One of the biggest decisions agency owners face is whether to turn over the keys to an internal partner or to look beyond the agency’s walls for the next owner.
There used to be clear-cut benefits (and drawbacks) of choosing internal or external perpetuation: Internal provided continuity and stability; external provided more options and a better price. But much of that has changed in today’s market.
“A lot of the old assumptions regarding external perpetuation simply aren’t true anymore, making it a much more favorable market for internal perpetuation right now,” says Rick Wittmann, assistant vice president of marketing and perpetuation lead for General Casualty.
“If you’re willing to put together a strategic plan, generate organic growth and pay attention to your agency’s bottom line – then it’s a great time to put together an internal perpetuation plan.”
Agency values are dropping…
Agency values reached their all-time high in 2007, averaging seven times earnings before interest, taxes, depreciation and amortization (EBITDA)*. Back then almost every agency was marketable, regardless of quality, Rick says.
As the market softened, commission income and earnings growth went down, putting agency values in a sharp decline. And the economic ripple effect continues to have a strong impact. In this economy, for example, people aren’t buying new cars – they’re holding on to their older, less expensive cars, which carry lower insurance premiums. On the commercial lines side it’s even more apparent; as companies’ workforces, facilities, vehicle fleets and overall worth goes down, so do their commercial insurance premiums.
All of this means that today, instead of seven times EBITDA, the agency valuation standard is 5.5 times EBITDA.*
And interested buyers are dwindling…
Rick has seen significantly fewer interested buyers for two reasons:
1. Banks themselves aren’t interested in buying agencies, due to the collapse of the credit market and the need to focus on their core business.
2. Because of the weakened economy and sub-prime crisis, would-be buyers are having trouble getting loans.
…. But talented employees are arriving
With the financial sector in turmoil and companies laying off workers or going out of business, there’s a larger pool of talented employees with financial and sales experience who are looking for work. Rick adds that recent grads and college students who expected to go into the financial sector might now be more interested in insurance careers.
“Having a greater pool of both new and experienced talent is a great benefit for the insurance industry, especially for agencies who are looking to groom the next generation of producers and potential owners,” Rick says.