Medium and smaller agencies are marketing for acquisitions like they market for insurance clients. They create marketing plans, they identify targets that accomplish their needs and they proceed to establish relationships with the agents targeted in order to become the logical opportunity when the need for perpetuation arises. This is a long-term plan exercised by many Agency Consulting Group, Inc. clients using Agency Consulting Group, Inc. as the conduit. And that works well to acquire agencies every year if enough prospects are worked consistently enough every year.
Finally, we encounter a growing number of frustrated agents who contact Agency Consulting Group, Inc. for acquisition assistance asking if we “happen to have” any agencies for sale in their particular geographic region. We try very hard to be consultative with these agents, explaining that there are multiple buyer options for every agency for sale, that most agents who are for sale have reasons beyond age and retirement that requires the sale and that the call for agencies for sale is much like calling and asking if we have any businesses who are in need of a good insurance agent. No one questions the need for marketing to insurance prospects. Why do they think that agency acquisition opportunities will just fall into their hands? If any agency would like to merge or acquire other agencies as a growth medium, please re-read the previous paragraph and call us for further advice.
So acquisitions, even of agencies that have not been for sale, continue unabated. It is just relatively more difficult and more expensive to harvest the newly ripening fruit and the ripe fruit higher in the trees.
GOING CONCERN VALUE VS. ACQUISITION FAIR MARKET VALUE
THE VALUE OF AN AGENCY (OR ANY OTHER BUSINESS OR PROPERTY) IS ITS POTENTIAL EARNINGS CAPACITY OVER TIME AS VIEWED BY THE PARTY CONSTRUCTING THE VALUATION FOR THE EXPRESSED PURPOSE OF THE VALUATION.
As most agents know, Agency Consulting Group, Inc. is a principal valuer of agencies throughout the U.S. And, as you know if you read our publications, agency value is not a static number. The value of an agency depends on the person and circumstances for which the value is being done.
For instance, when agencies are valued for estate planning purposes (insurance needs) and for other internal needs such as adding, buying out and annual value for partners, we use a Going Concern Value – the value of the agency remaining in current hands and operating pretty much as it has historically. On the other hand when one agency is seeking the acquisition of another, we will construct the valuation based on the economies of scale that will be achieved by the acquirer assuming control of the acquired agency. A third scenario involves the death or retirement of the agency owner. A Wasting Asset valuation takes the remaining book of business and wastes it away at a pre-determined retention rate in the hands of another agency who assumes control of the client base.
In each case, and hundreds of other scenarios requiring valuation, we construct the potential future earnings stream of the agency or of the book of business based on the assumptions of continuation or changes in revenue growth (i.e. there is none credited to the deceased or retired owner after the event in the case of a Wasted Asset) and in expenses as the result of the cause of the valuation.
For instance, if a simple acquisition will close one office and move into the acquirer’s office that has sufficient open space to accommodate the acquired agency, we eliminate the acquired agency’s occupancy cost and increase the potential profits and earnings. This will, eventually enhance the value of the acquired agency to the acquirer over the value of the same agency to the original owner who would have to maintain his occupancy costs as is.
THE MULTIPLE MYTH
We still get numerous calls every month from agents simply desiring the current “multiple” for valuation purposes. Regardless of how many times we repeat it, many agents ‘Don’t Get It’ – multiples are created by taking a calculated value and dividing it by the denominator being used (revenue, commission, EBITDA, earnings, etc.). It is meaningful only to the specific agency being valued because the agent doesn’t have to specify how much his agency is worth in real dollars. He can say it is worth 1.4X or 2.1X, or 3.3X. But if I get 50 times annual revenue for a building (that happens to be in mid-town Manhattan) does that mean that every building in the U.S. is now worth 50 times annual revenue?
Public companies routinely release multiples of earnings, EBITDA (Earnings before Interest, Taxes, Depreciation and Amortization) that they have paid for other companies. High multiples attract other businesses who feel that if the company has paid that multiple for one agency then it will logically pay the same multiple for other agencies.
However, even if the company expresses its offer in terms of multiples, I assure you that they do their due diligence and pay no more than they can afford for each asset that they purchase. It would be a foolish company indeed that continuously pays more for each purchased asset than it will project to earn for the acquirer over time – and an eventually bankrupt company.
