Third Quarter 2018 Allstate Agency Value Index

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Who You Sell to Matters

So you’ve owned your Allstate agency for a long time. After a great career of navigating the cyclical nature of the insurance industry, you decide to sell your business and retire. You reminisce about the day you opened your agency: no clients and a small loan from a relative. Here you are decades later putting your agency up for sale. You ask yourself some basic questions:

Who will buy my agency? How much will they pay me? How much cash will I get at closing? All great questions that you won’t know the answers to until you’ve secured a buyer who is not only an approved candidate with Allstate Insurance, but also financially savvy enough to secure third party financing.

Unbeknownst to you is the reality that the value you receive for your business depends heavily on the status of your buyer: Existing Agency Owner vs. Outside Buyer. Let’s not beat around the bush but jump into some real numbers:

The chart above shows the multiple paid by Outside Buyers and Existing Agents for agencies with greater than $3Million in earned premium. Over the course of the last 10 quarters (2.5 years), PPC LOAN has been involved in 113 agency sales with over $3million in Earned Premium. This represents a very healthy sampling size and the numbers clearly point to Existing Agents paying a much higher sales multiple than Outside Buyers. In fact, Existing Agents paid an average sales multiple of 3.31X over the past 2.5 years to purchase a satellite, whereas Outside Buyers paid an average sales multiple of 2.77X during this same time period.

What are some of the factors that drive Existing Agents to pay more for an agency than Outside Buyers?

1. Ability to Pay:

Existing Agency Owners have greater purchasing power than Outside Buyers, as Existing Agents are able to leverage the equity in their existing book of business to execute a higher multiple purchase. Outside Buyers looking to purchase an established agency are essentially purchasing a good paying job, which in most instances will be the primary 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. This is 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 personal expenses 100% covered from their existing agency cash flow. As a result, their purchasing power is greater than Outside Buyers, as the additional satellite business Existing Agents are purchasing does not require a living wage be paid to the owner, as that obligation is already covered by their existing cash flow positive business.

2. Limited Purchase Window:

Not all existing agency owners receive company approval to purchase another location and for those who do receive the blessing from Allstate Insurance to acquire, it is typically for a limited time window. So, when the opportunity presents itself, Existing Agents are typically aggressive in their purchase offers as they see the opportunity to increase their premium dollars as too good to pass up.

3. Known Commodity

For existing agents purchasing another Allstate Agency, they know what they are getting themselves into. Existing Agents typically have the infrastructure set up to handle the additional customers and they know what it takes to be successful. If the opportunity weren’t great, Existing Agents wouldn’t execute the purchase.

Seller cash at closing:*

Further analysis by PPC LOAN shows that those Allstate agency owners who sell their business to a fellow Existing Agency Owners will in most cases receive more cash at closing for the transfer of their Allstate business. Again, reviewing the last 113 sales transactions PPC LOAN was involved in over the last 2.5 years, Existing Agents who purchase another agency with greater than $3million in Earned Premium delivered their sellers 3.00 times cash at closing. Outside Buyers on the other hand delivered cash to the seller at closing (on average) in the amount of 2.40 times the book at closing.

*Cash at closing: the amount of cash the seller receives the day they transfer their business to the approved purchaser from cash down payments from the buyer along with proceeds received from third party lenders like PPC LOAN. 

NOTE: Any shortfall between the amount of cash received by the seller at closing and the agreed purchase price was obligated through a subordinate note where the buyer agreed to make payments to the seller over a set time period. 

 

 

The Allstate buy/sell market in the Second Quarter of 2018 was dominated by agencies with over $2 million in earned premium. Agencies with over $2 million in earned premium represented 79% of the agencies financed by PPC LOAN.

 

 

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.