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  • Writer's pictureChris Burand

Insurance Agency Valuations

Updated: Aug 25, 2020

Agency transaction values are possibly at an all-time high. I never thought I'd see agencies sell for multiples this high and excluding speculation, excessive optimism, and interesting accounting, I cannot figure out how some of these deals ever cash flow themselves. Note: they may cashflow, but not cashflow themselves. There is a big difference.

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These high values create conundrums, problems and great opportunities. I find many agency owners are still creating unnecessary problems for themselves because they do not understand a few basic rules. In other cases, because most people are not experienced sellers, and they only sell their agencies once, they do not know enough regarding valuation rules and differentiating appraisers. The following is only meant as a summary.

Valuations for family situations are different. The IRS has 60 years of case law specific to valuing businesses for family situations. The rules are fairly specific.

  • Rule #1: You do not get to do your own valuation. Sorry.

  • Rule #2: The IRS has wide discretion regarding what value they may assign. If they are wrong, you get to prove it.

  • Rule #3: Just because you think your agency is only worth $X means you failed Rules 1 and 2. What you think does not count for much. Sorry.

  • Rule #4: "No formula can be devised that will be generally applicable to the multitude of different valuation issues arising in estate and gift tax cases." (Appendix II, Revenue Ruling 59-60, National Association of Certified Valuation Analysts, 2008, p. 3.) In other words, 1.5 times revenue is unlikely to pass the IRS tests for valid valuation formulas. This is especially true if the formula is not updated at least annually.

  • Rule #5: The balance sheet matters. In fact, balance sheets matter an awful lot.

    1. The balance sheet determines if you are in trust.

    2. ALL STATES ARE TRUST STATES! Some states allow commingling of funds and some do not but 100% of all states, territories, and the federal government require agencies to hold premium monies in trust. The balance sheet shows whether the agency is holding adequate monies in trust. If not, then the agency automatically loses title to its expirations and its value is usually decimated.

    3. Depending on premiums payable/agency bill status, the balance sheet value can vary hugely from one month to another. This is why a valuation of the balance sheet as of the sale date is usually a requirement.

  • Valuations for family situations absolutely must be on a Fair Market Value basis.

Valuations for non-family situations, including some divorces:

  • Fair Value is becoming much more common due to a variety of case law and accounting rule changes.

  • Fair Value may seem similar to Fair Market Value, but the data used and the outcome likely will be materially different.

  • Never confuse Fair Value and Fair Market Value--and don't let your attorneys confuse the terms either.

  • Historically Fair Value has been used most often for divorces and shareholder law suits. Whereas Fair Market Value is mostly defined on a Federal level, Fair Value is usually defined at the state level which causes much confusion, even with most attorneys with whom I've worked on this issue. Fair Value is hard work.

  • Fair Value is now being used by private equity and publicly traded brokers in how they assess and assign value to their acquisitions. Fair Value is problematic on this basis because more subjectivity is allowed by the buyer. Some evidence is accumulating that Fair Value is being abused by some companies to make the value of their assets, often acquisitions, look more valuable than they really are.

The Fair Value vs Fair Market Value Problem.

  • What has happened with Fair Value from the acquisition perspective is that, generally, values have climbed far higher than Fair Market Value and those transactions no longer necessarily equate to Fair Market Value.

  • The details of why these transactions do not equal Fair Market Value can be numbing and go far beyond this short article, but it is imperative as a buyer or seller to either know the difference or hire an appraiser who knows the difference.

Quality Appraisers.

  • I find that most appraisers of insurance agencies lack the education required to complete a quality valuation report.

  • Many do not adequately understand the differences between Fair Value and Fair Market Value. These are difficult concepts and to execute an appraisal for one, much less both, requires considerable education and data and then the knowledge of how to apply that education to the data for each definition. I see many appraisers that treat the terms effectively synonymously and that is completely wrong.

  • I attended a national conference where several speakers argued they could appraise any kind of business using their various techniques. This was a premier business valuation conference with participants from around the world. I disagree, especially if they are using market multiples:

    1. Market multiples today are an expression of Fair Value rather than Fair Market Value at least for insurance agencies.

    2. Market multiples generally include a neutral value balance sheet, give or take. This reality requires and demands the balance sheet be considered and valued separately.

    3. And a thousand other reasons industry specific expertise is required.

If Selling:

  • If you are considering selling, my advice is to start with getting your house in order. This includes all your paperwork, data, documentation, financials, etc. Just because you think you have everything you need does not mean you have everything you need. When agency owners tell me all their data/documentation is quality, I tell them that is what every agency owner says, but it is rarely true. If you haven’t gone through the process, it is really difficult to appreciate the level of detail required and the questions that will be asked. It is not just that you have to provide the data. People will check whether the data reconciles. For example, if your tax returns do not match your financials, buyers will want to know why and it is best if you have a good answer.

  • Hire someone that works exclusively for you to assist in getting the agency ready to sell.

Agency valuation and due diligence is complex and difficult unless you want a sloppy job and a big risk. Doing it well is an opportunity. It is your choice.


NOTE: The information provided herein is intended for educational and informational purposes only and it represents only the views of the authors. It is not a recommendation that a particular course of action be followed. Burand Insurance Education, Burand & Associates, LLC and Chris Burand assume, and will have, no responsibility for liability or damage which may result from the use of any of this information.

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