Why Does a BOB Have Value?

Gulfman

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Hi Friends,

I am fairly new to the business and one thing i never clearly understood is "WHY does a book of business have monetary value?

A book of business can disappear in a few months. (new agency can not have a good rapore with existing clients or blow it with existing book)

  • -what factors go into pricing a book?
  • -a BOB is not tangible, its value can only be in the renewals and it so, what guarantee would the renewals actually be?

Can someone help me figure this out?

~Thanks
 
A book of business is valued by the amount of annual revenue it generates. Now that is the number before any bills are paid. That's not the premium amount but basically as you said the renewals. There are no guarantees but that's why it's easier to get money on a larger more established book than a new one. If you are looking to sell, the price is about 1.5 to 2 times the annual revenue and a larger one, say over 250k is worth more like 3x annual. You can't just walk into a local bank and get financed though you are better going thru groups that specialize in insurance lending like National Lending, Springtree etc
 
Hi Friends,

I am fairly new to the business and one thing i never clearly understood is "WHY does a book of business have monetary value?

A book of business can disappear in a few months. (new agency can not have a good rapore with existing clients or blow it with existing book)

  • -what factors go into pricing a book?
  • -a BOB is not tangible, its value can only be in the renewals and it so, what guarantee would the renewals actually be?

Can someone help me figure this out?

~Thanks

You would have to intentionally piss people off to make a book of business disappear in a few months.
 
That is not the only factor, but it is a primary factor for book valuation.

Goodwill is another factor.
Goodwill

This is especially helpful if the seller agrees to remain on-hand as a consultant and help to bridge relationships to the seller of the book of business or whatever.

In addition, if you have capable staff members that are incentivized well to stay through the transition, that can have an impact on the book value. Clients like having people they can count on - particularly during an ownership transition.
 
The value in a book of business is the revenue stream as well as the opportunities for account rounding and referrals.

For instance, if you take two P&C books of roughly the same premium and commission with similar types of clients. One is all packaged up, everyone has bundled home and auto, has an umbrella and all the toys written through the agency. While the other is mainly monoline or just home and auto. I would argue the second book is actually more valuable to a buyer. Not only do you get the existing revenue stream, you have plenty of opportunity to account round and increase premium and commission. That does not even consider referrals.

The same concept could be extended to any line of business where there are similar crossing selling opportunities. A DI book, health book, investment book, and even a life book.

Finally, assuming you are buying a book with a good loss ratio, it could significantly enhance your profit sharing bonuses from carriers.
 
For instance, if you take two P&C books of roughly the same premium and commission with similar types of clients. One is all packaged up, everyone has bundled home and auto, has an umbrella and all the toys written through the agency. While the other is mainly monoline or just home and auto. I would argue the second book is actually more valuable to a buyer. Not only do you get the existing revenue stream, you have plenty of opportunity to account round and increase premium and commission. That does not even consider referrals.

Very valid point, and I agree with you.... but I bet most of the agencies looking to buy a BOB wouldn't.
 
Very valid point, and I agree with you.... but I bet most of the agencies looking to buy a BOB wouldn't.

It also depends on how much effort you are looking to put into it. If you just want the revenue stream and don't really want to work the book, then the packaged and rounded one is more valuable, less work and people are less likely to leave.
 
It also depends on how much effort you are looking to put into it. If you just want the revenue stream and don't really want to work the book, then the packaged and rounded one is more valuable, less work and people are less likely to leave.

yep, that's what most are looking for ..... let the staff handle the headaches, sit back and collect a check.
 
yep, that's what most are looking for ..... let the staff handle the headaches, sit back and collect a check.

I don't think most realized just how endangered that model is. While no one is expecting an established agent to work like a 1st year agent desperate to survive and grow, the days of the 10:00 to 10:05 work days are numbered.
 
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