Insurance Agency Valuation and Goodwill Allocation for Marital Dissolution Purposes
If you own an insurance agency and are getting divorced, it is critically important to obtain a business valuation of your insurance agency; one which includes a valuation of your agency and a proper allocation of goodwill between personal goodwill and enterprise goodwill. Most family law courts classify an insurance agency, or any other business, to be a marital asset; and therefore the fair market value of the agency, and its corresponding goodwill, is divisible for marital dissolution purposes. However, in most U.S. states, personal (professional) goodwill is considered non-marital property and thus not a divisible marital asset and is excluded from the marital estate. In contrast, enterprise (business) goodwill is in fact considered marital property and thus is a divisible marital asset.
This may sound like gibberish to the layperson, but below is an example using hypothetical figures that will illustrate why this is so very important. Many smaller insurance agencies with annual commission revenue ranging anywhere from $100K to $10 million and more, oftentimes are dependent upon a key person(s) whom are integral to the operations and success of the insurance brokerage; as they possess key client relationships, industry expertise, personal experience and a highly regarded reputation in the insurance industry. This is indicative of an insurance brokerage whose goodwill value contains a significant and material amount of personal goodwill; which as explained above is non-marital and thus not a divisible marital asset and is therefore excluded from the marital estate. It is important to note that while $100K in annual commission revenue might seem small; the fair market value (total allocatable goodwill value) of this small book of business could range anywhere from $200K to $350K. Moreover, an insurance brokerage with $10 million in annual commission revenue could range anywhere from $20 million to $40 million in fair market value (total allocatable goodwill value).
Let’s say for hypothetical example that you are getting divorced and your agency is worth $1,000,000. Do you want the courts to take that number and divide by two such that you will need to come up with $500K in cash, or sell your agency, since the court has ruled that your agency is worth $1 million and there is no agency business valuation submitted to the court that properly allocates the goodwill of your agency? The answer is most certainly NO, and here is why. If you are a key person in your agency, then the amount of personal goodwill (non-marital property) could potentially range anywhere from 40% to 80% of the total fair market value of your agency. To illustrate, let’s use a hypothetical average personal goodwill derived allocation percentage of 60% ((40%+80%)/2). This means that now the divisible marital portion of the agency enterprise goodwill is $400K ($1MM-60%=$400K); since the agency is worth $1 million, but 60% is non-marital personal goodwill.
The mathematical derivation of the proper allocation of goodwill is very complex as the financial modeling is quite complex; so I am not going to discuss that here because I do not want the reader to fall asleep before getting to the end of this article. Needless to say, the process is very complex and many textbooks and business valuation practice guides have been written on the subject. I will only say here that my preference is to use the financial model that is most often used and the most widely accepted allocation model by family law courts; and my use of this model has been quite successful for me in providing litigation support expert witness services for marital dissolution clients.
Final note of critically important advice is to hire your own business valuation professional whom is a well experienced expert in how to properly determine and defend the fair market value of an insurance agency; AND properly derive and defend the enterprise versus personal goodwill allocation. If you do not select and hire someone, then the court may select someone whom is not of your choosing; or worse, your soon-to-be ex-spouse may hire someone whom is not of your choosing or preference, and that expert will not be YOUR expert, but instead will be hired by and working for your soon-to-be ex-spouse.
Sean H. Hayes, CVA - [email protected]
Mr. Hayes is a nationally recognized expert in the valuation of insurance agencies, insurance brokerages and other insurance industry entities. He is exclusively focused on providing business valuation, M&A and capital services to privately-held insurance brokers and agencies and other insurance industry entities for clients located throughout the United States, offshore and internationally. Mr. Hayes has over 30 years of business valuation, M&A, capital raising and expert witness litigation support experience and completes hundreds of insurance agency valuations and transactions every year, encompassing all types of valuation, capital raising, and M&A work; including buy-side and sell-side transactions, SBA 7(a) lending, estate/gift/capital gains taxes, litigation support expert witness testimony, financial reporting, wealth planning, strategic management, exit planning and corporate planning. During the course of my entire 30+ year career, I have completed several thousand expert quality SBA 7(a) loan insurance agency business valuations for various banks and other lenders located throughout the United States.
Mr. Hayes holds a Bachelor of Science degree with majors in accounting and finance and a minor in economics from Jacksonville University of Jacksonville, Florida; an AACSB accredited business school founded in 1934. Mr. Hayes is a Certified Valuation Analyst (CVA) and certified member of the National Association of Certified Valuators and Analysts (NACVA). Worldwide, the CVA certification is held by only around 6,500 valuation professionals and the CVA certification has been accredited by the National Commission of Certifying Agencies (NCCA), the accreditation body of the Institute for Credentialing Excellence (ICE). Mr. Hayes is a member of the American Society of Appraisers (ASA), the Institute of Business Appraisers (IBA), and a Sustaining Member of the National Association of Government Guaranteed Lenders (NAGGL). He is also a recognized Insurance Agency Valuation Expert designated by Business Brokerage Press, Inc. and a regular contributor to the Business Reference Guide: The Essential Guide to Pricing Businesses and Franchises. Mr. Hayes is headquartered in Chicago, Illinois, where he serves insurance industry clients and their advisors throughout the entire United States and internationally.
I am available to assist insurance industry clients, located throughout the United States, with the following matters: marital dissolution with goodwill allocation; business succession and exit planning; estate/gift/capital gains tax purposes; court ordered and other divestitures; capital acquisition services; shareholder buy-in/buyout; mergers and acquisitions; theft of a book of business; noncompete violations; shareholder disputes; United States SBA 7(a) lending; buy-sell agreements; and ESOPs.
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I have provided expert witness litigation support services, including courtroom testimony, in various states; including Michigan, Florida, Indiana, Illinois, California, Colorado, Hawaii, Maryland, Texas, Wisconsin, Ohio, Minnesota, and Iowa.
Sean H. Hayes, CVA
Expert Insurance Agency Appraiser
Expert M&A Transaction Advisor
225 N. Columbus Dr., Suite 5906
Chicago, IL 60601
904.655.5565
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