6. MARKET CONDITIONS
Another factor to consider when valuing an independent insurance agency is the market conditions. This includes both the local economy and competition. These two factors will be used by any astute buyer when creating their pro-forma financial statements.
Buyers are looking for markets where they can grow the book of business they are purchasing. An independent insurance agency located in an area with a thriving economy and limited competition can expect a premium in the valuation of their agency. These factors can and will be used to their advantage when negotiating a deal. On the other hand, many buyers will be leery of purchasing an agency in an area going through a recession and that has competition on every corner. This will lead buyers to forecasting a larger percentage of attrition in the seller’s current book of business. Higher attrition and less demand create a reduced valuation for an insurance agency.
Even though the local economy and competition both have an impact on an independent insurance agency’s valuation they should still be analyzed very carefully. Placing too much emphasis on these factors can lead to a buyer paying too much or not factoring in the synergies two agencies may have when merged together.