As more banks consider buying independent insurance agencies, they are recognizing that valuing these businesses defies easy analysis.

Bank executives and consultants who help broker these deals contend that a host of "soft" issues, such as the quality of an agency's work force, should be considered when determining its value to a banking company.

"You're really buying people's relationships," said Peter J. Verrill, chief financial officer for People's Heritage Financial Group, Portland, Maine. "The question becomes what those relationships will produce as part of the bank, and what revenues they will initially add to the bank's bottom line."

Timothy C. Pfeifer, a consulting actuary and principal at Milliman & Robertson Inc., a Chicago consulting firm, said, "Every one of these situations is really unique. I would definitely say that it's more art than it is science."

Take, for example, the use of simple statistical yardsticks such as multiples of revenues to determine an agency's value.

Though multiplesof revenues can be used as a crude expression of value, it is not an adequate way to price a deal, said John M. Wepler, principal and vice president of merger and acquisition services for Marsh, Berry & Co., Concord, Ohio.

Marsh Berry gives a rudimentary example of how to value a typical agency with $4 million of yearly revenue (see graphic).

Expenses and taxes are deducted from revenues to give after- tax profit. That is multiplied by a valuation multiple. Historically, the multiple runs from 8 to 12.

Then the multiple is adjusted for the risk associated with the sustainability of after-tax earnings. An average agency's performance merits a 9.5 multiple. Such an agency is less adept at receivable collections than a better performing agency.

The average agency also has a higher working capital requirement, which also diminishes value. Therefore, working capital is subtracted from an agency's preliminary value figure. Finally, an agency's tangible net worth is added in to arrive at fair market value.

Mr. Wepler cautioned that average agencies are not good acquisition targets. They are not growing adequately to overcome trends of fewer renewals and slimmer margins, he said.

"You're better off paying a 20% premium to book value for an agency that's a productive enterprise that has a longer record than buying one at discount," Mr. Wepler said.

Banks are paying 15% to 30% premiums, Marsh Berry data show. Typically, secondary deals are cheaper.

Milliman's Mr. Pfeifer said others besides bankers are paying the premium because "in this day and age distribution is king."

Banks "have to be skeptical" when an agency approaches them, said Valerie Jordan, president of Jordan & Jordan Associates, a Belchertown, Mass., consulting firm.

By contrast, better agencies are not worried about their future, Mr. Wepler said. "You have the right agency when you talk to them three or four times and they aren't for sale."

Finding the right agency means going beyond balance sheet analysis, observers said. Bankers who yield to the natural inclination to look solely at balance sheet issues "are going to get burned," Ms. Jordan said.

One priority is to determine whether the people who made the business what it is will want to remain with the bank.

If agents' contracts allow them to buy out any portion of their books of business in which they are not vested, those books of business might migrate to a competitor or start-up after acquisition, Mr. Wepler said.

"If you've got two or three people leaving, the cost structure to the agency is variable," he said. Retaining entrepreneurial-minded agents is crucial to success, he said.

Some banks hurt staff retention by slicing compensation, Mr. Wepler said. "Don't jump to the conclusion that everyone is overpaid," Mr. Wepler said. The better producers, though paid more, are more cost-effective.

Other considerations are the ages of agents and owners. Younger employees are good for the future, as are agencies that have owners of various ages, Mr. Wepler said.

Ownership for workers, through employee stock ownership plans, is the hallmark of a quality agency, Mr. Wepler said. Merely vesting agents in their books of business engenders a "staff of producers that perceive themselves as islands," he said.

As for valuing future cross-selling opportunities, experts urged conservatism. Synergy does not develop the day after acquisition, and building sales across business lines is one of the biggest challenges, so it is better to give it little weight initially, they said.

Peoples Heritage's Mr. Verrill said he gave little weight to cross- selling opportunities when his bank acquired Morse, Payson & Noyes, the largest agency in Maine.

Ms. Jordan advises banks to develop a business plan for insurance and to shun potential acquisitions that lack such plans. A recent study suggested that less than half of agencies have business plans of their own, she said.

"If they don't have a business plan or a marketing plan before you buy it, what do you think their chances are?"

Milliman looks for a breadth of underwriting relationships for stability, Mr. Pfeifer said. If a majority of an agency's business is done through one or two underwriters, those relationships better be rock-solid to avoid negatively influencing valuation, he said.

Banks are still new at balancing these issues related to agencies, Mr. Verrill said. "There's no consistency to it."

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