How much should I expect to pay for an insurance agency

Posted: Fri May 14, 2010 12:46 am Post Subject:

Hi traciemm, welcome to the forum.

There's absolutely no way that question could ever be answered here. There are so many variables and intangibles involved in establishing the value of this kind of business that any discussion in this forum would be nothing more than pure conjecture.

There's only one way... time to hire an established accounting firm with heavy experience in establishing values for insurance agencies. Sounds like you're considering an established agency; 40 years is a long time and 3,000 clients is a lot of clients. Mostly P&C could mean a lot of different things- commercial, personal lines, both... you get the drift

Any idea of the premium volume? That's the primary consideration when establishing value.

InsTeacher 8)

Posted: Fri May 14, 2010 01:45 am Post Subject:

Businesses are sometimes valued at 6-8 times cashflow, but that's rather nebulous.

Will the agency's existing clients jump ship when they learn that it's "under new management"? A few, many, most? What's that (not) worth?

In a situation as you describe, you'll mostly have to trust your gut instinct. Do you have the expertise to service the existing business? If you do, and your stomach doesn't turn at the prospect, then you might consider it.

The other question to ask is, "How am I going to pay for it?" The single biggest cause of business failure is lack of capital. It's been said that to be successful, a restaurant owner has to have enough cash on hand to keep the doors open for 2-3 years.

Probably a bit different for taking over an existing agency, but still a concern. You'd certainly have to know what the arrangements are for continuing commissions from the insurers. Will they still come to the agency, or do they continue to go to the writing agent(s)? What happens if they won't appoint you (probably not a concern, but always a possibility)?

Best wishes for success if you decide to go forward. At least it's not like starting from the ground up.

Posted: Fri May 14, 2010 02:01 am Post Subject:

To Ins teacher,

In regards to your question about premium value. I do know they gross approx. 250.000 annually.

Posted: Fri May 14, 2010 03:42 am Post Subject:

Are you kidding? 3,000 policyholders and only $250,000 gross premium? That's barely $80 per policy on average.

Or did you mean annual net commission? Even that is low considering 3,000 policyholders. I would expect a fair number to have more than one type of policy with the agency (home & auto, business & business auto, life & health). 3,000 policyholders should equate to at least 4,000 policies, don't you think? Now you're talking $60 per policy in average commissions. Very low.

But if $250,000 is average net premium, then an asking price of $1,500,000 - $2,000,000 is the most you might consider paying.

Have to ask yourself, how much NEW BUSINESS can I expect to write? If the answer is not much, then you'll end up a slave to your meager renewals. Not a good position in which to find yourself.

Posted: Fri May 14, 2010 05:20 pm Post Subject:

So if average net premium is $250.000 then an asking price of $700.000 would not be out of line?

Posted: Fri May 14, 2010 07:31 pm Post Subject:

No way that an agency with an annual PREMIUM volume of $250k is worth $700,000 as a purchase price. More like $175k, if that. If the premium volume is $250,000, with an average commission (P&C) of 12.5% (15% new/10% renewal commission) we're only talking about $31,250 in commissions paid annually. There's something wrong with the numbers.

I pulled out our numbers from when I sold my agency. This isn't exactly what's up, but close enough for comparison purposes.

We had almost 4,000 clients and our annual premium volume was roughly $4,000,000, not including the life and health side of things. That's only for the P&C stuff. We averaged about $1,000/client/year in premium. That wasn't the commission, that was the premium.

InsTeacher 8)