Fourth Quarter 2009

Wrapping Up 2009 — Size Matters

The multiple for which an Allstate Agency is sold relative to its Renewal Commissions has always increased, and continues to, as the size of the Agency’s Renewal Commission increases. The logic behind this phenomenon is that a larger agency generates more income, and thus wealth, for its owner and is therefore perceived as more valuable than a smaller Agency.

The Agency Size Weighted Average Price to Renewal Commission Ratio shown above is the average of the Allstate Agency Price to Renewal Commission ratios calculated for the four Agency size classes reported each year. The Simple Average Ratio shown above is the average of the Price to Renewal Commission multiples for all Allstate Agencies transitioned each year. In every year depicted above, the Simple Average is larger than the Weighted Average, indicating that a larger percentage of the transitions occurring each year were comprised of Allstate Agencies with annual Renewal Commissions of $200,000 or more. However, the gap between the Simple Average Ratio and Weighted Average Ratio has narrowed in 2008 and 2009, hinting at an increased number of smaller Agency transitions entering the mix during the last few years.

Going forward, the Value Index will use the Agency Size Weighted Average Ratio as its benchmark multiple for Agency transitions as it is not influenced by the variant mix of Allstate Agency sizes sold from year to year. However, the Simple Average will continue to be reported as it continues to serve as an excellent indicator of the size mix of Allstate Agency transitions.

Agency Prices Stabilize

Although the average price for which Allstate Agencies were sold relative to their annual Renewal Commissions continued to decline in 2009 compared to 2007 and 2008, Agency multiples viewed from the fourth quarter of 2008 through the fourth quarter of 2009 have clearly stabilized.

Though the clear hope is that Agency transition multiples will continue to firm and build a solid base in 2010, a factor that may work against this outcome is the likely increase in the number of smaller Agencies transitioned in 2010 as a result of the implementation of Allstate’s “Ideal Agency Model.” Should the “Ideal Agency Model” have an impact on the multiple for which an Agency is sold, it will be temporary in nature and should reduce the number of less effective Allstate Agencies from the mix of Agency transitions in the future, which will foster more stable and overall higher Agency Values.

A Decade Under The Belt

With 2009 complete, it has been roughly 10 years since significant numbers of Allstate Agency transitions began to occur in early 2000. During this time individual Allstate Agents and Allstate Insurance have experienced great success as they have worked together to maximize the potential of the Independent Contractor Insurance Agent Model.

So what’s the ”top story” regarding the last decade of Allstate Agency ownership transitions?
The Agency Price Bubble of 2007!

Beginning in 2003 and running through the first quarter of 2007, the value of an Allstate Agency as determined by Allstate Agency sales increased from 2.0 times Agency Renewal Commissions to roughly 2.95 times. This relatively sharp 47.5% increase in Value relative to Renewal Commissions was driven largely by a combination of the observed success noted by prospective buyers who already completed acquisitions and, most importantly, the availability of financing from lenders willing to trade high rates and fees for loose underwriting of loan requests. 

From the first quarter of 2007 to the end of 2009, the average value for which an Allstate Agency has been sold has dropped from the peak of 2.95 times Renewal Commissions to 2.46 times. This 16.61% drop in Value occurred in less than two years and is reflective of the exit of the lenders previously involved in supporting the higher Allstate Agency purchase prices and a fundamental shift in the perception of Allstate Agencies by perspective buyers. 

The exit of the more aggressive lenders for Allstate Agency acquisitions was precipitated by the large losses they experienced in their Allstate Agency Acquisition loan portfolio.  Buyers of Allstate Agencies today have shifted their focus from opportunities of growth to being concerned with the ability of an Agency’s historical cash flow to support their own individual income needs and the debt service associated with the Agency Acquisition Loan.  Unfortunately for most sellers, the typical Allstate Agency does not generate enough cash flow to meet the income needs of the buyer or service the monthly principal and interest due on a 3.0+ times acquisition price.

As noted in previous quarterly reports of the Allstate Agency Value Index, Agency Value determined through the agreement on price achieved by a willing seller and willing buyer is “Market Value” and Agency Value determined strictly through the focus on its historic cash flow is “Economic Value.”  At present, it seems that the Agency Market Value for which willing buyer and willing sellers are reaching agreement is very near to the Agency Economic Value, implying that the transitions occurring today are economically sound and much less likely to result in Agency transition failures due to insufficient cash flow. 

EXAMPLE: An Allstate Agency being sold with $250,000 in reliable renewal commission income can support about $100,000 in overhead costs (40%), a wage to the owner of $50,000 and debt service for a $550,000 loan (payment of $83,000 annually financed over 10 years) with $17,000 to spare. This assumes a purchase price of $625,000 (2.50 which is in line with the average for agencies this size sold in 2009), and also assumes a significant $75,000 down payment from the purchaser.

Agency Commissions	$250,000
Overhead	<$100,000>
Buyer Living Needs	<$50,000>
Loan Payment	<$83,000>
Free Cash Flow for Re-investment	$17,000