Revenues are the lifeblood of a business and producers play a key part in this aspect.  An agency will be ascribed a higher value if the firm's book of business is spread out over a number of producers as opposed to being dependent on one rainmaker.  A touchy subject but one that has to be discussed is also the age of these producers.  If these producers are nearing retirement age, the acquirer will be concerned about the stickiness of the book of business post-transaction should these producers decide to wind down their involvement in the agency.

An agency that has its commission base spread out over a number of clients as opposed to being dependent on one major client will be looked at more favorably by an acquirer.  Taking an extreme example, if an agency has a client that makes up 50% of its commissions and it happens to lose this account for whatever reason, the profitability of the agency will take a hit.  An acquirer will adjust the value of its offer to take this financial risk into account.

A book of business with a client base that is diversified across industries and geographic location is also an attribute that enhances the attractiveness of an agency.  An agency offering a mix of property & casualty ("P&C"), benefits, and personal lines products helps to aid in retention of clients and gives acquirers more comfort in the stability of the revenue base going forward.

Acquirers typically prefer to purchase assets as opposed to stock in an acquisition due to tax benefits associated with an asset purchase and reduced liability exposure.  A company structured as an S corporation or LLC avoids double taxation in the event that assets are sold compared to a C corporation.  Even if an agency owner that has a C corporation isn't considering a sale now, it might be beneficial to convert to a different structure as soon as possible since there is a waiting period of several years to realize these tax benefits in a sale.  Please consult your accountant for further discussion on these issues.

Solid non-compete and non-solicitation agreements signed by employees help to enhance the value of an agency as firms without these agreements run the risk of losing clients and revenue immediately should a key employee leave.  Another related issue is who has ownership of the book of business and sub-broker agreements.  If producers have ownership in their books of business, this situation would complicate matters in the event of a sale if they do not want to work for the prospective acquirer.  A similar situation would arise if there is significant sub-brokered business and the sub-brokers decide to move their business and take their client relationships elsewhere after the agency is sold.

As agencies are typically priced at a multiple of earnings before interest, taxes, depreciation, and amortization ("EBITDA"), larger agencies in terms of revenue and profitability will garner higher multiples than smaller agencies.  Firms with over $10 million in revenues are highly sought after by acquirers due to the scarcity factor of these types of agencies available for sale.

Like in real estate, location, location, location plays a role in how an agency is valued.  Being located in a major metropolitan area increases the pool of buyers likely to have interest in acquiring giving the seller more leverage in negotiations.  Even if an agency isn't located in a large city, if a potential suitor has a location nearby and can consolidate offices and gain cost synergies, this aspect increases the projected profitability of the agency post-transaction allowing the acquirer some wiggle room to increase their offer.

Acquirers typically produce a pro forma financial statement based on the projected financials of the agency after it is acquired.  Common adjustments include those for non-business related expenses, non-recurring items, and changes to compensation.  Agency owners, either as acquirers or sellers, should have a good understanding of what goes into a pro forma financial analysis in order to not leave money on the table.

The above are some of the common factors affecting the valuation of an agency.  Agency owners seeking to enhance and grow the value of their firms may want to keep these factors in mind when going through their long-term strategic planning.