency and the Johnson Agency. Both agencies have revenues in the range of $600,000, have EBIDTA profitability at the industry average of 25%, and both are looking to get a valuation of their agency. The Miller Agency is getting a valuation with the purpose of business planning, while the Johnson Agency is getting a valuation with a sale (external) in mind. Although they bring in nearly identical revenue and have the same EBIDTA profitability, there is nearly a $60,000 difference between the two agencies due to the EBIDTA multiplier.

As you can see, agencies that use valuations for business planning have a higher multiple than agencies that use valuations for other reasons. Using a valuation for business planning has multiple benefits and provides the most potential for higher valuations.

In conclusion, we recommend agency owners receive a valuation well before they approach retirement age. By understanding their value and knowing the factors that can be tweaked to increase value over time, agency owners will position themselves for the best possible exit when it is time to transition the business. To learn more about an agency valuation, please contact Craig Niess at Craig@iavaluations.com or Luke Hippler at Luke@iavaluations.com.

About IA Valuations – 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. To learn more about IA Valuations, please visit IAValuations.com or contact@iavaluations.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 contact@iavaluations.com to discuss your personal situation.

Copyright ©2022 by IA Valuations and Ohio Insurance Agents Association (OIA). All rights reserved. No portion of this document may be reproduced in any manner without the prior written consent of IA Valuations or OIA. In addition, this document may not be posted as a link on any public or private website without the prior written consent of IA Valuations or OIA.

By: Craig Niess, CVA, MBA and Luke Hippler, MBA

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