KIA&B 2019 March/April 2019 | Page 26

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 24 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 | KIA&B_MarApr2019_Draft.indd 24 4/19/2019 10:11:46 AM