The sale of Caesar's provides a great example of another kind of valuation, too: strategic value. Because the buyer in this case is Harrah's-another casino-Caesar's is believed to be worth more to it than it would be to most buyers. (This logic is probably erroneous, considering the numerous studies concluding that most acquisitions fail to produce adequate profits for the purchaser. But that is a subject for another article.) Thus the value in this example could be considered a strategic value.

Most agency owners are interested in fair market value. This is the IRS's definition of value and the same definition used in the antique example above. Agency owners usually assume that a fair market value is the same as a strategic value. But fair market value has a specific definition, which states that the buyer is without synergistic benefit.

On the other hand, a buyer's synergistic benefit is a key factor in determining strategic value. Some firms buying insurance agencies depend on premium increases and acquisitions for 100% of their growth, so they are willing to pay inflated prices for agencies. The growth they gain from acquisitions is synergistic, so the inflated prices could not be considered a fair market value. Also, some buyers manage to greatly reduce their tax rate. This advantage does not fit the IRS definition of fair market value.

Agency owners considering the sale of their agencies must understand their potential buyer(s). Many who don't may be leaving a lot of money on the table. On the other hand, some agency owners have been led to believe their agencies are worth far more than they really are. Consider the case of a real estate appraiser who recently made the news. He was appraising many small businesses in various small towns for potential litigation related to a highway project. He appraised all the businesses at a far higher value than did anyone else. After some evaluation, it was determined that his valuations were not wrong, but his assumptions were. He assumed that the businesses should be valued as if the area in which they were located was not so depressed. In fact, his appraisals assumed the local economy was booming, which more than tripled the real estate values.

Some agency owners make a similar mistake. Prices for insurance agencies may be high today, but they are not high for all agencies. If an agency is in poor shape or has a poor balance sheet, is too small or even too big for its geographic area, or is in a depressed region, it could be worth considerably less than strong agencies in bustling economies. More than one agency owner has passed up good deals because he thought his agency was worth far more than it really was.

Several additional definitions of value are also sometimes used. One such definition is fair value. Fair value is often used to determine agency values in divorce cases, which can become problematic because no standard definition exists. As an analogy, using a fair market value definition instead of a fair value definition is like valuing a Louis XIV chair as if it were available every day. More than one "expert" appraiser or attorney have been effectively laughed out of divorce court for using the wrong definition of value. The key is to make sure everyone involved uses the same one.

A variety of additional factors make valuing agencies even more complex, including the methodology used, the differences some believe exist between "S" corporation and "C" corporation values, and the almost total lack of understanding most attorneys and accountants have regarding agency values.

Different definitions of value apply for different purposes. Using the correct definition can help agency owners avoid costly mistakes such as leaving money on the table, owing the IRS extra taxes or overpaying the IRS.