The Most Critical Stage of Buying an Insurance Agency

buying an insurance agency

What is the most critical stage of when buying an insurance agency? Is it obtaining financing? Is it finding the right agency to buy? Is it making sure your own books are in order?

While there are indeed many important stages in the agency buying process, by far the most important stage is getting a proper valuation on the agency. Everything else hinges on this.

Let’s explore why the valuation is so important and what should be considered to reach the right valuation.

Why Is the Valuation So Important?

Without a well-researched and comprehensive valuation, one or both parties with have difficulty reaching an agreeable price. Negotiations can drag out indefinitely, wasting your time and money.

If an imbalance exists because of value disagreements, it becomes a shadow over all negotiations. One party may feel they are selling the agency that they worked to build for too little. As the buyer, you are naturally apprehensive about paying too much for that agency.

A more synergistic 3rd party valuation can eliminate this tug-o-war for a more seamless agency acquisition process. With an objective agency valuation, both parties will know when the agreed upon price is right.

The seller doesn’t feel that he/she has left money on the table. The buyer feels confident that he/she’s not sabotaged the future of the acquired agency or his/her own company by paying too much.

What Determines an Insurance Agency’s Valuation

Here’s how not to value an agency — three or four times earnings, 10 times profits or any other arbitrary numbers. These methods seem simple enough. It’s basic math. Numbers don’t lie but they do disregard the complexities of the insurance business.

Many factors go into an agencies valuation. Some factors are easier to quantify than others. Some can be more elusive like the knowledge and skill of the acquired agency’s middle leadership or the pressure on the seller to sell because of a divorce settlement, health or nearing retirement.

Here are the main things to look at to get a valuation.

Historical Financial Data

Obtaining an insurance agency valuation includes an in-depth look at the financial data both in the most recent year and year over year. The successes and failures of an insurance agency can be viewed through these financials. These help determine to health and future of this agency.

Comparison to Peers

We can now more clearly compare the agency’s standing to its peers during the same time periods and currently. How is this agency competing in the dynamic and ever-changing insurance marketplace? How are they adapting? Are they keeping pace with their peers or exceeding?

Qualitative Attributes Assessment

During a qualitative attributes assessment, we’re looking at the human resources, systems, and technologies within the company? Are these quality assets to be acquired or will departments need complete overhauls due to outdated or mismanaged systems.

The hiring process is obviously an arduous and expensive one. If the talent is already there, that’s of great value to you as a buyer.

Additionally, the qualitative assessment includes at look revenue trends and the diverse mix of:

  • Carriers
  • LOBs
  • Producers
  • Demographics
  • Vendor relationships
  • Reputation
  • Market Reach
  • And more

Future Projections

What was their five-year plan? What were the expectations in terms of revenues, marketing expansion, etc? We want to know not only where they are going but if those projections are well-founded.

Other Considerations

Each agency is unique. While a valuation endeavors to obtain the most objective valuation, we would do a disservice to both the seller and buyer if we didn’t consider any outlying or extenuating circumstances. These might include pending lawsuits, divorce settlements, niche specialties and other variables.

Comparable Sales

Once we understand the above factors, we can begin comparing these agencies to similar agencies that have sold in similar circumstances. These “comps” give us a solid number to work with as we further refine that number based upon differentiating factors.

Buying an Insurance Agency

Let’s talk about your plans to buy an insurance agency. We have the experience and skill to help you find the right agency and get the right valuation. We work with you every step of the way to ensure a seamless agency buying experience. It’s easy to get started and begin exploring your options. Contact us today.