What to Expect When You Get a Fair Market Valuation

Whether or not a sale is on the horizon, knowing the financial health and value of your agency is vital for every agency owner. For many, the current M&A environment is causing agency owners to contemplate whether now is the right time to buy or sell. Knowing your agency’s value is one of the best ways to prepare for opportunities that may arise either grow by acquisition or to potentially sell.

While many believe that they only need a valuation when they are planning to sell, savvy business owners understand that a valuation is a valuable tool when it is utilized far in advance of a sale to gain insights on how to maximize the agency’s value. Those insights combined with time can lead to exponential growth in the value of your agency.

With that in mind, a valuation is the best way to get a health checkup of one of your largest assets – your agency. Every agency owner should consider obtaining a valuation a minimum of every three years as part of their business planning process.

What a Valuation Report Really Tells You

A Fair Market Valuation translates your agency’s operational strengths, weaknesses, and market standing into a numeric value, representing what the agency could expect in today’s market. “A fair market value represents the internal valuation of an agency, not what the price of the agency.” The price of an agency depends on the synergies between the buyer and seller, the current market conditions, current performance of the agency, terms of the deal, and structure of the transaction. The valuation reports cannot factor in any information about a specific outside potential buyer, as the report assumed that the buyer is hypothetical. It reflects the ongoing operation if ownership were to change but operations remained the same.

While that range of value may be interesting, in my opinion it is the least important piece of information in a Fair Market valuation, unless you are planning on selling immediately. The gold is the insights that the report uncovers on how to maximize the value of your agency. By highlighting the risk factors that drive the multiples that are applied to the EBITDA, the owner of the agency gains perspective on opportunities for improvement, growth and scale as well as potential changes that can make over time to improve the overall value of the agency. These insights serve as a foundation for future decisions and strategies.

Key Components of a Valuation Report

There is a fair amount of information required to complete the valuation of an agency. By going through this process, an agency owner can be certain that they have reviewed and accessed the required information far prior to any potential purchase or sale. This allows them to be much more efficient in the lending and due diligence process when the time comes to buy or sell. Valuation reports are carefully structured to offer a complete view of an agency’s current and potential value.

A valuation report generally includes:

• Purpose and Assumptions: The valuation report will state the purpose and assumptions under which the valuation was completed. The key underlying assumptions, such as whether the agency is expected to continue operating or if it’s under special circumstances, like a liquidation. Typically, assumptions are made with the expectation that the agency will remain operational, reflecting its value as a going concern as well as a hypothetical and willing financial buyer, who is under no compulsion or requirement to buy.
• Overview of the Business: The evaluator will provide an overview of the agency including its location, corporate entity, ownership structure, mix of business, key carrier relationships, staffing structure, areas of focus, key business partnerships and other specific information that is pertinent to the agency’s operation and performance.
• Valuation Methodology: The report will include a description of the valuation methodology utilized to evaluate the agency. The most common valuation methods utilized in our industry include a multiple of EBITDA – or in the case of very small books of business – a multiple of revenue.
• Financial Analysis: The report looks closely at Profit & Loss Statements for the past 5 years, the most current year-end balance sheet and tax returns, and the agency’s cashflow statement, if available. The financials are analyzed and a proforma financial statement is calculated based on the agency’s trends, industry benchmarks and information provided by the leadership of the agency.
• Risk Factors and Opportunities: A core section identifies risks or strengths that impact the agency’s valuation multiple. These insights highlight areas of opportunity and suggest ways to strengthen the agency’s value, providing practical steps for reducing risks.
• Valuation Range and Financing Considerations: The final valuation is presented as a range, with additional context, like the impact of current interest rates or potential buyout scenarios.

Information Required for a Fair Market Valuation Report

An agency's value is made up of many details specific to each agency, which means that there is a lot of information required to provide a complete picture. At minimum, to get a valuation, the process starts with:

• Financial Statements: Five years of Profit & Loss statements, the most recent Year-end Balance Sheet and Tax Return are the key financial information required for the analysis.
• Current Staff Information: A list of employees, including their compensation structure, total compensation, benefits and a description of their roles.
• Book of Business and Carrier Reports: Book of business organized by customer, revenue, premium, carrier, line of business, and person responsible for the account. The year-end carrier reports representing where at least 80% of the business is placed.
• Operational Insights: Agencies are asked to provide details on their network affiliations, existing perpetuation plans, descriptions of the technology they utilize, sources of new business, any producer-owned books of business, describe the agency’s sales/service structure, community involvement and any recent E&O, legal or human resources claims.

Once the information is collected and reviewed, the valuation process includes interviews and time with the owners of the agency review details with the agency, ensuring the report reflects the “story behind the numbers.”

Business Health Check-up & Planning Tool

Valuations provide a complete picture of the agency’s health and if utilized properly can be an incredible strategic planning tool. The report will reveal the agency strengths, weaknesses, and areas to de-risk, equipping owners with insights to enhance their operations.

By treating valuations as part of a regular business routine, agency owners are better prepared to make informed, confident decisions no matter if you’re just trying to grow, or if there’s a future sale is on the horizon. Regular valuations serve as a benchmark to gauge an agency’s progress, market position, and opportunities for improvement and growth.

Our team recommends getting a valuation once every three years so that you have a firm understanding of your agency’s ongoing health.