By Mike Stroman
Over the past year, we’ve seen increases in interest rates by the Federal Reserve, but the increases have been small and implemented gradually. So, is this really an issue in insurance agency valuations?
The answer is a resounding “YES!”
There are three main effects this rise in interest rates has on agency valuations and the overall agency acquisition market:
- Higher interest rates take some buyers out of the market. There are two reason for this. First, lenders are not as loose on lending standards in an environment in which interest rates are increasing. And second, many buyers are bargain hunters—if they can’t borrow money very inexpensively, they simply remove themselves from the market.
- Seller expectations still need to catch up. Ordinarily, reduced multiples would adjust the price of the agency to be acquired, thus offsetting the cost of higher interest rates. However, the agency world has grown accustomed to multiples of revenue over 2x, and sellers have not adjusted their perspective (yet!) to accept lower prices based on this new higher interest rate environment. The net effect is that fewer qualified buyers want to spend their time to go through the acquisition process when they assume they won’t be able to match seller expectations anyway.
- Lenders become more stringent. Higher interest rates generally have the effect of cooling down the economy, making lenders even more cautious than they already are. Lenders factor in this potential downturn in the economy and seek more significant participation from buyers (read: a higher down payment) and, likely, a shorter amortization period.
Combined, these factors make it more challenging for sellers to get the value they deserve for their agency.
Do you want a guide on the journey to sell your agency? Stroman Consulting Group has concluded 69 sales of agencies to date, helping agencies of all sizes maximize their value in a sale/merger by walking with the seller through the increasingly complex world of entity sales.
Contact Mike to discuss the process and the support they can provide for you.