ADJUSTING EXPECTATATIONS --- AND THE LAW OF SUPPLY AND DEMAND
by Jon Persky
Back in the 1960s and 1970s, it wasn’t unusual to find people who worked for the same company for their entire career. Today, the average person has at least seven different employers over the course of his or her career.
Back in the 1990s, everyone was convinced that the stock market would keep going up and up. Today, we know better.
Back in the 2000s, the housing market was rocking and rolling. Individuals were buying multiple properties and flipping them. Today, many of those people are being foreclosed on as housing prices have dropped by 20% -50%, depending on where you live.
As time goes on, people have had to adjust their expectations.
The same holds true of insurance agency values. Could you have gotten 1.5 to 2 times agency revenues, or more than seven times EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) a few years ago? Yes.
Can you still get that for your agency today? It’s highly unlikely.
Two years ago, I recommended to an agency owner that he sell his agency. At the time, he had $500,000 of commission income and was insisting that he wouldn’t sell unless he could get $1,000,000 for the agency. When I told him that his agency wasn’t worth a million dollars, he said he would continue to own it and grow the agency until he could get a million for it.
As with everything else, insurance agency owners need to adjust their expectations to the realistic value or sales price of their agency. Not only is this an issue of the profitability of the agency – it’s also an issue of supply and demand.
Important Factors
Baby Boomers
As the population ages, so does the age of the typical agency owner. Of the almost 11,000 agency owners in The National Alliance database, 22.6% are older than 60. Another 37.2% are between 50 and 59. Many of these owners don’t have a perpetuation plan, and many of these agencies will be going up for sale when the owners decide to retire. This results in an increased supply of agencies.
Banks
During the past 10 years, banks thought it was a great idea to acquire insurance agencies and they expected significant synergies. Considering the current economic environment, most banks, even the very financially strong ones, are no longer actively acquiring insurance agencies. In fact, many banks are trying to sell off their insurance operations. This results in both a decreased demand as well as an increased supply.
Available Financing
Anyone who has tried to borrow money during the past year knows that it has become more difficult, even for those with good credit. So while there are people out there wanting to acquire insurance agencies, if they can’t obtain the funding, they aren’t viable buyers. This reduction of available financing results in decreased demand.
Lower Agency Profitability
In basic terms, the value of an agency depends on the net cash flow of the agency. More profitable agencies are more valuable than less profitable ones. The past few years have seen significant pressure on agency profitability for a number of reasons:
- The soft market has reduced premiums and commissions.
- The economy has driven many companies out of business, which eliminates agency commissions.
- Companies still in business have reduced payroll and sales, leading to decreased commissions.
- Home foreclosures have increased, which results in lost homeowner commissions.
What to Do
Agency owners need to take a long, hard look at their short- and long-term goals. In some cases, an owner might be much better off financially by selling the agency and becoming a producer for the buyer. Owners who insist on maintaining ownership of the agency should consider obtaining assistance with strategic planning, re-marketing agency services, workflow, etc., to make the agency more productive, effective, and profitable in these tough economic times.
Summary
Remember the owner who wanted two times revenues for his $500,000 commission agency? Today the agency has $300,000 of commissions and the owner is now looking at a purchase price of closer to $400,000. As the agency has shrunk in commissions (and value), the owner’s ability to invest in hiring producers and grow his agency has shrunk as well.
The owner hasn’t taken any compensation in six months and could make more money as a producer for a larger agency. At age 74, does he really want to continue to work, either for himself or for someone else?
Consider this:
- The average life expectancy is 75 years;
- You’ll spend 25 years sleeping;
- You’ll spend 20 years growing up;
- You’ll spend 15 years working;
- You’ll spend 10 years in your old age, too infirm to embrace life; and
- You’ll spend 3 years driving, cooking, cleaning, and waiting in lines.
This leaves you with only about 730 days to have some fun. Do you really want to own you agency and keep working until your number comes up? Think about it!
Jon Persky, CIC, CPA, PHR, is president of Optimum Performance Solutions, LLC , an agency consulting firm that provides valuation, merger and acquisition, agency, perpetuation, strategic planning, and marketing and retention services to insurance agencies nationwide. He is also a member of The National Alliance faculty and a speaker at Ruble Seminars. For more information, contact John at (813) 835-7337, e-mail [email protected], or visit www.optperform.com. Reproduced from Resources Magazine, with permission from The National Alliance for Insurance Education and Research.