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As I reported in a previous blog a few months back, the market for selling an insurance agency is better than it has been in many years. The economy has improved from the pits of the recession, agency revenues are rebounding, and cash-flushed buyers are flooding the market with limited opportunities of preferred property and casualty agencies to be acquired. This is having a multiplier effect on valuations: (1) higher revenue/earnings = higher value and (2) more buyers = higher valuation multiples.
I genuinely believe that we are in an acquisition bubble that will pop shortly after interest rates begin to rise. It is impossible to fathom that valuation multiples for preferred P&C agencies could continue to increase significantly based on the current market place. Once interest rates do rise, and they will significantly, then the cost of capital will also rise and drive down multiples. For now though, money is flowing freely into agency acquisitions from private equity sources and lenders.
So, back to my question, is 2014 the right time to sell? Well, it depends. Apart from the immediate motivations of retirement, health concerns, life changes, etc, I think it would be wise for any agency principal within three years of their desired exit to initiate the process by way of an agency valuation. Here’s why:
(1) Your agency may be operating below its maximum profitability. The average agency with over $300,000 in revenue typically sells for a multiple of earnings, which, depending on your revenue, could be 4 to 8 times the pro forma earnings. Even minor adjustments to expenses now can have a significant impact on the value later.
(2) You may need to stay on for an extended period of time after closing. This is primarily true for agencies with over $1M in revenue, and/or those in which the owner is a key producer for commercial accounts. Larger deals commonly have earn-out or retention-based components and you’ll need to stay involved to maximize your payout.
(3) It’s always a good idea to consider your exit before market values crest. We met many agency owners between 2008 and 2010 that would have netted more money if they sold pre-recession, then they did working another 1-3 years before selling for significantly less. The market contraction dropped agency revenues and the demand, creating a considerable decline in agency values. Like any investment, the timing of a sale is important.
With over a dozen agency valuations and eight transactions in the works across nine states, I can assure you that we understand the market value of independent insurance agencies as well as anyone in the country. Please feel free to give me a call if you have any questions: (321) 255-1309. We value your business and our fiduciary responsibility is always to our clients.
Posted by: Michael Mensch, CBI, M&AMI and Managing Partner