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2014 Q3

Third Quarter 2014

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Larger Pool of “Approved Buyers” Helps Drive Allstate Agency Values to Highest Level Since 2008

The simple average for agency values has reached 2.66 times for the first time since 2008. Agency values for each agency size group are also up, as seen in the chart below. A deeper analysis of agency sales occurring in the Third Quarter of 2014 reveals that Existing Agency Owners purchasers are contributing greatly to this increase as their average buying multiple was 2.87 times for the 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 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

Use the arrows to see agency values over time.

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There are two interesting discussion topics that have emerged during the Third Quarter of 2014. One supports the headline of agency values being up, and the other is simply interesting for the rarity of its occurrence. The two are described in more detail below:

1. Existing Agency Owners driving value increase with average satellite purchase at a 2.87 times multiple

Statistically speaking, the number of Existing Agency Owners consummating an agency purchase during the first Three Quarters of 2014 is significantly higher than the number of Existing Agency Owners who purchased a satellite during the same time period of 2013 – up more than 50%. Simply stated, with more Existing Agency Owners qualifying to purchase a satellite agency, the pool of “Approved Buyers” has increased in 2014, a trend that has resulted in a positive move for Allstate Agency Values.

This increase of Approved Buyers has allowed many sellers to receive a higher sales multiple as both Outside Buyer and Existing Agency Owner alike have made competing offers for an agency purchase. As is always the case, Existing Agency Owners must present a compelling business case to receive “Approved Buyer” status, which can include hitting various performance metrics and outlining growth strategies, along with presenting a comprehensive business plan.

It is especially worth noting that Existing Agency Owners typically come to the table with strong purchasing power, utilizing the equity in their existing business to secure high levels of financing. As a purchaser of agencies, Existing Agents paid far more than the average (or Outside Buyers for that matter), and they did it because they can. Let’s examine some of the “Why’s” for Existing Agency Owners who are seemingly paying a premium for a satellite purchase:

Don’t want to miss an opportunity

Many Existing Allstate Agency Owners around the country have voiced their desire for ownership of additional Allstate premium dollars. This significant desire to own additional Premium dollars is now an opportunity many top performing agents can execute on, and they are viewing the opportunity as “too good to pass up.” As a result, existing Allstate agents are making aggressive purchase offers when a quality buying opportunity presents itself, significantly contributing to this Quarter’s upward trend of agency values.

Strategic purchase

Many existing agents are making a top dollar offer to purchase a satellite because it gives them a greater presence in a desired market area. Having a larger geographic footprint, along with greater access to commission dollars, makes it easier to substantiate the deployment of resources for the purpose of agency growth.

Additional profit is gravy, not necessity

Beyond just their desire to purchase additional premium dollars, existing Allstate Agency Owners are in a unique buying position as they simply are able to pay more for a purchase than your typical outside buyer. Utilizing the equity in their existing agency contributes to an agent’s purchasing power, something an Outside Buyer does not have at his or her disposal.

In most instances, an existing Allstate agency owner is providing for their personal living needs from the cash flow of their existing agency, and any profits from a satellite purchase simply represents “gravy.” This is not the case with Outside Buyers, as they typically need every dollar of cash flow to support their personal living obligations and pay business overhead, along with business purchase loan payments.

For further analysis of this topic I invite you to take a look this Quarter’s Editorial which is titled “How Deals Get Done.” In this editorial I examine the various types of acquisition opportunities we see and the financing package that are put together to make these deals work. The Editorial includes an analysis of Outside Buyers and Existing Agency Owners, along with agencies qualifying for ADB and those at scale.

2. No merger transactions in the Third Quarter of 2014

Since I began tracking the nature of an agency transaction back in 2008 (satellite purchase, merger or split agency), this is the first quarter I have on record where PPC LOAN was not asked to participate in the financing of a merger transaction. I will continue to watch and report on merger activity going forward. Certainly, the lack of merger activity has not adversely affected the value of agencies.

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%

Use the arrows to see agency values over time.

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During the First Quarter of 2014, larger-sized agencies with new and renewal commission income of $300,000 or greater represented only 21% of agencies sold during the Quarter. During the Second and Third Quarters of 2014, these largest sized agencies represented more than 50% of the total.

With larger-sized agencies selling for the largest multiples, the simple average has increased during the Second and Third Quarter of 2014, as agencies with more than $300,000 in New and Renewal Commission income represented a larger percentage of total sales. This trend reminds us of the importance of focusing on the sales multiple for each size group.

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

Use the arrows to see agency values over time.

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How Deals Get Done

I wanted to take a look at the various types of financing requests PPC LOAN received, then examine the aspects of the financing packages that were ultimately accepted to consummate the acquisition. I think it is of importance for the market to understand what typical financing deals look like from a structural standpoint, as every small business owner is a seller at some point in their career. Knowing how financing is typically structured is a vital component of retirement planning.

Through this examination process, I reviewed the three most common loan requests that PPC LOAN receives:

Outside Buyer purchasing a Small Agency that qualifies for ADB (Agency Development Bonus)
Outside Buyer purchasing a Scale Agency
Existing Agency Owner purchasing a Satellite

Before I share my findings, I want to point out that what I am reporting is not the financing structure of a single deal, but rather the average of a handful of deals for the specific example analyzed. I want Allstate Agents to have an idea of what a typical financing transaction looks like. Here are the results of what I found.

Outside Buyer Purchasing a Small Agency– ADB Qualifying

For this size group PPC LOAN was regularly asked to finance just under $1.5 million in Earned Premium to allow for the maximum book size to be purchased under the Outside Buyer Test Program where new candidates receive 80% of the Start-up Agency Development Bonus (ADB). Typical financing for these deals had the following specifications:

$1.5 million in Earned Premium
$350,000 Purchase Price (2.33 times New & Renewal Commissions)
$25,000 Buyer Down Payment (7% of the price)
No Seller Note
$325,000 PPC LOAN Bank financing towards the purchase price

Buyers who qualified for agencies in this group typically had strong sales experience (inside or outside the insurance industry), their credit score was typically well over 700, and their personal living obligations were very modest. Having low personal living expense needs was one of the major requirements to get a loan to purchase a smaller sized agency. From an underwriting perspective it is deemed imperative that the agency buyer take as little cash out of the business as possible for personal expenses (mortgage, car, etc.), as the cash is best served remaining in the business for growth purposes. Those candidates best able to take advantage of the ADB/enhanced commission program were granted an approval for the purchase of these loans, and, as noted above, their cash down payment was on average only 7% of the purchase price.

Scale Agency Purchase by an Outside Buyer

This is likely the most common financing request PPC LOAN receives. This group typically represents fairly sophisticated Outside Buyers looking to make a career change and join Allstate Insurance. They have quality professional experience and have historically made a good living. They are looking for an acquisition opportunity that will provide instant cash flow along with upside potential. Typical financing for these deals had the following specifications:

$2.5 million in Earned Premium
$650,000 Purchase Price (2.60x New & Renewal Commissions)
$0 Buyer Down Payment
$50,000 Seller Note (8% of purchase price)
$600,000 PPC LOAN Bank financing towards the purchase price (2.40x New & Renewal Commissions)

It is not uncommon for Sellers to take back a portion of the purchase price in the form of a Seller Note. This is especially common when the purchase price of the Agency is greater than 2.50x the New and Renewal Commission of the business. In this transaction, no down payment was required of the buyer. A Seller Note of 8% of the purchase price assisted in lowering the bank loan to $600,000, or 2.40x the Commission of the agency.

Satellite Purchase by an Existing Agency Owner

Existing Agency Owners purchasing a Satellite became a more common request received by PPC LOAN in 2014. In reviewing this group's performance through CSRP and other agency reports, they are outperforming their peers in production and growth, hence validating their approval to purchase by Allstate Insurance. All agency owners who have requested financing through PPC LOAN have had significant equity in their existing agencies. Typical financing for these deals had the following specifications:

$2.9 million in Earned Premium (Seller)
$2 million in Earned Premium (Buyer)
$4.9 million in Earned Premium (Combined)
$850,000 Purchase Price (2.93X New & Renewal Commissions)
$0 Buyer Down Payment
$0 Seller Note
$850,000 PPC LOAN Bank financing towards the purchase price
- Less than 2x Financing of Combined New & Renewal Commissions

Utilizing the equity in their existing agency, Existing Agency Owners are able to secure 100% financing, while paying a premium relative to Outside Buyers. In this example, the existing agency owner was able to secure 100% financing all while paying 2.93 times. The Outside Buyer purchasing a similar sized agency for just 2.60 times was required to put down cash or convince the seller to take back a note to get the deal done.

Chart Comparison

Conclusion

The chart above clearly shows the purchasing power of existing agency owners. They are typically paying a higher price multiple for satellite purchases, and receiving 100% financing.
Not to be outdone, the majority of Outside Buyers are receiving generous financing packages that regularly provide more than 90% of the purchase price in the form of bank financing.
Outside Buyers purchasing a good-sized agency (in this example around $3 million in Premium), can finance the majority of the purchase often with no money down.