Not All Allstate Agencies are Created Equally - The Driving Factors of Allstate
Agency Values
Coming off last Quarter’s report where I compared the ownership opportunities of
Allstate, State Farm and Independent, I wanted to further look at the Allstate opportunity
and try to determine what makes one Allstate Agency more valuable than another.
I often get calls from sellers or even buyers who say they are looking at the Allstate
Agency Value Index and are trying to pinpoint the exact value or sales price of
a particular Allstate Agency by looking at PPC LOAN’s report. At this point, I remind
them that the Allstate Agency Value Index is an average of agency sales and that
no single Allstate Agency sells for exactly the average. Certainly, there are many
factors that will drive the final sales price of an agency above or below the average,
given that buried within the average multiple in the AAVI are agencies that sold
for less or more than the average. Some even sold for much less or much more than
the average due to various factors and circumstances surrounding the sale. The bottom
line is that not all Allstate Agencies are created equal.
In an effort to make this Quarter’s Editorial as reader friendly as possible, I
have decided to make a TOP 10 LIST of the most important
items and issues that affect the value of an Allstate Agency. The list was compiled
by analyzing the buying habits of Allstate Agency purchasers, through interviews,
conversation at various meetings like the National Forum, and analysis of individual
agency purchase transactions.
TOP 10 LIST – DRIVING FACTORS OF ALLSTATE AGENCY VALUE
1. SIZE – Size continues to be the biggest
factor driving the purchase multiple paid for an Allstate Agency. Certainly there
are many factors regarding size that are attractive to buyers. The most apparent
is the superior amount of take-home pay opportunity that a larger agency owner typically
realizes compared to his peers with medium to smaller sized agencies.
Let’s take a look at the example below:
|
COMPARATIVE MODEL
|
|
|
AGENCY “A”
|
AGENCY “B”
|
|
AGENCY SALES PRICE
|
$330,000
|
$925,000
|
|
PRICE MULTIPLE
|
2.00
|
2.5
|
|
|
|
AGENCY REVENUES
|
$165,000
|
$370,000
|
|
AGENCY OVERHEAD (35%)
|
$ 57,750
|
$129,500
|
|
PRINCIPLE & INTEREST PAYMENT*
|
$ 49,629
|
$139,113
|
|
CASH FLOW TO buyer
|
$ 57,621
|
$101,387
|
Agency “A” receives approximately $165,000 in annual commission income, where Agency
“B” receives approximately $370,000 in annual commission income. Both agencies are
provided 100% financing in the chart above, with Agency “B” selling for a higher
multiple. In the end, Agency “B” despite carrying a higher multiple of debt provides
almost twice the amount of free cash flow to its agency buyer.
The above example is a prime case for why the size of an agency is the greatest
determiner in the value of an agency.
2. AVAILABITY OF FINANCING - There are many
small business owners that have similar revenues, profitability and business models
as Allstate Agents. However, they cannot get anywhere near the value of their business
at the time of sale due to the lack of financing readily available.
Why do Allstate Agents continue to get 2.0 to 2.5+ times commission income at the
time of sale while CPA and Investment Advisors continue to receive pennies on the
dollar relative to the amount of free cash flow available? It boils down to a lack
of consistent and reliable sources of bank financing. But why are banks willing
to lend money to Allstate Agents?
- Easy to control the collateral (cash is king and Allstate Insurance
Company will remit the monthly loan payment directly to the lending institution
each month).
- Relatively simple businesses to operate
- Allstate screening and management support
- TPP value – serves as a safety net, not the ultimate lendable value
3. RETENTION - Retention is a key component of any agency purchase,
and one of the first things agency buyers and sellers will discuss when an agency
sale is imminent. Retention tends to be the measuring stick when it comes to how
much new business an agency buyer must write to maintain or grow their newly purchased
agency. For example, let’s compare two agencies, both with $2 Million in Earned
Premium:
- Agency “A” has 90% retention. For the purchaser to maintain the
agency (assuming 10% of the agency’s premium is lost to attrition), the buyer of
this agency must write $200,000 in new premium business during their first year
of ownership. $300,000 in new business written would result in 5% annual premium
growth. •
- Agency “B” has 80% retention. For the purchaser to maintain the
agency (assuming 20% of the agency’s premium is lost to attrition), the buyer of
this agency must write $400,000 in new premium business during the first year of
ownership.
***At $400,000 in new business required to maintain Agency “B”, Agency “A” would
have realized 10% growth in agency premium by retaining its retention ratio of 90%.
Certainly, the demonstration above shows the importance of purchasing and maintaining
a strong retention ratio.
4. AGENCY PROFITABILITY - No, I’m not talking
about loss ratio, I’m talking about the amount of profit an agency owner realizes
from operating their business. In 2011, I wrote an article titled “Businesses are
meant to be profitable.” I got a lot of feedback from agents after this
article was published. Many of these agents mentioned the difficulty they were having
with regards to their businesses profitability, and many felt lost and didn’t know
how to make their business more profitable.
At the end of the day, anyone purchasing a business wants to know that there is
enough free cash flow to service any acquisition debt service that may be required
to purchase that business. Allstate Agencies are no different. If an agency buyer
has to come in and make drastic changes to the operating expenses of a seller's
Allstate Agency just to have enough cash flow to make his or her loan payment, the
buyer is not likely to make this purchase at the price that is desired by the seller.
On the other hand, if the business shows an extended history of consistent performance
in the area of agency profitability, this can often result in top value being received
by the Allstate Agency seller.
Rule of Thumb:
For every dollar of commission income that is wasted on unnecessary business expenses,
or those expenses that do not generate a positive return, the buyer has less cash
flow, diminishing their purchasing power. If you have a $2 Million earned premium
agency to sell, and you have 5% in unnecessary business expenses included with your
true operating expenses, this results in a purchaser having $10,000 less free cash
flow per year, which if applied towards debt, could result in approximately $70,000
in lost value.
**Please note that when I mention unnecessary business expenses above, I am not
talking about discretionary or personal expenses, as many business owners include
a portion of these on their business tax return for obvious reasons. Any lender
who consistently makes loans to Allstate Agents will have no issues in adding those
discretionary expenses back to the net profit of the business, allowing for a loan
in step with the maximum value of the business. I am talking about truly wasted
or unnecessary business expenses that a buyer will incur that will hamper cash flow
and the seller value – these include:
- Rent – If a seller has signed a lease that must be assumed by a
buyer for an inefficient space, resulting in a higher than necessary occupancy costs
being absorbed by the buyer (not at their choosing), that will negatively affect
cash flow, and likely drive the final price of the agency down.
- Staff costs – If a sellers pays his staff above market value, or
gives benefits typically not offered to Insurance staff, this will have a negative
effect on cash flow and will likely result in a lower price being received for this
agency at the time of sale.
- I always recommend business owners be smart with their staffing
costs. Remember, staff is replaceable. You as the owner are not replaceable. Be
the CEO of your business and make the hard decisions to ensure your interests are
taken care of.
5. SELLER TRANSITION PLANS - The seller’s transition
plans could potentially be the number one item on this list. I have seen many deals
die because a buyer becomes uncomfortable with a seller’s plans after the sale.
I have also seen a large-sized agency sell for just over TPP because the selling
agent was not willing to sign a noncompete or solicit agreement that would provide
ample protection to the agency buyer.
Word travels fast. If a seller has plans to stay in the business or violate a noncompete
agreement, the buyer often finds out in advance of the sale. Of all the items on
the list, the seller transition plan can be the most damaging for both the buying
and selling parties.
There are many agency buyers who are dealing with lawsuits and disputes regarding
violations of a covenant not to compete and solicit agreements with former sellers.
On the flip side, many selling agents have been forced to take TPP as the market
didn’t see the risk in purchasing an agency from an individual they knew was going
to be a direct competitor following the sale.
6. COMPENSATION – When I talk about compensation,
I am talking about the income received by an Allstate agent and what is required
of the agency owners to receive that income. My personal opinion is that the proposed
Variable Compensation model for 2013 (with relative ease for agents to get from
9% back to 10% comp) is ideal for maximizing Allstate Agency values, as it provides
a healthy mix of fixed income (reward for historical performance / renewals), and
contingent or bonus income designed to compensate agents for new business. If the
compensation model was modified to compensate agency owners primarily for new business
written, and the compensation received by agents for historical performance and
client retention was diminished, then we will certainly see a reduction in the value
of Allstate Agencies. Agency purchasers are buying the historical performance of
an agency with the hopes of rewarding themselves for the future performance of the
business under their own leadership.
7. COMPULSION TO BUY OR SELL - Compulsion is
almost always bad and typically will negatively affect either the buyer or seller
acting with compulsion. However, compulsion can be a part of a calculated strategy.
I see three areas where Compulsion factors into the buy / sell process and affects
the final price of an agency purchase:
a. Compulsion on the part of the buyer – These individuals are often outside buyers
and it is often the case that buyer will “stretch” on a purchase because “It’s really
close to home” or “I’ve just always really wanted to own my own business.” In these
cases, the buyer is putting good business decision making on the sideline in their
seemingly blind pursuit of an agency purchase. They do not have their business hat
on, and will typically not walk away from a purchase that is screaming at them to
walk away. These buyers usually overpay on price, and will even concede in very
dangerous areas such as a covenant not to compete and acovenant not to solicit terms.
b. Compulsion on the part of the seller – Currently, the amount of compulsion I
am seeing from sellers has diminished significantly. During 2011, and the early
parts of 2012, many agents sold for less than full value due to their negative perception
of Variable Compensation. PPC LOAN also financed many agencies where the selling
agent was either terminated or felt a termination was eminent, and value was lost
in these circumstances.
c. Experienced agency purchaser using compulsion as a strategy
– What does this mean? Well, I have seen existing large and successful agency owners
purchase another agency above market value as part of a bigger strategy (i.e. to
obtain market share or eliminate a competitor). Ultimately, these individuals are
paying above market value with little to no risk of failure due to the purchase
being part of a purposeful business decision.
8. CURRENT AND EXPECTED LOCAL MARKET CONDITIONS
- One of the most vocal topics of discussion PPC LOAN staff have with potential Allstate
Agency buyers is: What are the current and expected market conditions for selling
insurance in the local area of the agency being purchased. Being competitive or
price proxy gives buyers confidence at the time of purchase, as everyone buying
an insurance business wants to get off to a good start by having a climate that
is conducive to writing large amounts of new business. Being in a market where competition
has a significant edge can make potential buyers uneasy about paying top dollar
for an agency. The current and future expected market conditions can be used by
agency buyers to negotiate a reduced price, especially if the current reality and
future outlook are gloomy. Conversely, if the market of the agency being sold has
been strong for years, and is expected to continue to be strong, this can serve
as a strong selling point for Allstate Agency sellers to get the maximum value for
their agency.
This is one area where I have seen many agency purchasers getting burned, as they
put too much stock in current positive market conditions, and they do not factor
in a possible adverse future business climate that could make doing business harder.
Current and expected market conditions are important to buyers and seller when trying
to determine the final purchase price of an Allstate Agency, however it must be
taken with a grain of salt, as market conditions in the insurance business can change
rapidly.
9. CORPORATE POLICY – In my opinion, the job
of a CEO and those who work with and advise the CEO, are:
a. Position the company to ensure it continues beyond their tenure as an ongoing
concern. Essentially, don’t take risks that might put the company out of business.
b. Maximize shareholder wealth.
Those in charge at any business have to make tough decisions every day. When focusing
on the long-term health of the business, it is sometimes necessary to make unpopular
decisions. One could argue that any decision a CEO makes will never be supported
by 100% of those who work for or interact with the company.
As an Allstate Insurance agency owner, Allstate Home Office will make decisions
that positively or adversely affect your business. Allstate Home Office also makes
decisions that affect the employees, regions and management either in a positive,
neutral or negative way.
One example of a corporate policy change was the allowance of agency mergers for
the bulk of 2010 and 2011. Many smaller agency owners who wanted to sell reaped
a benefit in the form of a higher sales price, as their agency became more attractive
to the market of Allstate Agency buyers who saw more value in merging a small agency
relative to the alternative of having it maintained as a single location. In this
scenario there was also tremendous benefit received by agency buyers, be it outside
buyers or existing agency owner’s, as they were able to achieve a significant economies
of scale by having a single location and essentially eliminating duplicate expenses
associated with maintaining multiple locations. With merger activity reducing in
2012, we will likely see some level of disappointment from existing agents and outside
buyers alike as they are unable to achieve their desired agency size (#1 on the
list) through a purchase, and hitting their business goals will likely be more contingent
upon organic growth.
Corporate policy is an area that has a great deal of effect on the supply and demand
economics of agency sales. In an ideal world where Allstate Agency values are maximized,
there will always be more demand for a purchase opportunity than there is supply.
Currently, the value of Allstate Agencies is very strong due to:
- The Allstate brand has a very strong reputation in the market.
- The agency ownership opportunity is a very unique entrepreneurial
opportunity desired by many and not matched by any other major Insurance carrier.
- The product sold is a base need product that is required for purchase
by the state and/or mortgagee, resulting in very inelastic demand for the product.
- Allstate provides significant training and support from field management
to all its agents.
All these factors contribute to a nice equilibrium of supply and demand for Allstate
Agencies which helps to ensure that agencies maintain healthy values in step with
their economic value. Certainly, Home Office has been instrumental in developing
and maintaining the positives mentioned above. However, corporate could also change
direction and put policies in place that reduce the attractiveness of the Allstate
Agency ownership opportunity. Some of the factors that could result in the equilibrium
price of an Allstate Agency being reduced are:
- Dramatic shift in the compensation model from primarily fixed compensation
to predominately variable or contingent compensation.
- Any event resulting in a flood of sellers (increased supply), where
demand (those desiring to purchase) could not keep up.
- If the Allstate brand took a hit and was viewed by the customer
pool as a less than reputable company to purchase insurance from (this negative
stigma would likely stick heavily on the agency force).
- If the Allstate Agency ownership opportunity is seen as less than
desirable by those looking for a career change.
10. DEATH – Death of an existing Allstate agency
owner is not a very common occurrence as most agency owners sell their agency and
enter retirement or another field of business prior to their own death. However,
in those instances where an unexpected death does occur during a period of ownership,
death could result in significant loss of agency value. In some instances a surviving
spouse or widow will transfer the book into their own personal name or into the
name of a child, and although this can be a lot of work, it can help preserve long-term
value until the agency is sold (or in some cases the business is desirable to the
widower or child and is maintained as a primary source of income).
The worst case scenario for a widower in the event of an owner’s death is receiving
the TPP value or some nominal amount above TPP in an agency sale. PPC LOAN has seen
several transactions that involved an unexpected death of an Allstate Agency owner
where the agency was transitioned to another agent or outside buyer for less than
market value. Instances even included high quality $3M to $4M agencies that sold
for just pennies over TPP.
The lesson to be learned is prepare a succession plan as you are able, but realize
Allstate must ultimately approve the buyer. Don’t wait until the last minute, as
after the time of death will likely be the hardest time to quickly secure a buying
candidate.
Ultimately, life insurance is the one sure safeguard for your heirs in the case
of an unexpected death. Do not burden them with the task of selling your agency
for top dollar following your death. Have ample insurance and leave them in a position
to where any sale of your agency is strictly a cherry on the top of an already sound
estate planning strategy.
Certainly, these Top 10 Factors are not the only factors driving the value of an
Allstate Agency. Below, I have included a list of additional items than can be critical
when determining the final value of an Allstate Agency:
- TURNKEY OPERATION - Does the seller have the processes,
the people and the proper utilization of technology to make it easy for the purchaser
to succeed?
- FINANCIAL STRENGTH OF BUYER - As a Seller, unless
you get lucky and find that needle in a haystack Agency Purchaser who has cash to
write a check for your desired purchase price, you are going to need a little luck
when selling your agency with regards to the ability of a candidate to qualify for
the desired amount of financing.
- LOCATION - Coastal vs. Non-Coastal
- LOCATION - Rural vs. Urban
- LOCATION - BRE / quality of the facility
- LOCATION – On a Desirable thoroughfare?
- BONUS - Another source of income to pay the bills.
Also a great indicator of the quality of the agency
- MIX OF BUSINESS - Standard auto, commercial, homeowners
- THE ODD DUCK – For example, it may be hard for
a $20Million Earned Premium Agency to receive all cash at closing
- SOURCE OF INCOME - Allstate P&C vs. bonus vs.
brokerage income
- HOUSEHOLD PENETRATION
- LOSS RATIO
- FINANCIAL PRODUCTION / QUALITY EFS
- TPP
- AGE OF THE AGENCY
- TPP
- AGENCY REPUTATION
ACTION PLAN
I know what you are thinking, “WOW, that’s a long list. What can I do with all this
information?” I would recommend you focus on the items you can control. Certainly,
there are many areas of focus to make your individual agency more valuable in a
possible sale, and more valuable to you as the day to day operator.
Here is what I recommend:
- Go through the list and designate each item as a strength or a weakness for your
agency
- Work on those items that you can control
- Start by attacking the low hanging fruit
- Set goals with deadlines - This is especially critical if you are possibly selling
in the near future
