Looking for help valuing a Non-Standard Auto ONLY Independent Agency

[BenLooking]

Trying to get some assistance from those in the IA field who may have experience either on the buy/sell end or market valuation(s) as to a fair market value ballpark for a Non-Standard Auto ONLY Agency & Premium Finance Company that I am currently in talks with.

I've proven up the income/expenses & revenues via the Carrier Statements, Tax Returns & other financials. Trying to zero in on the right price.

Asking was roughly $575/550k; which I believe is high. Everything I have seen in my past research; valuations for a Non-Standard (not in financial distress) tend to be in the .75 - 1.0 times annual Agency Revenues. Owner has never bought nor sold an Agency - his pricing leans more towards a Standard/Preferred IA agency on Direct Bill.

Agency Details:

• Agency has been around 40 years & owner is retiring; no family to leave it to. Big City, office has been in the same spot since day one with busy street frontage. One girl would be staying on - she's a key piece. Lost a long time employee in 8/2019.
• Agency renewal rate runs right around 80%, which is obviously high for a Non-Standard Agency.
• Revenues are slowing declining. Agent in 70's with health issues. Most of his referral pipelines are gone/retired, so not writing as much new business as in the past.
• Agency Bill - all financials done on paper, in house by current Agent: files, ledgers & individual policy accounting cards. It would need to be moved to an Agency Management System.
• All Furniture & Equipment come in purchase. 5 newer Computers, used for the Comparative Rater. 20yr old Steelcase desks in great shape, chairs, file cabinets, printers, etc.
• Premium Finance Company: Also handled in house on paper. Generates roughly $30k of the Agency revenues.
• 8 Carriers Represented - 7 pay 25%, 1 pays 20%. 6 & 12 month policies available.
• No Preferred Standard Carriers; No Home, Commercial or other lines of insurance in Agency.
• I am making an ALL CASH offer, not asking seller to carry back anything; which is what I know he's looking for.
• How does this Covid19 situation affect pricing/risk is an uncertainty, especially depending on how long it drags out thus affecting customers ability to pay their bills (insurance).

Corporate Agency Revenues:
2016: 339k
2017: 338k
2018: 319k
2019 (ends 6/30/2020): currently revenue at $132k to date through 12/31/2019; down 17k to last corp fiscal year, although 3rd Corporate quarter (Jan-Mar) tends to be biggest quarter of the year.

• My Proforma Expenses would be roughly $195k annually.

Anyone with experience in this field/valuations have any thoughts or feedback?
Thanks in advance, gentlemen!

 

[adjusterjack]

These days "fair" market value goes out the window. He's in his 70s with health issues, revenue is already decreasing. It's going to get worse. He'll be lucky to have $200K by the end of June. Non standard auto is the first to get dumped by policyholders during economic crises. The "key piece" CSR may decide to practice "social distancing" or, worse, get the virus.

He's desperate.

This is what, in real estate, would be called a distressed property.

Offer $200K for starters. See what he counters. Don't pay more than $250K. And if you do pay $250K better hope you don't get shut down right after you pay it.

Another thing. Customers may be loyal to the guy who has been their agent for decades but once he's gone, they'll be shopping the rates instead of the agent.

Another another thing. Have you thought about having the guy stay on for a transition period while the customers get used to you? Every agency I've ever worked for that bought other agencies kept the seller on contract for a few years. My friend sold his agency and part of the deal was that he stay on for 5 years.

PS: No need to post more than once. We all read all the boards. Your 3 duplicates have been reported for deletion.

 

[BenLooking]

Adjuster,

My apologies for the duplicate posts...I appreciate your reply & candor!

Seller would be staying on to train me to his “accounting” & help with transition of business. I’d also be looking to add another CSR immediately to have them trained up. I’m not new to the Insurance game, but am new to Non Standard & Agency Bill - which adds a new twist.

You, I and some others who have put eyes on the business all see the same thing (and all of the points you made in your reply.) However, the Agent/Seller, unfortunately has an unrealistic value of his Agency. As I stated in my original post, he was at $575k to start. After getting a look at the financials and all things considered, I needed to amend my initial offer. My adjusted offer the Seller considered an insult. (Which was over 1.0)

Unfortunately, if I can’t get him to come around, he may simply go down with “his ship”; riding the renewals & revenues as they sink. The last thing I want to do is grossly overpay.

 

[whatyouwantfinally]

Buying a non-standard, auto only book isn't smart, almost regardless of price. Nothing about what you described suggests this situation is one of the exceptions. Every red flag is there, right down to the grumpy old guy who is unrealistic about the value.

I did something similar years back. Old guy, wanting to retire, heavily non-standard, mostly auto only book that came largely from foot traffic to a storefront. He wanted a completely unreasonable price; I thought I "won" by getting his price down dramatically. It was a much smaller book (insurance was a side gig for him) and I paid cash. People told me the same thing I'm telling you, but I thought I knew better and that the price I got made it worthwhile.

I was wrong. Sure, I made my money back, but barely. A year or so after, I reached the point most new agents eventually do; trying to cleanse my book of "crap" business. Low and behold, most of the business I didn't want came from the book I bought.

Most of us start by writing whatever we can to get things rolling, and non-standard auto is usually the low-hanging fruit. Then we realize there are only so many hours in the day, and these customers are actually a hindrance to getting to where we want to be. They're not stable, they are service/claims nightmares and typically don't provide cross-selling and referral opportunities. I basically bought that lesson vs "earning" it, and it sounds like you're considering the same.

Getting too deep into determining a "good" valuation will lead you down the exact same path I went down. Even if you "win" the negotiation, you lose.

Just walk away. You're dealing with a guy who built his book the old/lazy way, never had the initiative to move beyond the low-hanging fruit days and wants his life's work to be worth the same as those who did.

 

[Warrior]

When I do a valuation of his business as you wrote it down, I see he is giving you a person who can help with the transition, but is leaving you with many files to manage into a computerized system manager. That takes time, time is money.

His evaluation is for him wanting to retire with money to live on as he will no longer be able to work. He should have invested his earnings into stocks or retirement accounts. But that was then, this is now. Because he is offering an office that has been there since Noah's Ark, this is an asset. Since he is giving you the furniture, this is kind of an asset. Since there will be one employee staying, that is an asset.
Seeing his book getting smaller, that is not something I would worry about. You can cross sell these guys and do annual reviews and see if you can't get them into a better situation. I would offer no more than $375k. I say this so he won't be rubbed too hard. But you need to explain that his hard work, is not a monetary valuation. It is only what he still has in his book of business. Is he renting or owning the building? renting it? HE gets less money. Owning it, he gets what the property is worth on the county assessment. I would keep his office because of the long standing in the community and relaunch it with lots of fanfare that you are a Young agent that has low rates for Standard people. Get photos of the old agent shaking hands with the new agent as the old agent rides off into the sunset. So the community sees this as a good thing.

I know I am rambling on, but I think of this book of business being more than just a book. It is a legacy that this older agent created for many, many years. You can't pay for his years, but you can pay for what the book is now and for the office and the person who is staying (her experience is golden) You will not need to hire and train another person until your book is brought up to current modern technology and you can evaluate what the current employee can do for you. Multi-Tasking is more affordable than just hiring many people.

 

[tikibarrister]

Not being a P&C guy, I’m curious...why is non-standard auto unattractive? Just harder to scale up because each client takes a lot more time?

 

[BenLooking]

Tiki - one of the biggest reasons
Non-Standard is somewhat unattractive would be the overall retention rate. Most Non-Standard Agencies, especially the large ones that advertise low cost/low down payment, only renew somewhere around 40-50%.
Another negative would be the carriers looking for ways to deny claim(s) which can be a headache as well.

 

[Warrior]

I sell P&C Life. I will sell to anyone, I always state in my advertising that I am an Affordable Agency because everyone wants to pay less on autos. However, I have had my share of sub par clients who will get a policy, get into an accident, get a new policy, forget to pay it, I have to get it reinstated, and the policy goes up, because of their background of either always driving without insurance, getting into accidents, or never paying their bills and the policies get cancelled. They are the types we agents who have been working in the P&C world, choose to tell them that there is a General in town who will recruit them. Too much work, but for me, it was too much drama from the client that made me choose not to write them. If for some reason I do, I always tell them they must pay in full for their whole policy term. They either run away or they become responsible clients. I have a few who listened to my education on how to get the best rates, and they are now my premium clients. Took 5 years, but they saw the light at the end of the tunnel. If I were to buy a sub-standard only agency, I would call every single one of them and see if I could get them a better rate and get them back into premium standards and strongly encourage them to buy Life insurance to make my book worth more.

 

[Allen Trent]

At 80% renewal rate, you will lose almost your entire purchased book in about 7 -8 years (50% will be gone in just 3 years at 80% retention). Needs $70k of new comm every year just to replace the stuff going out the back door.

Also, non standard auto is 1 of the most transient & labor intensive lines of business. Couldn't pay me to do it. I would rather put a self service kiosk in the DMV to sell direct than have a high rent storefront with staff & overhead to deal with that nightmare of high demand need it now client & car dealers.

You have a 60%+ & growing expense ratio. If you pay $500k, you are basically spending $500k to get yourself a 100K a year job before taxes before taxes, self employment taxes.

I think based on the info you gave, he will be lucky to get 100k to 150k for it.

500k investment in a handful of residential real estate properties would get you to 100k job quicker & maybe less labor than this opportunity.