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2016 Q3

Third Quarter 2016

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Values Remain Strong Thanks to Mergers and Existing Agents Purchasing Satellites

Allstate Agency values remained strong in the Third Quarter of 2016 thanks in large part to both merger transactions being executed by Outside Buyers and Existing Agency owners purchasing a satellite location. Recent trends have seen top-performing existing Allstate Agency Owners receive approval to acquire a satellite, along with the occasional Outside Buyers being granted approval to purchase and merge two or more locations when such action is deemed to support Regional business objectives. Although the majority of Allstate Agency sales continues to be to Outside Buyers, the sheer existence of both Outside Buyers completing a merger and Existing Agency owners purchasing a satellite (regardless of their frequency or lack thereof), has been an important part of Allstate Agency values maintaining their current levels – a concept that will be discussed in greater detail below.

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 4th QTR

N/A

0.229

0.127

0.336

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

2013 4th QTR

N/A

0.247

0.107

0.349

2013 1st QTR
2.1
2.15
2.38
2.51

2.3

1.28
2.95

2013 2nd QTR
N/A
1.99
2.3
2.57

2.34

1.88
3.07

2013 3rd QTR
2.19
2.18
2.39
2.68

2.5

1.59
3.07

2013 4th QTR
N/A
2.2
2.48
2.74

2.5

1.07
3.49

2014 4th QTR

N/A

0.264

0.107

0.352

2014 1st QTR
1.74
2.32
2.35
2.7

2.38

1.07
3.16

2014 2nd QTR
N/A
2.43
2.47
2.76

2.62

1.73
3.52

2014 3rd QTR
N/A
2.52
2.54
2.77

2.66

1.97
3.45

2014 4th QTR
N/A
2.43
2.54
2.79

2.69

1.94
3.52

2015 4th QTR

N/A

0.251

0.126

0.431

2015 1st QTR
N/A
1.99
2.45
2.66

2.5

1.69
3.35

2015 2nd QTR
1.48
2.4
2.5
2.85

2.54

1.34
4.31

2015 3rd QTR
1.26
2.04
2.71
3.05

2.55

1.26
3.66

2015 4th QTR
1.86
2.22
2.39
2.91

2.43

1.68
3.31

2016 1st QTR
1.53
2.09
2.47
2.61

2.35

0.81
3.01

2016 2nd QTR
N/A
2.1
2.51
2.79

2.59

1.61
3.78

2016 3rd QTR
2.55
2.15
2.54
2.74

2.58

1.8
3.67

Use the arrows to see agency values over time.

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The premise above, which states that Allstate Agency values are at their strongest when mergers are on the table and Existing Agents can pursue approval to purchase a satellite, is supported by these occurrences of the Third Quarter of 2016:

All agencies transitioned with less than $1 Million in Earned Premium were sold as part of a merger transaction. The opportunity to merge has significantly bolstered these sized agencies average sales multiple up to 2.55 times this Quarter.
29% of Allstate Agencies sold with over $3 Million in Earned Premium were sold to an existing agency owner at an average multiple of 3.19 times – a sales multiple well above the average multiple for the quarter of 2.74 times for agencies with over $3 Million in Earned Premium.
Absent Existing Agency owners purchasing satellite locations, Outside Buyers paid an average sales multiple of 2.56 times for agencies with over $3 Million in Earned Premium. Outside Buyers represent 71% of these larger-sized agency sales.

Supply and Demand

The inclusion of Existing Allstate Agency owners as part of the approved buyer pool has increased demand for Allstate Agencies and has been great for Allstate Agency values. This has been a long-standing trend and is very apparent in this quarter’s numbers, as Outside Buyers paid an average multiple of 2.56 times for agencies with $3 Million in Earned Premium or greater, while Existing Allstate Agency owners paid 3.19 times. The chart below depicts how movements in demand affect the Price/Value of Allstate Agencies.

Limited Market Demand

In the chart below, the “Limited Market Demand” line depicts a price equilibrium or average sales multiple of 2.56 times for agencies with over $3 Million in Earned Premium. This demand line reports Allstate Agency sales only consummated by Outside Buyers and is labeled as the “Limited Market Demand” line, as it excludes those agencies that were purchased by an Existing Agent.

Open Market Supply and Demand

The above chart also depicts the “Open Market Demand Line,” which illustrates how Allstate Agency values increase when you have a larger pool of approved buyers. Open Market Demand is defined as the inclusion of both high-performing Existing Agents along with Outside Buyers as approved purchasers who are looking to acquire an established Allstate Agency. The resulting sales multiple is 2.74 times, a much higher multiple as greater demand proves to equate to a higher Price / Value.

It is interesting to note that just the inclusion of a few highly qualified existing agency owners as purchasers of established satellites can have a significant effect on Allstate Agency values (Existing Agency owner’s represented 21% of the transactions in this Quarter). Certainly, each Region reserves the right to approve or disapprove any Agent wanting to purchase based on the business objectives of the Region or even the character or performance of the individual agent requesting approval to purchase. It is refreshing to see top performing agents get the opportunity to oversee larger volumes of premium dollars on behalf of Allstate Insurance, something that is undoubtedly good for shareholders and customers alike.

Why are Existing Agents Paying More?

It all comes down to purchasing power. Outside Buyers looking to purchase an established agency are purchasing a good paying job, which in most instances will be the only source of income used to provide for their family. Outside Buyers have to pay their mortgage, car notes, child expenses, etc. out of this newly purchased business, so they bring a unique level of scrutiny to the due diligence process, primarily when analyzing the cash flow of the business and what they can afford to pay as an Outside Buyer.

Existing agents almost always have their “grocery money” covered from their existing agency cash flow. As a result, their purchasing power is greater than an Outside Buyer, as the additional satellite business they are purchasing amounts to “gravy” on top of an already well performing and cash flow positive business.

Percentage of Agency Sales by Size Group

$0 to $100,000

$100,001 to $200,000

$200,001 to $300,000

$300,001 and up

2007 1st QTR

N/A

2007 2nd QTR

N/A

2007 3rd QTR

N/A

2007 4th QTR

N/A

2008 1st QTR

N/A

2008 2nd QTR

N/A

2008 3rd QTR

N/A

2008 4th QTR

N/A

2009 1st QTR

N/A

2009 2nd QTR

N/A

2009 3rd QTR

N/A

2009 4th QTR

N/A

2010 1st QTR

N/A

2010 2nd QTR

N/A

2010 3rd QTR

N/A

2010 4th QTR

N/A

2011 1st QTR

N/A

2011 2nd QTR

N/A

2011 3rd QTR

N/A

2011 4th QTR

N/A

2012 1st QTR

N/A

2012 2nd QTR

N/A

2012 3rd QTR

N/A

2012 4th QTR

N/A

2013 1st QTR

17%

28%

27%

28%

2013 2nd QTR

N/A

21%

38%

41%

2013 3rd QTR

15%

26%

52%

2013 4th QTR

N/A

25%

42%

33%

2014 1st QTR

15%

58%

21%

2014 2nd QTR

N/A

17%

29%

54%

2014 3rd QTR

N/A

43%

52%

2014 4th QTR

N/A

36%

61%

2015 1st QTR

N/A

12%

41%

47%

2015 2nd QTR

22%

44%

30%

2015 3rd QTR

32%

27%

36%

2015 4th QTR

14%

31%

24%

31%

2016 1st QTR

31%

24%

31%

2016 2nd QTR

N/A

14%

35%

51%

2016 3rd QTR

13%

41%

45%

Use the arrows to see agency values over time.

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The Third Quarter of 2016 saw a large number of agencies with over $2 million in Premium sell, with agencies over $3 Million in Premium representing 43% of this size group. Fewer ADB qualifying agencies were financed in the Third Quarter, and it will be interesting to watch going forward if this becomes a trend.

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

2013 1st QTR

2.3

2.06

2013 2nd QTR

2.33

2.11

2013 3rd QTR

2.5

2.21

2013 4th QTR

2.5

2.19

2014 1st QTR

2.38

2.17

2014 2nd QTR

2.62

2.28

2014 3rd QTR

2.66

2.31

2014 4th QTR

2.69

2.32

2015 1st QTR

2.5

2.19

2015 2nd QTR

2.54

2.21

2015 3rd QTR

2.55

2.24

2015 4th QTR

2.43

2.14

2016 1st QTR

2.35

2.06

2016 2nd QTR

2.59

2.32

2016 3rd QTR

2.58

2.4

Use the arrows to see agency values over time.

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For those Agency Owners residing in a state where a good portion of the homeowners insurance is written through a third party brokerage company (primarily coastal counties), looking at the multiple of revenues may be your best measuring stick for agency value as it takes into consideration both Allstate and brokered (i.e. non-Allstate) revenues. Certainly, the brokerage book is a reliable source of renewal income and has a level of value that is not presented in the traditional multiple applicable to Allstate commissions.

Being the creator and author of the Allstate Agency Value Index has afforded me the opportunity to write countless articles and to travel on behalf of PPC LOAN to speak to both Allstate Management and the Agency force. In the process, I have learned of the issues often faced at loan closing, such as the restrictive covenant.

So, this quarter I have asked Aaron Racino to share his expertise in the area of seller financing. If you would like to discuss financing with Aaron he can be reached at [email protected] or toll free at 800-456-2779.

Paul Clarke President of PPCLOAN

The Good, The Bad, and The Ugly: Seller Financing

This editorial is part one of a two part series. This part will discuss the ins and outs of seller financing and the second section will focus on an analytical view of how these acquisitions are structured in real world transactions. In today's market where the demand for Allstate agencies seems to be ever-growing, values have been holding strong and seller financing has become a common part of selling an agency. The following editorial will discuss the various aspects of seller financing as they relate to the classic western film The Good, the Bad, and the Ugly starring Clint Eastwood.

The Good

Seller financing the sale of an agency is attractive for a variety of different reasons, with the primary being that the seller acts as the bank. Without having a bank involved, the seller has significantly more leverage and is better able to dictate the terms of the loan, sell for a premium purchase price, and choose an approved buyer of their liking regardless of their ability to secure traditional financing.

Another common perk of seller financing is the steady stream of loan payments that the seller receives on a monthly basis. This is particularly attractive for agents that are retiring as they might benefit from a monthly annuity-like payment rather than a one-time lump sum. These payments can act to replace their existing income and be used to cover personal living expenses well into retirement. The seller can structure the loan with things such as interest rate, repayment term, and amount financed in a variety of different ways in order to achieve the desired size of the monthly payments.

The buyer and seller have the flexibility to structure the deal however they see fit and are able to negotiate things like the interest rate, loan term, down payment, and purchase price to achieve an ideal loan structure that may be outside of what conventional lenders may be willing or able to do. For example, banks may have limitations on the duration of a loan term and they may be less likely to negotiate interest rate due to underwriting guidelines. Additionally, traditional lenders may be more selective of who they lend money to which is due largely to the creditworthiness of a potential borrower.

The Bad

Although there are attractive aspects to seller financing the sale of a business, there are reasons to be slightly hesitant. When sellers are lending someone money to purchase their business, they are often times placing a lot of trust on the buyer to repay the debt. Banks do this every day when they are making all types of loans but two of the major differences are that banks are well diversified among hundreds of loans and they are also experts in assessing risk.

Underwriting a financing transaction is one of the most crucial steps to ensure that you are lending money to someone that is likely to repay their obligation. All banks have their own underwriting guidelines and procedures in place to make sure that they make good quality loans. In a seller financing transaction, it is the sole responsibility of the seller to make sure that they are loaning money to an individual that is likely to repay them. Sellers often forgo this step altogether and this puts them in jeopardy of lending money to someone who may have a history of not repaying debt or financial adversity which may ultimately lead to loan default.

Additionally, when a seller enters into a contract to finance the sale of their agency themselves, they are committing the proceeds from the sale to be repaid over time and are reliant on the agency to continue to perform so that they can be repaid. One problem with agreeing to loan somebody money over a long period of time is that you lose the ability to "cash out" and take the lump sum amount to use for other investments or opportunities. This tradeoff is called opportunity cost; meaning that you lose the opportunity to invest your money elsewhere and earn a higher rate of return because your funds are committed to a different investment. If your funds are locked up in a seller note, you are unable to invest in another business venture, invest in the stock market, or pursue other opportunities.

The investment of a seller note may often times be rewarding but, as many financial experts will tell you, it is critical to diversify your investments. Diversification plays such a large role in investment portfolios because it helps spread the risk of loss among many assets so even if you are losing money in one investment, it may be offset by several different profitable ones. In the case of seller financing, all of the funds are dependent on one investment and the risk for loss is much greater than a well-diversified retirement portfolio.

The Ugly

Without a doubt the biggest drawback to seller financing 100% of the sale of a business is that the seller is taking all of the risk. In the event that the buyer of the agency defaults on the loan, for any variety of reasons, the seller is the one who suffers the consequences and bears the expense to legally pursue a default judgment.

One major risk of lending money to an Allstate agent is the possibility of Allstate terminating their contract. This can happen for a number of reasons and can occur suddenly which will often leave lenders (traditional banks and sellers alike) scrambling to collect as much money as possible to minimize their loss. Loan default may also be the result of things such as declining revenue, increased expenses, or the agent simply walking away.

Simply put, the chance of a loan default is at the forefront of everyone's mind when they make a loan whether it is for $100 or $1,000,000. For many agents, their most valuable asset is their agency and they rely on the proceeds from the sale to live off of during retirement. Although an individual that is retiring may find seller financing to be attractive, they are also the ones who most heavily rely on the proceeds from the sale and stand the most to lose in the event of a loan default because they are left without much of a retirement strategy. In any case, defaults can be extremely costly to any lender that is owed money and puts them in danger of taking a substantial loss.

Any Last Words?

So is seller financing the sale of your agency better than using a bank? Unfortunately, it's hard to say either way with confidence but it is certainly more risky. Every person may have different preferences and every acquisition is unique so it is important to weigh The Good, the Bad, and the Ugly characteristics to determine what is best for you. In the next editorial we will take a look at the last 100 outside buyer Allstate acquisitions that PPC LOAN has financed to gain insight into how sellers are structuring these deals in the real world. We find that there may be a middle ground between minimizing risk and maximizing the reward.