It’s pretty common knowledge that Allstate agencies generally sell for a higher multiple of revenue than independent agencies. Independent agents, and former Allstate agents, are also pretty vocal that the grass is greener on the independent agent side of the field. So why are Allstate agencies selling for a higher multiple of revenue than independents?
When buying an agency, every buyer is looking for (1) enough cash flow to cover debt service and (2) a reasonable ROI on their cash input on a deal. I don’t care what anyone says about revenue multiples. If the deal doesn’t meet those two requirements, then it’s not going to happen. So what does this have to do with Allstate agency versus independent agency values?
If you take an Allstate agency and standard personal lines independent agency of the same revenue, nine times out of ten the Allstate agency nets 10-20% of revenue more than the independent. In my experience, the average Allstate agency with $350k in commission revenue will net 60% to the owner’s pocket, whereas, an independent agency of the same revenue will net 40-45%. A small agency of this size will generally sell for 3.5 to 4.0 x the net due to limitations of cash flow after debt service. Using a 3.5 multiple, the math works like this:
AA: 60% of revenue x 3.5 = 2.1 x revenue for an AA
IA: 45% of revenue x 3.5 = 1.6 x revenue for an IA
Granted, in reality, an independent agency of this size will typically be acquired by a strategic buyer (larger IA) that might merge the book into an existing office increasing the profit margin by 15%. In such a comparison, the Allstate agency might have a projected retention of 85-90% based on historic performance versus the independent having a lower projected retention (say 75-85%) due to the historic performance and anticipated loss with a merger. The strategic buyer of an independent agency then could justify paying closer to 2 x revenue instead of the 1.6, which is what we see in the marketplace.
The question might be why are Allstate agencies more profitable? The answer is simple. Allstate agencies tend to have: (1) higher retention rates – requiring less new business production and fewer staff, (2) simpler systems – only one company to quote in most states, no expensive management system and again fewer staff requirements, and (3) Allstate pays for cooperative marketing – cutting the marketing budget in half. Using my prior example, an Allstate agency with $350k in revenue likely only needs 2 staff if the owner works full-time; whereas, the independent agency needs 3 staff due to the number of companies being utilized and higher production requirements to keep the revenue from declining.
That’s my two cents on the topic.
Posted by: Michael Mensch, CBI, M&AMI and Managing Partner