TECHNOLOGY
Marsh-Berry offers online performance analysis
By Len Strazewski
"We've been asked by many of our subscribing organizations to provide some method by which they can analyze situations they encounter frequently as part of their overall business."
--Douglas A. Terrill, vice president of information resources, Marsh-Berry Services, Inc.
Padgett-Young & Associates, an independent agency in Lodi and Wadsworth, Ohio, isn't for sale, and its principals aren't shopping for an acquisition right now.
But it doesn't hurt to have a good estimate of the agency's fair market value, says Vice President Chris Betts. "Even if you are not in the acquisition market at this time, it is nice to know the agency's value in the insurance marketplace. An agency value is really the measure of your overall performance.
"If your market value is high, you can be reasonably sure that your management strategy is on target in building and maintaining your business," he says.
Padgett-Young, a personal and commercial lines agency with 14 employees, is the largest independent agency in the Lodi area, Betts says. The 12 year-old firm represents seven multline insurers, including the Westfield Companies and its local carrier, Ohio Farmers Insurance Co.
Last year, the Westfield Companies recommended that the agency review its value and subsidized a subscription to the Perspectives on High Performance (PHP) agency assessment and performance consulting services of Marsh-Berry Services, Inc., in Concord, Ohio.
As part of the subscription service, Marsh-Berry collects agency financial information and generates a performance analysis that can be used for a variety of management purposes, including agency performance, market valuation, and producer business development schedules, Betts notes.
However, in addition to these services, Padgett-Young also helped test a new online product available to users of Marshberry.com, the consulting firm's Web site. The OnLine Value Estimator automates analysis of agency financial accounting, business management and marketplace dominance to create an estimate of the agency's fair market value.
Daniel Skowronski is vice president, consulting services.
Just walking through the financial analysis of the agency balance sheet as well as anticipated growth and earnings potential can paint a revealing picture of management strategy and help the agency plan for the future, Betts explains.
"The program takes our agency numbers and puts them in a spreadsheet structure that allows us to see pretty clearly how our agency works. It also forces us to take a look at numbers and performance information that we may have not looked at closely enough, in order to create the pro forma statements the program requires."
The results were pretty good for Padgett-Young, Betts says. However, he expects the agency will learn even more about its value and performance as he experiments with the program, plugging in new numbers, estimates, and agency expectations to test how they will affect the valuation bottom line.
"We've just started to really test the program," he says. " I think as we get into it, we will learn more about how to use it as a planning tool, not just as a valuation tool," he says.
Douglas A. Terrill, Marsh-Berry vice president of information resources, says the Value Estimator can be useful in a variety of agency management scenarios.
"We've been asked by many of our subscribing organizations to provide some method by which they can analyze situations they encounter frequently as part of their overall business," he explains. "We designed Value Estimator to be a valuable tool whenever an agency is approached by another firm looking to sell, or when an agency is looking to buy another firm.
Mark C. Maurer is Marsh-Berry's Web developer.
"In those situations, agency management needs a way to make a quick estimate of the value of the situation--to see if it is something you should pursue."
Daniel E. Skowronski, vice president, consulting services, agrees. "When an agency down the street approaches you about buying them out, the deal can look pretty attractive. The Value Estimator can help you decide whether or not there is any reason to pursue the situation."
Agencies also can use the program to evaluate a producer's book of business for compensation or for management participation, or create an agency buy/sell agreement as part of a long-term agency perpetuation plan.
The program doesn't produce a definitive evaluation, Terrill notes, but has special value for agents because "it provides insight and understanding of
the agency valuation process," and how that process influences management decisions.
Subscribers to the Marsh-Berry consulting service package can buy a 30-day subscription to the OnLine Value Estimator for $295 and import agency financial data directly from the PHP report available to subscribers on the Marsh-Berry Web site. Non-subscribers to PHP can purchase a 30-day subscription for $395 and must enter their agency financial data directly into the estimator online model.
Terrill says a subscriber who has already created a portfolio of financial information for PHP can import the data online and run through a valuation simulation in one to two hours.
New users must enter the data manually according to a five-step process that builds a comprehensive financial portrait. The steps incorporate the Marsh-Berry agency evaluation model that also is used in the more formal and extensive agency valuation services. The new user process takes three to four hours to produce the first valuation.
The steps include:
* Pro Forma Earnings Potential. Agents enter actual revenue and expenses from the agency expense statement and make pro forma adjustments by line item. The earnings potential of an agency is determined by the agency's earnings before interest, taxes, depreciation and amortization (EBITDA).
* Projected Earnings Potential. Based on the pro forma income statement assumptions as well as income taxes and future growth of the agency, the future earnings potential of the agency is projected over five years. Agents enter expected average growth percentages for property and casualty and life and health insurance programs.
* Balance Sheet Value. Agents enter actual revenue and expenses for the balance sheet using either a short-form or detailed version of the balance sheet. The online spreadsheet provides detailed definitions of key line items, which helps users to determine which agency accounts should be included in any line item. To avoid disputed values, agency intangible assets are set to "0."
* Risk Assessment. An important step in any valuation is to assess the amount of risk associated with an agency. In this step, risk is estimated by answering a short questionnaire about the agency (see accompanying sidebar).
* Estimation of Book Value. With the previous four steps completed, agents can proceed to an estimation of book value which is derived from an average of two value tests commonly used in the industry: the Present Value of Future Cash Flows Value Test and the Cash Buyers Retrospective EBITDA. Then, the Value of the Balance Sheet and the Book of Business Value are added together to produce Full Fair Market Value.
While the Value Estimator provides a good glimpse of the financial factors and the process by which the consulting form creates a formal agency valuation, Terrill warns that the online tool is not a replacement for a full analysis and appropriate acquisition due diligence.
A complete Marsh-Berry valuation analysis for an acquisition requires 12 to 24 work hours and costs $2,000 to $4,000. *
How risky is your business? As part of the Marsh-Berry Services Online Value Estimator product, agents ask themselves 10 questions that help them assess the strength and stability of their ability and the agency's ability to prospect for replacement business.
While the questions are just one part of the overall agency valuation program, the questions themselves can be a good way to identify agency strengths and weaknesses, says Chris Betts, vice president of Padgett-Young & Associates in Lodi, Ohio.
"The risk assessment questions are particularly helpful because they take some of the guessing out of evaluating your business," he notes. "When you put them all together with your answers, you get a real picture of your revenue stability."
Try them yourself:
1. What percentages of the agency's total commissions do the 10 largest accounts represent?
Responses range from less than 5% to more than 35%.
2. How many of the agency's 20 largest accounts have been lost over the last three years?
Responses range from "None" to "More than five."
3. What percentage of the total commissions does the commission handled by the producer with the largest book of business represent?
Responses range from less than 15% to more than 50%.
4. Does the agency have non-compete or non-piracy agreements in place with all producers?
Responses range from "all of the producers" to "none of the producers."
5. What percentage of the agency's total premium volume does the premium with the single largest carrier represent?
Responses range from less than 5% to more than 50%.
6. Considering the three largest carriers from which the agency normally receives contingent income, were the most recent year's loss ratios generally...?
Responses range from less than 40% to more than 75%.
7. What is the Revenue per Employee of the agency?
Responses range from lower than $80,000 to more than $110,000.
8. Considering the three areas of personal lines, commercial lines and employee benefits, how many of these is the agency able to offer clients directly (not outsourced)?
Responses range from one to all three.
9. Considering the normal marketing area of the agency, what is the population of the largest city in which it actively prospects for business?
Responses range from less than 10,000 to more than 500,000.
10. How are the premiums on Agency Bill accounts generally collected?
Responses range from "on or before the due date" to "later than 30 days after the due date."
For more information:
Web site: www.Marshberry.com