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2012 Q4

Fourth Quarter 2012

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Strong Finish to 2012

For the first Three Quarters of 2012, Agency Values have showed significant signs of stabilization relative to Agency Values realized in 2011 and before. Many would be surprised to learn that the Fourth Quarter of 2012 finished as the strongest quarter of the year for Allstate Agency Values despite two theories that had many expecting agency values to finish the year on a decline:

Theory 1 – Sellers would likely be willing to accept a lower than market value price for their agency as long as the transition took place in 2012 allowing them to avoid a larger tax bill than those sales taking place in 2013.
Theory 2 – Sellers would be compelled to sell (at a presumably lower than market price) prior to January 1, 2013 to avoid a reduced commission under variable compensation should their agency not meet the standards required to return to a commission of 10% or greater.

Despite the theories above that were expected to negatively affect agency values, Allstate agency values saw a boost during the Fourth Quarter of 2012 as the simple average of all agencies transitioned was 2.39 times, an increase from Q3 of 2.28 times. In fact, the Fourth Quarter of 2012 was the strongest quarter of the year.

So what have we learned from Q4 – 2012?

For starters, I think we learned that the majority of Allstate agency owners / purchasers see Variable Compensation in its current form as an opportunity and not a hindrance to doing business. If this wasn’t the case, I think we would have seen some measurable decrease in the value of Allstate Agencies during the latter part of 2012 – just prior to Variable Compensation starting in January of 2013. Second, I don’t think a 5-10% tax savings was enough for agencies owners to rush to sale their agency.

At the end of the day, Allstate Agencies are very valuable businesses and a hasty move to sell was not deemed by the market of sellers advantageous enough to rush to sell for less than full market value. Stated another way, compulsion to sell based on the avoidance of taxes or variable compensation did not drive down the value of Allstate Agencies by any measurable amount.

Merger update

Merger activity continues to thrive in the Fourth Quarter of 2012 at a slower pace than the previous three months of the year. Exactly 50% of the agencies purchased in the Fourth Quarter of 2012 were part of a merger transaction. Of those agencies merged, 19% were sold to existing agency owners, with the remaining 81% of agencies being purchased and merged by Outside Buyers. The average book size that was merged in the Fourth Quarter of 2012 was $1,715,000 in Allstate Earned Premium.

When looking at single location agency purchases consummated in the Fourth Quarter of 2012 (the other 50% of transitions occurring), 12.5% were sold to existing agency owners as a satellite location, while the remaining 87.5% were sold to Outside Buyers who maintained the agency as their sole location.

Agency Analysis by Size Group

$0 to $100,000 in New/Renewal Commission

Agency Values with New and Renewal Commissions between $0 and $100,000 increased significantly during the Fourth Quarter of 2012 to 2.14 times (an increase from 1.96 times in the Third Quarter of 2012). A closer look at individual sales revealed higher multiples being paid for these sized agencies by Existing Agency Owners as part of a strategy to increase the size of an already well-established book of business.

$100,000 to $200,000 in New/Renewal Commission

Mergers of these sized agencies continued at a fairly significant pace, as over 80% of Agencies with between $100,000 and $200,000 in New and Renewal Commissions were part of a merger acquisition during the Fourth Quarter of 2012. These sized agencies maintained value just above 2.20 times for the fifth straight quarter (Second Quarter 2011 was 2.16 times), showing strong signs of stability at this level.

However, should the future opportunity to merge agencies of this size be reduced, this occurrence will likely have a negative effect on the value of these sized agencies. Absent a merger opportunity, Buyers looking to operate these sized agencies as a standalone or satellite will likely see a business that needs to grow for the cash flow to work in their favor, and will likely be inclined to pay less than if the agency was being merged.

$200,000 to $300,000 in New/Renewal Commission

Agencies ranging from $200,000 to $300,000 in New and Renewal Commissions have historically been the most steady of all Size Groups, consistently maintaining a value multiple of 2.40 to 2.50 times over the past three years. After a brief drop to 2.33 times in the Third Quarter of 2012, agencies in this size group have rebounded to 2.43 times in the Fourth Quarter of 2012.

$300,000+ in New/Renewal Commission

Agencies in this size group realized an average multiple of 2.55 times in the Fourth Quarter of 2012, keeping pace with the previous three Quarters of 2012. With all four Quarters of 2012 resulting in values for these larger sized agencies ranging from 2.54 to 2.59, this group appears to be the most consistent of all the size groups with regards to consistency in value.

Allstate Agency Price to 12MM Earned Premium Ratio (National Average)

$0 to $100,000

$100,001 to $200,000

$200,001 to $300,000

$300,001 and up

Simple Average

Low

High

2000
N/A
N/A
N/A
N/A

0.202

0.117
0.262

2001
N/A
N/A
N/A
N/A

0.209

0.133
0.311

2002
N/A
N/A
N/A
N/A

0.197

0.119
0.255

2003
N/A
N/A
N/A
N/A

0.199

0.147
0.254

2004
N/A
N/A
N/A
N/A

0.236

0.157
0.393

2005
N/A
N/A
N/A
N/A

0.259

0.175
0.398

2006
N/A
N/A
N/A
N/A

0.298

0.188
0.402

2007
2.37
2.65
2.92
3.01

2.96

1.21
4.56

2007
N/A
N/A
N/A
N/A

0.292

0.121
0.456

2008
2.32
2.41
2.74
3.13

2.71

1.45
4.06

2008
N/A
N/A
N/A
N/A

0.271

0.145
0.406

2009
2.14
2.35
2.50
2.78

2.46

0.82
3.97

2009
N/A
N/A
N/A
N/A

0.247

0.082
0.397

2010
N/A
N/A
N/A
N/A

0.24

0.106
0.353

2010 1st QTR
1.94
2.29
2.52
2.91

2.39

1.06
3.53

2010 2nd QTR
2
2.27
2.47
2.8

2.37

1.17
3.16

2010 3rd QTR
2.22
2.26
2.5
2.74

2.43

1.42
3.31

2010 4th QTR
1.94
2.33
2.49
2.76

2.41

1.95
3.28

2011 4th QTR

N/A

0.231

0.12

0.366

2011 1st QTR
1.78
2.36
2.49
2.73

2.47

1.2
3.57

2011 2nd QTR
1.99
2.37
2.41
2.53

2.33

1.2
3.66

2011 3rd QTR
1.89
2.16
2.45
2.7

2.25

1.5
3.66

2011 4th QTR
2.05
2.23
2.45
2.52

2.34

1.62
3.37

2012 1st QTR
1.87
2.2
2.41
2.54

2.3

1.47
3.07

2012 2nd QTR
1.84
2.27
2.4
2.56

2.3

1.46
3.29

2012 3rd QTR
1.96
2.22
2.33
2.59

2.28

1.27
3.24

2012 4th QTR
2.14
2.21
2.43
2.55

2.39

1.53
3.36

Use the arrows to see agency values over time.

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Allstate Agency Value Ratios

Agency Price to New/Renewal Commissions

Agency Price to Total Revenues

2007 1st QTR

2.95

2.37

2007 2nd QTR

2.74

2.39

2007 3rd QTR

2.75

2.35

2007 4th QTR

2.49

2.18

2008 1st QTR

2.95

2.38

2008 2nd QTR

2.74

2.39

2008 3rd QTR

2.75

2.35

2008 4th QTR

2.49

2.18

2009 1st QTR

2.65

2.28

2009 2nd QTR

2.5

2.22

2009 3rd QTR

2.42

2.17

2009 4th QTR

2.37

2.17

2010 1st QTR

2.39

2.08

2010 2nd QTR

2.37

2.09

2010 3rd QTR

2.43

2.13

2010 4th QTR

2.41

2.09

2011 1st QTR

2.47

2.18

2011 2nd QTR

2.33

2.05

2011 3rd QTR

2.25

2011 4th QTR

2.3

2.06

2012 1st QTR

2.3

2.02

2012 2nd QTR

2.32

2.05

2012 3rd QTR

2.28

2.05

2012 4th QTR

2.39

2.11

Use the arrows to see agency values over time.

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"When the Going Gets Tough, the Tough Get Going"

It's the oldest of all clichés. "When the going gets tough, the tough get going." I love it because it is so simple and can be applied to so many aspects of our lives. Business life, personal life, spiritual life; we can all think of instances in our own lives where this saying firmly applies.

For those of you who know me well, you know that I am a big sports fan. I love baseball, football, basketball and golf. Of all these sports that are played by ordinary men and women, I believe golf gives us the greatest opportunity to peek into the character of those individuals who choose to play the game.

Have you ever played golf with someone that throws their clubs? What about the golfer that can't keep his mouth shut while others are trying to hit? In my opinion, the most annoying golfer of them all is the golfer who always seems to have an excuse for every bad shot. Like I tell my 7-year old son – "Excuses are for losers." Certainly these poor-sport golfers are not playing in harmony with "When the going gets tough, the tough get going."

Greg Norman was quoted as saying "The best golfer's welcome bad weather. You always knew 85 to 90 percent of the field was complaining. The rest find a way to get it done." Essentially what Greg was saying is "When the going gets tough, the tough get going."

Among his peers, Tom Watson, a five-time British Open champion, is the indisputable choice as the best bad-weather performer of the modern era of golf. His three-under-par 69 in the second round of the 1979 Memorial Tournament, when the wind chill sank to 13 degrees and the wind gusted to 30 mph, is engraved in the minds of many tour players. "Tom was always the best bad-weather player we had on tour," Jack Nicklaus says. "He's the best I've ever seen. Whenever it's windy, howling and cold, he seems to shine."

Do you know a fellow Allstate Agent that runs their business like Tom Watson plays golf? When the product isn't competitive they just continue to find new ways to get it done. How do they do it? "When the going gets tough, the tough get going."

In his heyday, golfer Tom Watson viewed the harsh elements as an opportunity to separate himself from the competition, and he genuinely enjoyed the challenge. "It's not for everyone, but I found playing in bad weather to be fun," says Watson, "I was prepared to deal with whatever Mother Nature was willing to dish out."

WOW! Talk about words to live by. Tom Watson says – "I was prepared to deal with whatever was dished out." How simple yet profound. Tom even states that he found playing in bad weather to be "fun." Are you serious – fun? I can think of a lot of words to describe playing golf in 13 degree wind-chill and fun would not be one of them.

Tom Watson is golfs version of who we all strive to be as business owners. When a day at his office (the golf course) was difficult he saw the fun in the challenge. How do we view our jobs/businesses when things are tough? Do we focus on the challenge ahead or do we soak in self-pity?

I think I have learned a few things from Tom Watson and his dominance of bad weather golf:

Change is going to happen – sometimes good, sometimes bad,
You must always be prepared to deal with the unexpected, and
If you are going to do it, do it with a smile on your face

Let’s look at each of these three individually:

1. Change is going to happen – sometimes good, sometimes bad

Not much to say here. We all know change is right around the corner. If your product isn't competitive, guess what? It soon will be. If making money is easy today, guess what? It is going to be hard tomorrow.

2. You must always be prepared to deal with the unexpected

When looking at this from a business perspective, I think an appropriate descriptive word is Cyclical. Are you prepared for the cyclical nature of business? Are you spending every penny of your take home pay during the good years? If this is the case, then you are not ready and prepared to deal with the down years.

Do you manage your business quarterly or annually based on the wide or narrow availability of opportunities? Do you have a succession plan, life insurance and contingencies for the future? If yes, then you are prepared

3. If you are going to do it, do it with a smile on your face

This one seems silly, but it might be the most important of the three. Why? Because everyone is watching you. A sour attitude by the boss will make its ways into the customer's ear. This is a fact.

I really understood this concept in 2002. I had been working with a referral source for a little over a year and every conversation with this individual was less than pleasant. He was always upset even when I was delivering good news. Finally, I got an opportunity to work and communicate with others in his office. Unfortunately, these individuals had the same negative/crappy attitude. This was not by coincidence. They were simply conforming to the mold that had been presented to them by their boss.

Tying it together:

When I was doing my research for this editorial, I stumbled upon Wikipedia which in my opinion does a great job of explaining "When the going gets tough, the tough get going":

The meaning of the phrase is "When the situation becomes difficult,
the strong will work harder to meet the challenge."

I love this, but I still struggle with one thing – Who are "the strong"? Is it a chosen few who have superior talents and resources? I don't think so. I think "the strong" is anyone who chooses to be strong when the situation is difficult. In fact, I think a slight tweak of Wikipedia's quote is in order. Here is my version:

“When the situation becomes difficult, some will choose to become strong
by working harder to meet the challenge.”

Whether you agree with my version of this quote or not, one thing is for certain: During difficult times, the recipe for success is hard work.

So what is the takeaway?

I hope you develop your own takeaway, however, the takeaway for me has been added to my New Year's resolution (in addition to getting in shape):

I will be the source of a positive attitude in my office – regardless of what issue we are dealing with.
I will continually monitor my business for:
a. Opportunities, and
b. Change on the horizon
When change does happen, I will greet it with a smile and work harder.