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2016 Q4

Fourth Quarter 2016

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2016 – Great Year for Allstate Agency Values

Allstate Agency Values wrapped up a strong 2016, with the Simple Average hitting 2.57 times in the Fourth Quarter. Mergers continue to be an option for Outside Buyers in the Fourth Quarter, although at a slightly lower rate than the Third Quarter of 2016. Additionally, Existing Agency Owners continued to participate in the acquisition process, representing 13% of all purchasers in the Fourth Quarter.

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

2016 4th QTR
1.8
2.34
2.42
2.76

2.57

1.65
3.24

Use the arrows to see agency values over time.

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Allstate New Jersey 2016 Values

The AAVI gave an overview of agency values specific to New Jersey at the end of 2015, and since PPC LOAN has been involved in quite a few New Jersey transactions in 2016, we have enough data to release these updated statistics for 2016. First, it is important to note that Allstate New Jersey is a separate company from Allstate Insurance, and that Agents have a compensation model which pays a base commission rate of 6.5% with an opportunity to make well over 10%.

Below is an overview of the characteristics of New Jersey Agencies PPC LOAN financed in 2016:

Average 12 Month Moving Earned Premiums = $4,177,309
12 Month Renewal Commission Income = $422,389
Average Commission Percentage = 10.1%
Average Sales Price = $848,000
Sales Multiple of Renewal Commission Revenues = 2.01X

In general, New Jersey agencies are very profitable to the owner due primarily to large average customer premiums. The sales multiples in New Jersey are below what we see in the rest of the country, and this is primarily due to the wide range commission scale which starts at a base compensation of 6.5%. The sales multiples in New Jersey clearly back the theory that guaranteed renewal income holds a greater value over contingent or transactional compensation.

Allstate Agencies – Why so Valuable?

With Allstate Agencies experiencing strong values in 2016, this is as good a time as any to reflect on why Allstate Agencies are so valuable. The value Allstate Agencies receive is very unique compared to their peers in other service sector industries (see chart below), and those who have been successful as a captive agent at Allstate Insurance have been rewarded nicely. Let’s take a quick look at some of the driving factors as to why Allstate agencies are so valuable:

Renewal Income
Those in the personal mortgage origination business receive a single commission check at the time of their customer’s loan closing and no additional residual income is received. When they wake up the morning after a closing, they have to start from scratch and do it all over again. For businesses without renewal income, a single bad month or quarter can be disastrous. Entrepreneurs prefer the reliability that renewal Income affords a business owner, as well as the challenge associated with trying to grow the businesses renewal income base. In fact, renewal income is essential for creating enterprise value and is the number one driving factor as to why Allstate agencies sell for such a high multiple of revenue.
Cash Flow / High Profit Margin
According to BusinessWeek, Outpatient Care Centers’ net profit margin is 12.1%, child care services net a whopping 10.4%, and Lumber Wholesale’s profit margin is on average is 1.7%. To generate $1,000,000 in revenues, but only net $17,000, is like watching a movie with a thrilling beginning and a horrible ending. Certainly, Allstate Agencies yield a much higher bottom line than these aforementioned businesses, something that highly contributes to the large multiple of revenues value received at the time of sale.
Selling a Base Need/Inelastic Product
The value of selling a base need product shines in a down economy as discretionary spending decreases. During this time, many businesses selling “want-based” items suffer while those selling “need-based” items do not (at least not as much). The ultimate base need product is one that consumers are required to purchase – such as insurance. Selling an inelastic product is to own a business that is moderately affected by the ups and downs of the economy.
Devoid of Large Capital Expenditure
Capital expenditure is the ongoing upgrade of physical assets for the business. Almost every small business has some form of ongoing capital expenditures. Owners of cleaning companies, medical practices, and restaurants have to regularly replace very costly equipment. Capital expenditures reduce free cash flow and thus, many savvy investors avoid industries with high CAPEX. Outside the occasional computer purchase, Allstate agencies have little to no ongoing Capital Expenditures.
No A/R or Inventory Management
What a hassle for your average medical professional, having to dedicate staff solely to collect on overdue accounts receivable. Allstate agents also avoid the sometimes dreaded hassle of having to manage inventory, specifically perishable inventory associated with restaurant businesses.
Available Resources
You may be able to make it across the Atlantic in a homemade raft, but it would make a lot more sense to leverage resources that may be available to you such as a large boat, navigation system, weather information, and plenty of food. There are many business endeavors that are akin to building your own boat and then trying to take it overseas. This fruitless expenditure of effort may be avoided by placing yourself in a business that provides you with substantial resources to increase your likelihood of success. Allstate agency ownership is the perfect example of an abundance of resources available to agents, all of which assist the business owner from having to re-create the wheel.

As mentioned above, the following chart illustrates Allstate Agencies’ superior values compared to those of other major industries where an organized buy/sell market exists. Being an Allstate Owner has many traits that separate itself from other business opportunities, however; when it comes to business valuations, the proof is in the pudding.

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%

2016 4th QTR

17%

22%

57%

Use the arrows to see agency values over time.

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The Buy/Sell market in the Fourth Quarter of 2016 was dominated by agencies with over $2 million in Premium, with agencies over $3 Million in Premium representing 57% of agencies sold.

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

2016 4th QTR

2.57

2.37

Use the arrows to see agency values over time.

prev next

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 PPC LOAN

Seller Financing: What to Expect in Real World Acquisitions

This editorial is the second part of a two-part series on seller financing the sale of an Allstate agency. To refresh your memory, the first part of this editorial discussed the good, the bad, and the ugly aspects of seller financing to weigh the risk and reward of self-financing the sale of an agency. Now that we have laid the groundwork to determine the pros and cons, we are going to take a look at the last 100 Allstate acquisitions by non-existing Allstate agency owners that were financed through PPC LOAN to determine how these sales are structured in real world scenarios.

Before we dig into the numbers, let's take a moment to discuss some of the nuances that impact the outcome of our findings. It is important to keep in mind that these figures do not include acquisitions that were 100% seller financed, purchased for cash, or financed through another lender. However, this data gives us great insight into agency acquisitions that are financed traditionally through a bank. As a result of PPC LOAN offering up to 100% financing, this information is going to be as accurate as possible because the loan structure is mostly geared toward buyer and seller preferences rather than financing restrictions from the lender. If we were looking at data gathered from a lender with pre-determined down payment requirements, all acquisitions would look the same and we would not have any insight into buyer and seller preferences because everything is determined by the bank.

Each business acquisition is unique and has characteristics that impact how the purchase will be financed. For example, some buyers prefer to put down as much cash as they are able while others prefer to put down the minimum required in order keep to cash on hand to invest into the agency during the beginning of their Allstate career. Similarly, some sellers prefer to seller finance a large portion and others want to get all cash at closing. While both sides have their merits and flaws, there are a handful of these atypical circumstances in our data. By including these deals that do not fit the "norm", we get a more accurate conclusion by encompassing all available information.

The Data

After reviewing data from the last 100 outside buyer acquisitions financed through PPC LOAN, we find a lot of telling data. The average Allstate agency purchase price was $769,667 and the average financing structure included $632,112 from PPC LOAN, $98,091 carried in the form of a seller note, and $39,465 cash down from the buyer. This equates to an average loan structure consisting of 82% financing from PPC LOAN, 13% seller financing, and 5% cash from the buyer.

To illustrate this financing structure under a few different scenarios, see the chart below:

***The purchase price column is calculated as 10% of Allstate premium times the latest 4th Quarter 2016 multiples of the respective agency size. The remaining columns are calculated according to the 82/13/5 financing split***

What does this mean for the Seller?

Under these averages, the seller receives 87% of the purchase price at closing (82% from loan proceeds and 5% from the Buyer) and finances the remaining 13%. With this loan structure, the Seller is undertaking only a minimal amount of risk and is receiving a majority of the proceeds from the sale at closing. This helps alleviate many of the undesirable characteristics that we spoke about in the previous editorial. For example, two major examples of this is that you are mitigating most of your risk of loan default and you outsource the responsibility of choosing a creditworthy buyer to a specialized lender, among other things.

Logically analyzing the results of our study, this loan structure makes a lot of sense for a seller. Using the figures from the average agency acquisition, the purchase price would be $770,000 and the seller would receive $672,000 at closing. With a seller financing need of $98,000, the seller would receive more than $1,000 per month assuming a 5% interest rate over a 10 year term. This acts as a monthly annuity type payment that could be a nice supplement to your income after selling your agency or during retirement. Getting 87% of the sales price at closing allows you to do any number of things with these funds while simultaneously reducing your risk and responsibility.

Final Thoughts

So, what are we to make of all of this information? It doesn't tell us in a one-size-fits-all way that seller financing or bank financing is best for the seller. However, it does tell us that there is some middle ground between seller and bank financing that theoretically maximizes the benefits for all parties. Although there are special circumstances that may dictate that the loan structure falls well outside of this norm, the middle ground seems to be a fair and equitable compromise. The seller gets most of the cash up front and still receives a small monthly payment, the buyer only has to put 5% cash into the purchase, and the bank is taking most of the risk, what more could you ask for?