Mercer Capital’s Insurance Industry newsletter is a quarterly publication providing perspective on valuation issues pertinent to insurance brokers, underwriters, and other industry professionals. Each issue includes a segment focus, market overview, mergers and acquisitions review, and more.

1. VALUE FOCUS
Insurance Industry
Fourth Quarter 2014
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2. © 2014 Mercer Capital // www.mercercapital.com // Data provided by SNL Financial 1
Value
FocusInsurance Industry
Fourth Quarter 2014
Insurance Stocks Post Weak Returns in Q3. Through the end of the third quarter, insurance
companies on the whole continued to exhibit weak stock market performance. Concerns about
slowing premium growth and low investment yields contributed to the lack of investor enthusiasm.
The SNL Underwriter Index posted a 1.5% total return for the quarter, relative to a 1.1% increase in
the S&P 500. Multi-line and P&C companies led the increase, at 3.0% and 2.1%, respectively. Life
& Health stocks dipped 1.9%, after having received a modest boost in the second quarter on news
of the $5.6 billion Dai-ichi Life / Protective Life deal announcement. Managed Care stocks posted
the highest return for the quarter (4.3%) as well as last twelve months (27.3%).
Pricing Under Pressure. According to MarketScout, the average increase in renewal pricing
among commercial lines accounts was 2% in September. This is generally in line with pricing trends
observed thus far in 2014, but it is half the average level observed for 2013. Commercial property
and general liability lines appear to be experiencing the most competition. While there have been
several cat events in the first half of the year, the absence of a major catastrophe in 2014 contributes
to increasing industry capital and even less impetus for further rate increases.
Valuation Multiples Turning? As shown in the attached charts of historical and current pricing
by segment, price/book multiples for the SNL P&C and L&H Indices dipped slightly during the third
quarter to 1.23x and 1.05x, respectively. Price/book for the SNL Reinsurance Index dropped to
0.95x, the first time below book value since 2012. Among insurance brokers, EV/EBITDA multiples
remain at multi-year highs, but pulled back slightly from 12.0x at June 30 to 11.7x at the end of the
third quarter.
M&A Deal Notes. Underwriter transaction volume through the third quarter stood at its lowest level
in four years (at 41 announced deals compared to 65 in the prior year). The largest announced
deal of the quarter was Enstar’s $218 million acquisition of Companion Property and Casualty
Insurance Company. Companion writes P&C, specialty, and workers’ compensation business,
and also provided fronting and TPA services. According to SNL, the deal price represents 86% of
statutory book value. Transaction activity among insurance brokers continued to accelerate in the
third quarter with 74 reported deals (53 in the prior year). Deal activity through the third quarter now
represents a 54% increase over 2013 levels. The most notable deal in the third quarter was Tiptree
Financial’s $209 million acquisition of Fortegra Financial. The deal consideration of $10.00 per
share in cash represents a 42.5% premium to the prior day’s closing stock price and approximately
5.7x LTM EBITDA.
Special Insert:
How to Value Your Insurance Brokerage

3. © 2014 Mercer Capital // www.mercercapital.com // Data provided by SNL Financial 2
SNL Insurance Broker and Underwriter IndicesSNL Insurance Underwriter Segment Indices
Mercer Capital’s Value Focus: Insurance Industry Fourth Quarter 2014
60.0!
80.0!
100.0!
120.0!
140.0!
September30,2013=100!
S&P 500: 19.73% ! SNL Insurance Multiline: 20.73% !
SNL Insurance L&H: 15.92% ! SNL Insurance P&C: 12.43% !
SNL Reinsurance: 12.63% ! SNL Managed Care: 27.30% !
SNL Title Insurer: 17.03% ! SNL Mortgage & Finl Guaranty: 9.11% !
90.0!
95.0!
100.0!
105.0!
110.0!
115.0!
120.0!
125.0!
September30,2013=100!
SNL U.S. Insurance Broker: 15.04% !
SNL U.S. Insurance Underwriter: 16.73% !
S&P 500: 19.73% !
M&A Activity Recap: Insurance UnderwritersM&A Activity Recap: Insurance Brokers
Q1! Q2! Q3! Q4! YTD at 9/30!
2011! 24 ! 18 ! 32 ! 31 ! 74 !
2012! 20 ! 26 ! 27 ! 20 ! 73 !
2013! 23 ! 17 ! 25 ! 13 ! 65 !
2014! 19 ! 13 ! 9 ! 0 ! 41 !
0 !
20 !
40 !
60 !
80 !
NumberofTransactions!
Q1! Q2! Q3! Q4! YTD at 9/30!
2011! 77 ! 59 ! 72 ! 83 ! 208 !
2012! 64 ! 71 ! 56 ! 138 ! 191 !
2013! 41 ! 42 ! 53 ! 76 ! 136 !
2014! 75 ! 61 ! 74 ! 0 ! 210 !
0 !
50 !
100 !
150 !
200 !
250 !
NumberofTransactions!
60.0!
80.0!
100.0!
120.0!
140.0!
September30,2013=100!
S&P 500: 19.73% ! SNL Insurance Multiline: 20.73% !
SNL Insurance L&H: 15.92% ! SNL Insurance P&C: 12.43% !
SNL Reinsurance: 12.63% ! SNL Managed Care: 27.30% !
SNL Title Insurer: 17.03% ! SNL Mortgage & Finl Guaranty: 9.11% !

4. © 2014 Mercer Capital // www.mercercapital.com // Data provided by SNL Financial 3
Mercer Capital’s Value Focus: Insurance Industry Fourth Quarter 2014
SNL Life & Health IndexSNL Multi-Line Index
SNL Property & Casualty Index SNL Reinsurance Index
9/30/146/30/1412/31/1312/31/1212/30/1112/31/1012/31/09
Price / LTM EPS 12.5117.4416.5514.748.3511.7113.53
Price / Book 1.051.151.270.810.811.131.21
Price / Tang. Book 1.111.201.290.710.771.001.31
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
2.50
0.00
2.50
5.00
7.50
10.00
12.50
15.00
17.50
20.00
22.50
25.00
Price/Book
Price/Earnings
9/30/146/30/1412/31/1312/31/1212/30/1112/31/1012/31/09
Price / LTM EPS 19.8612.2621.617.685.1810.809.88
Price / Book 1.741.131.140.660.560.710.72
Price / Tang. Book 2.191.332.161.140.760.810.74
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
2.50
0.00
2.50
5.00
7.50
10.00
12.50
15.00
17.50
20.00
22.50
25.00
Price/Book
Price/Earnings
9/30/146/30/1412/31/1312/31/1212/30/1112/31/1012/31/09
Price / LTM EPS 14.3314.6514.8112.8415.9512.7018.26
Price / Book 1.231.321.381.121.121.131.09
Price / Tang. Book 1.601.621.651.381.451.401.30
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
2.50
0.00
2.50
5.00
7.50
10.00
12.50
15.00
17.50
20.00
22.50
25.00
Price/Book
Price/Earnings
9/30/146/30/1412/31/1312/31/1212/30/1112/31/1012/31/09
Price / LTM EPS 10.129.5111.556.9822.939.4324.08
Price / Book 0.951.011.060.830.820.841.11
Price / Tang. Book 0.991.041.090.850.850.871.44
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
2.50
0.00
2.50
5.00
7.50
10.00
12.50
15.00
17.50
20.00
22.50
25.00
Price/Book
Price/Earnings

5. © 2014 Mercer Capital // www.mercercapital.com // Data provided by SNL Financial 4
Mercer Capital’s Value Focus: Insurance Industry Fourth Quarter 2014
SNL Title Insurance IndexSNL Managed Care Index
SNL Mortgage & Financial Guaranty Index SNL Insurance Broker Index
9/30/146/30/1412/31/1312/31/1212/30/1112/31/1012/31/09
Price / LTM EPS 15.8015.2013.929.8910.728.6611.05
Price / Book 2.162.152.021.511.641.341.42
Price / Tang. Book 4.174.494.563.363.334.223.43
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
0.00
2.50
5.00
7.50
10.00
12.50
15.00
17.50
20.00
22.50
25.00
Price/Book
Price/Earnings
9/30/146/30/1412/31/1312/31/1212/30/1112/31/1012/31/09
Price / LTM EPS 23.6923.8414.449.3812.9610.9128.22
Price / Book 1.521.441.531.220.890.851.00
Price / Tang. Book 1.882.003.232.631.661.622.01
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
4.00
4.50
5.00
5.50
6.00
0.00
2.50
5.00
7.50
10.00
12.50
15.00
17.50
20.00
22.50
25.00
27.50
30.00
Price/Book
Price/Earnings
9/30/146/30/1412/31/1312/31/1212/30/1112/31/1012/31/09
Price / LTM EPS 9.4116.626.240.553.563.340.44
Price / Book 1.521.861.940.660.670.850.89
Price / Tang. Book 1.151.301.980.660.670.860.89
0.00
0.25
0.50
0.75
1.00
1.25
1.50
1.75
2.00
2.25
2.50
0.00
2.50
5.00
7.50
10.00
12.50
15.00
17.50
20.00
22.50
25.00
Price/Book
Price/Earnings
11.7
12.0
12.2
9.6
9.3
10.4
8.1
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
9/30/146/30/1412/31/1312/31/1212/30/1112/31/1012/31/09
EnterpriseValue/LTMEBITDA

6. Mercer
Capital
Insurance Industry Services
Contact Us
Copyright © 2014 Mercer Capital Management, Inc. All rights reserved. It is illegal under Federal law to reproduce this publication or any portion of its contents without the publisher’s permission. Media quotations with source attribution are encouraged.
Reporters requesting additional information or editorial comment should contact Barbara Walters Price at 901.685.2120. Mercer Capital’s Industry Focus is published quarterly and does not constitute legal or financial consulting advice. It is offered as an
information service to our clients and friends. Those interested in specific guidance for legal or accounting matters should seek competent professional advice. Inquiries to discuss specific valuation matters are welcomed. To add your name to our mailing list
to receive this complimentary publication, visit our web site at www.mercercapital.com.
Mercer Capital provides the insurance industry with corporate valuation,
financial reporting, transaction advisory, and related services.
Industry Segments
Mercer Capital serves the following industry segments:
• Agencies
• Independent insurance brokers and agents
• Bank-owned agencies
• Retail, wholesale, and MGAs
• Ancillary
• Third-party administrators
• Claims adjusters and other service providers
Mercer Capital Experience
• Nationwide client base
• Agency clients range from single office agencies to top-10 public brokers
• Underwriter clients range from monoline privates to publicly traded multi-line carriers
Contact a Mercer Capital professional to discuss your needs in confidence.
Lucas M. Parris, CFA, ASA
901.322.9784
parrisl@mercercapital.com
Travis W. Harms, CFA, CPA/ABV
901.322.9760
harmst@mercercapital.com
Mercer Capital
5100 Poplar Avenue, Suite 2600
Memphis, Tennessee 38137
901.685.2120 (P)
www.mercercapital.com
• Underwriters
• P&C, life & health, and managed care
• Reinsurance
• Captives and risk retention groups

7. HOW TO VALUE YOUR
Lucas M. Parris, CFA, ASA
INSURANCE BROKERAGE
October 2014
www.mercercapital.com

8. HOW TO VALUE YOUR
INSURANCE BROKERAGE
Mercer Capital provides insurance agencies,
brokerages, and underwriters with corporate
valuation, financial reporting valuation,
transaction advisory, and related services.
LUCAS M. PARRIS, CFA, ASA
901.322.9784
parrisl@mercercapital.com
TRAVIS W. HARMS, CFA, CPA/ABV
901.322.9760
harmst@mercercapital.com
Soft market or hard market, it is important for insurance brokerage owners to have an idea of what
their business is worth. A lack of knowledge regarding the value of your business could be costly.
Opportunities for successful liquidity events may be missed or estate planning could be incorrectly
implemented based on misunderstandings about value. In addition, understanding how insurance
agencies and brokerages are actually valued may help you understand how to grow the value of your
business and maximize your return when it comes time to sell. The purpose of this article is to provide
an informative overview regarding the valuation of insurance brokerages and agencies.
WHEN DO YOU NEED TO KNOW WHAT YOUR BUSINESS IS WORTH?
SELLING OUT?
In the most obvious case, someone who is planning to sell their business needs to know what it is worth. Probably
the hardest issue a business owner encounters is cashing-out their life’s work. Beyond the myriad of emotional
issues you will face is the raw economics of how you will sell and for how much. There are hundreds of issues that
may arise in a transaction. Many of them ultimately affect the proceeds of the transaction to the seller. Knowing
what you should be able to expect will let you evaluate whether or not an offer for your company is reasonable.
SELLING IN?
If you are planning on transferring ownership to your children or your management team, you will need to know
what the interests in the business being transferred are worth. Depending on the circumstances, a small minority
interest may be worth much less than a pro rata interest in the total value of the business. Ignoring this issue can
cost you a lot of money.
BUY-SELL AGREEMENTS
Many business owners fail to understand the valuation implications of buy-sell agreements. If you have other
shareholders in your business who are non-family, and maybe some who are, you probably have some kind of
buy-sell agreement between the shareholders that describes how the business (or business interests) will be
valued in the event of a shareholder dispute, death, or departure from the business (even on friendly terms).
In our experience, buy-sell agreements almost never sufficiently describe the mechanism to be used to value the
business. The process looks simple when the buy-sell agreement is being drafted and a transaction is not on the
table. However, when the day comes that a buy-sell agreement is invoked, you will want the process to be clear.

9. 3
VALUATIONS FOR FINANCIAL REPORTING
Have you made acquisitions of other agencies or books of business in the past? If so, how are those items
recorded on your company’s balance sheet? Does your agency have intangible assets such as customer renewals,
expirations, non-compete agreements, or goodwill? Whether your business is a private company or a publicly
traded firm, these types of assets require testing for impairment at least annually. For goodwill impairment
testing, a valuation of the entire business may be necessary.
Maybe you’re considering buying another agency in the future? Current accounting rules require that the
consideration transferred be allocated to tangible assets, any identifiable intangible assets, and any excess to
residual goodwill. In order to comply with these rules, a valuation of the specific intangible assets and possibly
the underlying business itself may be required.
OTHER OWNERSHIP TRANSFER SCENARIOS
Most business owners are consumed with day-to-day activities of running the business. Many fail to acknowledge
that life (and business) cycle events do happen to them, their partners and their families and that these events
will require that their businesses be valued.
On the other hand, some business owners use business valuation as an essential tool for creating ownership
stability and assessing management performance. Mercer Capital professionals have spoken for years about the
“things that happen to you” and the “things you make happen.”
The key take-away is this: an understanding of the value of your business or business interest is critical in
preparing yourself for any of these eventualities. The following table illustrates the range of potential events that
might trigger an ownership change.
The Business
Transfer Matrix
PARTIAL SALE/TRANSFER TOTAL SALE/TRANSFER
THINGS YOU
MAKE HAPPEN
ESOP
Outside Investor(s)
Sale to Insiders/Family
Combination Merger/Cash Out
Going Public
Sale of Business
Stock-for-Stock Exchange w/ Public Co.
Stock Cash Sale to Public Co.
Installment Sale to Insiders/Family
ESOP/Management Buyout
THINGS THAT
HAPPEN TO YOU
Death
Divorce
Forced Restructuring
Shareholder Disputes
Death
Divorce
Forced Restructuring
Bankruptcy
© 2014 MERCER CAPITAL www.mercercapital.com

10. 4
VALUE MANAGEMENT
Maybe you are not currently contemplating a transaction in your business. You do not plan to sell in the next few
years, you are not planning on transferring it to your children, you are not entering into any buy-sell agreements
or shareholder agreements based on the value of the business, nor do you anticipate any of the other events
that might precipitate a valuation. Then why do you care? Because knowing the value of your business can be a
tremendously effective management tool.
Ultimately, you will get two returns from your business – what we in the valuation community call “interim cash
flows” and “terminal cash flows.” Interim cash flows might be your salary, your benefits, and your dividends. You
know what these are and what you can do to influence them. However, your biggest cash flow may be the terminal
cash flow – when you go to sell your business. Are you managing your business in a way that increases its value
or not? Do you know?
BASIC CONCEPTS THAT MUST BE DEFINED IN EVERY VALUATION
Before covering specific details related to the insurance industry, it is important to understand a few basic
concepts related to valuation analysis.
It comes as a surprise to many business owners to learn that there is not a single value for their business.
Numerous factors (legal, tax or otherwise) play important roles in defining value based upon the circumstances of
the transfer of equity ownership. While there are significant nuances to each of the following topics, our purpose
is to help you combine the economics of valuation with the legal framework of a transfer (either voluntary or
involuntary).
THE VALUATION DATE
Every valuation has an “as of” date, which simply means that it is the date around which the analysis is focused.
The date may be set by legal requirements related to a death or divorce, or be implicit, such as the closing date of
a transaction.
THE PURPOSE OF THE VALUATION
The purpose of the valuation is important because it is linked to the transfer event (such as a sale, estate planning,
etc.). A valuation prepared for one purpose is not necessarily useful or applicable for another.
THE STANDARD OF VALUE
The standard of value is an important legal concept that must be addressed in every valuation assignment. “Fair
market value,” most commonly used in tax matters, is the most familiar standard of value. Other important
standards of value include “fair value” (financial reporting purposes under GAAP), “investment value” (purchase
and sale transactions), “statutory fair value” (corporate reorganizations), and “intrinsic value” (public securities
analysis). Using the proper standard of value is crucial in obtaining an accurate determination of value. The
standard of value will influence the selection of valuation methods, as well as the level of value.
© 2014 MERCER CAPITAL www.mercercapital.com

11. 5
THE LEVELS (PREMISE) OF VALUE
Does it make a difference in value per share if you own 10% or 75% of a business? You bet it does. The former is
a minority interest and does not enjoy the prerogatives of control that the latter does. How does this affect value
per share? The minority owners are relegated to bearing witness to a process over which they have no control or
discretion. In effect, they often play the role of silent partners. They cannot control compensation or distributions,
and they certainly cannot dictate the strategic direction or operational management of the business. Thus, the fair
market value per share of a minority owner is likely worth less per share than the shares of a 75% owner.
To add further insult to injury, a minority owner of a private business likely has no ready market in which to sell
their interest. Minority ownership in a publicly traded company enjoys near instantaneous liquidity given that
such interests can be traded on organized and regulated exchanges. The unique uncertainties related to the timing
and favorability of converting a private, minority ownership interest to cash gives rise to a valuation discount
(marketability) which further distances the minority owner’s per share value from that of a controlling owner’s
value per share.
The following chart provides perspective of the various levels of value. In most cases a valuation is developed at
one level of value and then converted to another level of value by way of a discount or premium. Knowing when to
apply such adjustments and quantifying the size of these adjustments is no simple matter.
The Whole Business Control (Strategic) Value
Value to Uniquely
Compelled Investor
Control Strategic Premium
The Whole Business Control (Financial) Value
S Election or
Sale of Company
Control Financial Premium Minority Interest Discount
Theoretical for
Most Privates
Marketable Minority
Public Stocks,
Appraisal Construct
Marketability Discount
Most Shareholder
Planning & Transfers
Nonmarketable Minority
Private Illiquid Assets,
Appraisal Conclusion
What does all this have to do with your business? A lack of basic knowledge of these concepts can leave you
short of the required vocabulary and understanding needed to comprehend the context with which the value of a
business interest is developed.
FINANCIAL CONSIDERATIONS
The financial health and outlook of an insurance agency should be assessed in the context of the overall insurance
market. The trajectory of revenue and earnings have a lot to do with the timing in the insurance cycle. As the
insurance market hardens, profitability is often enhanced in the short term, especially for renewals. On the
other hand, softening markets tend to cause revenues to slow or contract – and when combined with weak
macroeconomic conditions (such as rising unemployment), the negative effects are exacerbated.
© 2014 MERCER CAPITAL www.mercercapital.com

12. 6
As a professional service firm, much of the value of an insurance brokerage is inherently contained in the firm’s
customer base (or expirations) and in its producer workforce. Unless these types of assets have been booked in
conjunction with an acquisition, a snapshot of a company’s balance sheet may not reveal the true value of the
company. So for many agencies, the most valuable assets of the business are not even carried on the balance sheet.
For companies with an active acquisition strategy, it is also important to measure revenue and earnings growth
on an organic basis. Too much focus on top-line revenue growth can lead a firm to neglect its existing customer
base and forgo valuable cross-selling and organic growth opportunities. Firms that rely too heavily on acquisition-
based growth will find themselves standing still or declining when the M&A environment grows cold.
The average age of the typical insurance agency owner/producer continues to increase as well. Those agencies
that have invested in training the next generation of producers and managers tend to stand out among their peers.
Likewise, those agencies and brokers that have invested in new technology will be more attractive to new carriers,
new customers, and even potential acquirers. Insurance brokerage M&A peaked in 2012, driven by anticipated
changes in tax rates that prompted many owners to monetize. As a result, deal volume in 2013 was more subdued
but 2014 appears poised to return to more normal levels.
-20%
-10%
0%
10%
20%
30%
40%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
QUARTERLY AVERAGE COMPOSITE RATE CHANGE
FOR COMMERCIAL INSURANCE
Source: MarketScout
Rate increases
begin slowing in
2Q'13...
1% Increase in
August 2014
100
150
200
250
300
350
400
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014E
INSURANCE BROKERAGE TRANSACTIONS (2004 - 2014)
Source: SNL Financial. 2014E based on extrapolation of activity through 9/30/14.
Tax-Driven Peak Volume
in 2012
On pace for
+15% growth
in 2014
© 2014 MERCER CAPITAL www.mercercapital.com

13. 7
HOW DOES VALUATION WORK?
Without offering a full dissertation on business valuation, you need to understand that there are fundamentally
three commonly accepted approaches to value: asset-based, market, and income. Approaches refer to the basis
upon which value is measured.
Each approach incorporates procedures that may enhance awareness about specific business attributes that may
be relevant to determining the final value. Ultimately, the concluded valuation will reflect consideration of one
or more of these approaches (and perhaps several underlying methods) as being most indicative of value for the
subject interest under consideration.
THE ASSET-BASED APPROACH
The asset-based approach can be applied in different ways, but in general it represents the market value of a
company’s assets minus the market value of its liabilities.
Investors make investments based on perceived required rates of return, and only look at assets as a source of rate
of return. For an insurance brokerage, it is the income generated by these assets that typically drives the value
of the business. For this reason, the asset-based approach is typically not the sole (or even primary) indicator of
value.
THE MARKET APPROACH
The market approach utilizes market data from comparable public companies or transactions of similar companies
in developing an indication of value. In many ways, this approach goes straight to the heart of value: a company
is worth what someone is willing to pay for it.
In many industries, there are ample comparable public companies that can be relied on to provide meaningful
market-based indications of value. In the insurance brokerage space, there are several publicly traded companies
(think Marsh, Arthur J. Gallagher, or Brown & Brown), but comparing these large, diversified, increasingly global
businesses to the typical private, independent brokerage can be problematic.
Acquisition data from industry acquisitions (typically a median from a group of transactions) can also be utilized
as a multiple on the subject company’s performance measures. This will often provide a meaningful indication
of value as it typically takes into account industry factors (or at least the market participants’ perception of these
factors) far more directly than the asset-based approach or income-based approach. Given the large volume of
transactions in the insurance brokerage industry, the comparable transactions method should be considered,
particularly when valuing a controlling interest.
However, the market-based approach is not a perfect method by any means. For example, industry transaction
data may not provide for a direct consideration of specific company characteristics. Say a company is a market
leader and operates in a prime geographic market. Since the market and the specific company are relatively
more attractive than the average transaction, the appropriate pricing multiple for this company is likely above
any median taken from a group of industry transactions. Some prospective buyers, particularly private equity
firms, distinguish between platform agencies and bolt-on or fold-in targets. Pricing multiples for quality platform
agencies can often meet or exceed those observed for the public brokers. Clearly, the more comparable the
transactions are, the more meaningful the indication of value will be. Finally, caution must be exercised when
utilizing data from market transactions since the circumstances surrounding each sale are often unknown.
© 2014 MERCER CAPITAL www.mercercapital.com

14. 8
THE INCOME APPROACH
The income approach allows for the consideration of characteristics specific to the subject business, such as its
level of risk and its growth prospects relative to the market. The most common valuation methods under the
income approach are the single period capitalization of earnings method and the discounted cash flow method.
Under the single period method, the analyst estimates a base level of annual earnings and then applies a multiple
to those earnings based on market returns. Under the discounted cash flow method, the analyst develops a
discrete projection of future revenue, expenses, and cash flow, and then discounts those cash flows to the present
at an appropriate discount rate.
So what about the old “1.5x revenue” rule of thumb for valuing an agency? A revenue-based multiple makes for
a good shorthand way of expressing value, but it is rarely the method that acquirers with full information will
actually use. Most buyers tend to focus on pro forma EBITDA and margin rather than on top-line revenue. When
buyer and seller disagree on price, multi-year earn-out structures are often used to bridge the gap and align the
interests of all parties to the deal.
SYNTHESIS OF VALUATION APPROACHES
A proper valuation will factor, to varying degrees, the indications of value developed utilizing the three
approaches outlined. A valuation, however, is much more than the calculations that result in the final answer.
It is the underlying analysis of a business and its unique characteristics that provide relevance and credibility
to these calculations. This is why industry “rules-of-thumb” (be they some multiple of revenue or earnings, or
other) are dangerous to rely on in any meaningful transaction. Such “rules-of-thumb” fail to consider the specific
characteristics of the business and, as such, often fail to deliver insightful indications of value. A business owner
executing or planning a transition of ownership can enhance confidence in the decisions being made only through
reliance on a complete and accurate valuation of the business.
Agencies located in a fast-growing area or those with a unique industry and/or product niche can command
premium valuation multiples. Exposure to certain types of business may also attract or repel certain buyers.
For instance, agencies that place benefits products with small businesses may face additional risk given the
uncertainty regarding the effects of the Affordable Care Act and related changes in health care distribution.
From a valuation perspective, potential buyers are most often interested in some measure of earnings before
unusual or non-recurring expenses, discretionary owner expenses, and owner compensation (in excess of market
rates). The smaller the agency, the more likely there are to be normalizing adjustments to the company’s income
statement. The ability of a particular buyer to take advantage of synergies or operational improvements can also
have an impact on value.
The historical growth rate of the business may not reliably indicate its future growth potential, or the risks of
achieving that growth. Assessing the risk of an agency involves, among other things, looking at the overall quality
of the book of business, the health and age of key employees, customer/carrier concentrations, investments in
technology, and internal systems. Owners and managers that concentrate their efforts on improvement in these
areas, rather than sheer revenue growth, will be well on their way to maximizing the value of their business.
© 2014 MERCER CAPITAL www.mercercapital.com

15. TRAVIS W. HARMS, CFA, CPA/ABV
901.322.9760
harmst@mercercapital.com
LUCAS M. PARRIS, CFA, ASA
901.322.9784
parrisl@mercercapital.com
CONCLUSION
Mercer Capital has long promoted the concept of managing your business as if it were being prepared to sell. In
this fashion you promote the efficiencies, goals and disciplines that will maximize your value. Despite attempts
to homogenize value through the use of simplistic rules of thumb, our experience is that each valuation is truly
unique given the purpose for the valuation and the circumstances of the business.
Mercer Capital has valued many insurance brokerages, underwriters, and ancillary service providers over the
years. We hope this information, which admittedly only scratches the surface, helps you better shop for business
valuation services and understand valuation mechanics.
We encourage you to extend your business planning dialogue to include valuation, because sooner or later, a
valuation is going to happen. Proactive planning can alleviate the potential for a negative surprise that could
complicate an already stressful time in your personal and business life.
For more information or to discuss a valuation or transaction issue in confidence, do not hesitate to contact us at
901.685.2120.
ABOUT MERCER CAPITAL
Mercer Capital is a national business valuation and financial advisory firm. We provide insurance agencies,
brokerages, and underwriters with corporate valuation, financial reporting valuation, transaction advisory, and
related services.
Since 1982, we have provided thousands of valuation opinions for corporations of all sizes in a wide variety of
industries. Our suite of services includes corporate valuation, financial institution valuation, financial reporting
valuation, gift and estate tax valuation, M&A advisory, fairness opinions, ESOP and ERISA valuation services, and
litigation and expert testimony consulting. Our valuation opinions are well-reasoned and thoroughly documented,
providing critical support for any potential engagement.
LUCAS M. PARRIS, CFA, ASA
parrisl@mercercapital.com
HEADQUARTERS
5100 Poplar Avenue, Suite 2600
Memphis, Tennessee 38137
901.685.2120 (p)
901.685.2199 (f)
www.mercercapital.com
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