Independent agents often ask bank lending officers threequestions:

• What's going to happen to interest rates?
• What price could I get if I sell my agency?
• Are valuations for independent agencies now at their peak? (Theimplied question behind this is: Should I sell my agency soonbecause prices are high?)

When bankers hear these questions, they answer with the caveatthat they don't have a crystal ball. Besides, as bankers, it's nottheir business to predict the movements of interest rates or makeindependent valuations.

But bankers do spend a lot of time talking with insurance agencyowners and producers, working up close on independent agencyperpetuation and merger & acquisition transactions, andobserving the economic signs. At InsurBanc, which provides creditexclusively to the independent agent channel, lenders have a vestedinterest in having an ongoing dialogue with agents/brokers.

On the following pages, are observations about the three commonquestions that bank lending officers receive:

Related: 6 tips to get your financial services practiceready to sell

Interest rates likely will not increase rapidly in 2016, butmay raise once or twice this year. (Photo: iStock)

1. What will happen to interest rates?

Insurance agency buyers and sellers have been operating in a lowinterest rate environment. The federal funds rate — a benchmarkrate for economists, lenders, and investors — didn't budge from0.25% from December 2008 until December 2015. The Federal ReserveBoard at its December 2015 meeting announced it would raise itsbenchmark interest rate to between 0.25% and 0.5%. Further, the Fedsaid it expects “only gradual increases” in the federal funds rate,depending on the economic outlook and that the “rate is likely toremain, for some time, below levels that are expected to prevail inthe longer run.”

That rate has important symbolic and actual financial impact onthe economy. It cascades through the banking system. It affectsrates paid by borrowers on everything from business loans to creditcard debt. It is a factor on earnings on financial instrumentsranging from savings accounts to stocks.

As the federal funds rate goes up, it likely will tricklethrough to the interest rates that buyers would pay to borrowcapital to acquire independent agencies. And as buyers put togethertheir plans and their pro forma financial statements, they have toconsider whether the expected investment return from an acquiredagency would clear the “hurdles” of paying back their loans.

These are two typical sets of agency buyers:

• A “strategic buyer” usually is already working in the agency asa producer; is a family member working in the business; or isotherwise interested in operating the agency after acquiringit.
• A “financial buyer” is primarily interested in the cash flowand investment return that an acquired agency could provide.

While buyers have had a low interest rate environment forborrowing for some time, a good portion of independent agencyacquisitions have been funded by private-equity capital (which,presumably, is not borrowed funds).

At InsurBanc, we predict that rates will not increase veryrapidly, perhaps once or twice more in 2016. The reason is thatthere is no indication of inflation and monies continue to flowinto U.S. treasuries.

But it's a safe assumption that borrowers' ability to accesscapital in the marketplace at relatively low rates is not going tobe here forever. Typically, our recommendation is that agencyborrowers strongly consider refinancing variable-rate debt andfixed-rate debt, even if the rate is low, if it will be maturing orrepricing in the next six to twelve months.

Related: What's YOUR succession plan?

Carriers, customer sets and niches all factor into agencyvaluation. (Photo: iStock)

2. What price could I get if I sell myagency?

Sometimes the discussions about valuations of independentagencies are about “multiples,” such as:

• “I sold my agency for three times revenue.”
• “I got 10 times EBITDA (earnings before interest, taxes,depreciation and amortization).”

Multiples are interesting, especially in discussions on the golfcourse or at agent conventions. But there can and should be contextaround any discussion of valuations. For example, two agencies with$3 million in revenue might have different valuations. One factorcould be that agency A had $2.5 million in revenue in the prioryear, while agency B had $3.5 million. The price is important, butno transaction can be boiled down to one ratio.

Independent agencies have a lot of commonalities. But it's ourview at InsurBanc that each agency is a little different. Eachagency's business mix is particular to it. Carrier appointments,customer sets, niches, makeup of the producer base — these andothers are important qualitative aspects when evaluating andvaluing an agency.

Any valuation of an independent agency can and should be done bya competent third-party appraisal firm. And in our view valuationsshould be done only in the context of an agency principal'sstrategic objective, or to understand what strategic options mightbe available to the agency owner.

Typically, the reasons for that strategic decision are: toperpetuate the agency to the next family generation so that theowner generation can exit over time; or to monetize the value of alifetime business investment in order to exit the insurancebusiness.

Absent a business objective, any talk about agency valuationmultiples — however scintillating — is just talk.

Related: How to maximize the value of youragency

The decision to sell involves a range of factors other thanprice. (Photo: iStock)

3. Are valuations for independent agencies at theirpeak?

The values being paid for independent insurance agencies havebeen high during 2014 and 2015. In fact, Reagan Consulting notesthat 2015 likely will be a record year for agent/broker mergers andacquisitions.

So does that mean the time is right for an agency principal tosell?

It's unwise to make that decision based solely on a financialperspective. The value of an agency sale is a vital consideration.But it should not be the only or deciding issue. Low interest ratestypically keep multiples of price-to-revenue or price-to-earningslofty. And the attractive, steady earnings of insurance agencieshave drawn capital and liquidity from able buyers.

The decision to sell involves a range of factors other thanprice: the stage of life and career for the agency principal(s),the availability of an internal buyer for perpetuation, familypriorities, taxes, the prospects for the agency's producers andstaff under new ownership, and the role that the principal wouldplay after an agency sale.

Each agency principal faces a unique set of circumstances whendetermining if and when a sale makes sense. Timing is in the eye ofthe beholder. A decision on a transaction really needs to be drivenby personal and business circumstances and not merely financialconsiderations.

However, at InsurBanc, it is our opinion that while agencyvaluations may be frothy and it may be attractive to sell to thehighest bidder, there is a compelling economic case to be made forexecuting a well-planned perpetuation program.

Robert J. Pettinichi is executive vicepresident and chief lending officer of InsurBanc, a divisionof Connecticut Community Bank N.A. E-mail him at [email protected].

Related: Selling your agency: Top 10must-dos

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