by Tom Doran, July 2005

National Underwriter

You've all heard the story about the agency down the street and the deal they got when they sold out to the bank - or the national broker - or the newest insurance consolidator- he got two times revenue!  Or three times revenue!  The ubiquitous high multiple of revenue deal - when practically every agency deal is rumored to be a high multiple deal, it's enough to make you wonder whether or not it makes sense to remain privately held as an insurance agency today. 

Before you pack it in and head off looking for the ultimate payday, keep in mind that you are probably only be getting half the story from the seller- if that.  The truth is, since most agency sales today are tied to an earn-out, in which a significant portion of the purchase consideration isn't paid for several years after the deal closes, the "real" sale price is generally unknown at closing.  In an earn-out arrangement, the ultimate purchase price is heavily influenced by the selling agency's performance after the agency is sold.  So, more accurately, the seller should say "I may get two times revenue for my agency."  That one word, may - it makes all the difference, doesn't it?

What if I told you I'd buy your business for two times revenue if you grow it for three years at 15% per year and generate a 25% margin?  If you sold it to me, you'd be on the golf course next week bragging on your two times revenue multiple deal.  Flash forward three years, after you delivered three years of 7.5% growth and an 18% margin and your final earn-out check brings the total purchase price multiple to 1.5 times revenue.  Are you going to bring your agency owner buddies back together to inform them of the "real" multiple you were paid?  Probably not.  They'll go on kicking themselves that you got the two multiple and they didn't! 

Be very careful before you believe everything you hear about what an agency sold for.  Many times, the reality differs from the story told.  High Multiple Agencies are in fact, rarer than you might imagine.

There are, however, agencies that actually sell at the huge revenue multiples - north of two times revenue, sometimes well north of it.  What do these exceptional agencies look like?  What do they have going for them that the average agency does not?  Is it a good name - a storied history - a prime location - a stellar reputation?  What really makes an agency a High Multiple Agency?    Simply put, a high margin, high growth agency is an agency that sells for a high multiple of revenues. 

Well, that answer is too broad - it's like answering the question "what does a Major League Baseball player look like?" with "fast, strong and able to hit a curve ball."  Well, we know that- how did he develop those attributes?  What were the disciplines and habits that got him to the major leagues?  What does his DNA look like?

What does a high margin, high growth agency look like, when you really break it down?  How does an agency become a high margin, fast growing agency?  What is the DNA of a High Multiple Agency? 

We know many agencies well that really sold for high multiples and there are, in fact, distinguishing characteristics that define these insurance powerhouses.  They generate high margins and grow rapidly because they have many of the following characteristics.

Superior Leadership

Superior leadership is perhaps the most common characteristic of the High Multiple Agency - and not necessarily for the most obvious reasons.  In his book The Art of the Start : The Time-Tested, Battle-Hardened Guide for Anyone Starting Anything, Guy Kawasaki (the former Apple Computer visionary), describes a highly undesirable (and very common) organizational phenomenon called a Bozo Explosion.  A Bozo Explosion occurs when a "B-level" leader recruits and hires "C-level" players, who, in turn, recruit and hire "D-level" players, and so on and so on.  Kawasaki's premise is that sub-"A-level" leaders tend to hire individuals less talented than they are.  Before you know it, you have an organization filled with Bozos!  Kawasaki states that "B-level" (or lower) leaders are largely incapable of recruiting, hiring and retaining "A-level" talent.  "A-level" talent generally refuses to work for anyone who is not himself an "A" player.

A Bozo Explosion is avoided when an "A-level" leader recruits and hires other "A-level" employees, who, in turn, do the same.  High Multiple Agencies often have "A-players" as leaders that are capable of recruiting and hiring other "A-players" throughout the organization.  Ours is a people business - attract the best people and you are likely to become the best agency, a High Multiple Agency.

Young Talent

We recently represented a High Multiple Agency in a sale in which the average producer's age was 35.  For a buyer, this type of youth pool is a highly desirable characteristic of an acquisition target.  An agency in which the buyer will have to "reload" the talent base shortly after the sale is not a High Multiple Agency.  Buyers will necessarily account for the future "people" investment required when pricing a deal on an agency with too few young employees.    High Multiple Agencies invest continually and heavily in young talent.

Creative & Innovative

High Multiple Agencies beat the competition by being more creative and innovative in the way they do business.  One High Multiple Agency literally transformed its entire market area by offering a significantly enhanced service experience - at no additional cost to the buyer.  How would you like to compete with someone selling a vastly superior product at the same price?  This High Multiple Agency personified an "outside the box" attitude through its creative and innovative commitment to continually improving its services.  It did what others (its competitors) said could not be done.  This agency's growth rates averaged over 30% annually in the years leading up to its sale.

Another High Multiple Agency makes a practice of regularly working with its key markets to identify and exploit new niche opportunities.  These efforts sometimes result in exclusive programs that greatly enhance the agency's competitive position.  High Multiple Agencies can generally offer solutions that lower multiple agencies cannot. 

Geographically Lucky

Remember the old saying regarding the three most important factors in real estate - location, location and location?  The same holds true for many High Multiple Agencies.  A High Multiple Agency may be simply a very good agency that finds itself in the right place and the right time.  Simply put, certain communities are more desirable to buyers than others.   If you find yourself in a high growth community underrepresented by bank insurance agencies or national brokers, you may find yourself in a very fortunate position as a seller.  To get the right agency and the right people in the right community, a highly motivated buyer may be willing to pay a "strategic" price, a price that exceeds the actual economic value of an agency. 

A Sales Culture

Excellent service is the cost of admission to the insurance business.  But excellent service is rarely a defining characteristic of an agency - without it, an agency would be hard pressed to remain in business very long.  More often, insurance agencies distinguish themselves by their exceptional sales cultures.  And this is almost always true of the High Multiple Agency. 

An exceptional sales culture is a culture populated by exceptional producers.  High Multiple Agency producers tend to be well trained, specialists (rather than generalists), highly accountable for results, highly selective about the business they target, well supported (and thus free to sell, rather than service), hard workers, and disciplined.  

Attractive Customer Base / Lines of Insurance 

It's been said that you are known by the company you keep and agencies are no different.  High Multiple Agencies are generally very focused on writing desirable lines of insurance with the right customers.  Generalist agencies who strive to be all things to all people are rarely High Multiple Agencies.  High Multiple Agencies tend to focus on profitable, low turnover business with affluent and loyal customers.

One Highest Multiple Agency we know is, surprisingly, a 100% personal lines P&C agency.  With annual growth of 15-20% in a coastal resort community, this agency wrote high ticket vacation and retirement homes.  By focusing exclusively on this highly profitable niche, this agency quickly developed a reputation as a premier provider of high-end personal lines P&C business.  When asked why his competitors hesitated to focus on this business too, this High Multiple Agency's owner responded, "they think there's more money to be made writing all kinds of insurance for all kinds of people."  This High Multiple Agency sold to a local bank for a multiple well above two times revenue.

If and when it's time to sell your business, you no doubt hope to negotiate a high multiple sales price.  By focusing your time and attention on what real High Multiple Agencies look like, you may get just what you hope for.

Tom Doran is a senior vice president and principal of Reagan Consulting, Inc., an Atlanta-based management consulting firm that developed and produces the "Independent Insurance Agents and Brokers of America Best Practices Study."  The Best Practices Study may be accessed free of charge at Reagan Consulting's website www.reaganconsulting.com.  Tom may be reached at (404) 869-2534 or by email at tom@reaganconsulting.com