Agency Perpetuation
THE MYTH OF AGENCY MULTIPLES
by David Tralka,
CEO Insurbanc
W
henever agency principals get together,
the topic of agency valuations is sure to
come up. Someone will start talking about
an agency that sold at an unbelievably high mul-
tiple. Pretty soon, everyone’s nodding their head
and saying there’s a killing to be made selling
your agency.
These types of discussions tend to be long on con-
jecture and short on facts. They remind me of the
stories fishermen tell about the big one that got
away. Rarely does anyone know the actual price that
was paid for an agency. And even if they do, that
doesn’t mean yours will sell for the same amount.
It’s important to know what creates agency value
and how markets determine price. Mergers and ac-
quisitions may still be going strong, but the steady
increase in interest rates is likely to act as a gover-
nor on prices going forward. So if you really want
top dollar for your agency when it’s time to sell,
you need to realistically take stock of your firm
and not let those dollar signs go to your head.
There are different ways to look at value. Some
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buyers pay attention to revenue multiples, essen-
tially commission income. Others look at EBITDA
(earnings before interest, tax, depreciation and
amortization), or cash flow.
I’ve always felt the revenue approach is flawed
because it doesn’t take into account the cost of
generating income. If you’re spending a dollar to
make a dollar, that’s not a very efficient operation.
The cash-flow model is a better indicator of the
quality of an agency’s earning power. That is, your
agency’s value comes from your ability to drive
sustained cash flow over time.
Regardless of how you measure value, higher-per-
forming agencies will always sell for a premium.
It’s no different than when the best maintained
house in the neighborhood goes on the market.
You know it’s going to sell for top dollar.
Which brings me to another point: The market is
the price at which a buyer is willing to pay a seller.
You may think your fixer-upper agency is worth a
lot more, but if no one wants it at that price — well,
KANSAS INSURANCE AGENT & BROKER | March - April 2019 |
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