This greater confidence stems from their experience of implementing operational "Best Practices" throughout their own companies, and from their experience in integrating past acquisitions.

Let's look at a hypothetical acquisition scenario.

Target Agency Inc. is a $5 million revenue agency that is generating EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) of $1 million, or 20 percent of revenue.

Assuming Target is a well-diversified, growing, multiline retail agency, and assuming no changes will be made to the agency's bottom line, the valuation of the agency for internal stock transfers should typically be in the neighborhood of $6 million, which represents 6.0-times EBITDA (1.2-times revenue).

On the other hand, a strategic buyer might be willing to pay over $10 million--a premium of 67 percent--for that same business. How?

First, a buyer might determine that Target's bottom line will be enhanced post-closing.

For example, the migration of Target's producers to the buyer's commission formula (public broker commission splits are almost always lower than private broker splits) might result in an enhanced bottom line.

In certain transactions, the consolidation of overhead expenses will result in further cost savings. An operationally astute buyer can sometimes also assist the seller with the implementation of cost-saving best practices following closing.

In each of these examples, a motivated buyer with a clear business model and strong operational experience might be willing to pay Target's shareholders a multiple of the anticipated cost savings as an inducement to sell their agency.

In addition to offering a premium based on expected higher profits, buyers will typically offer incentives for future performance. This is commonly referred to as an "earn-out"--a bonus that becomes payable after a period ranging from one-to-three years (sometimes longer) following closing.

Earn-outs are typically tied to the achievement of revenue goals, or profit goals--or both. And depending on the transaction, earn-outs can be extremely lucrative, representing a significant percentage of the overall deal.

The accompanying table provides a detailed look at the factors impacting the magnitude of the premium offered for Target Agency Inc.

In the example shown, Target's value increases from $6.0 million to $8.4 million (from a 1.2 multiple of revenue to 1.7) when the buyer credits Target with a 6.0 multiple of $400,000 in cost savings related to projected changes in producer compensation, consolidation economies and implementation of best practices.

In addition, the buyer is willing to offer a performance-based earn-out of $1.68 million (a 20 percent premium over the $8.4 million, worth an additional 0.3-times revenue) to be paid after three years if Target grows its revenue by 10 percent for each of those three years.

All told, Target's shareholders will potentially receive a price of roughly 2.0-times revenue (a 67 percent premium) for their agency if they can run it successfully following the sale. That's not bad for a business that on its own is worth only 1.2-times revenue.

In addition, if the buyer ends up paying the full price, as ironic as it might sound, the buyer will be delighted--since the achievement of three years of 10 percent growth will indicate Target was successfully integrated into the buyer's organization.

A final issue that can enable outside buyers to deliver a materially higher valuation than insiders for the same agency is taxes.

If an outside buyer can purchase an agency's assets rather than its stock, then the buyer can typically write the deal off over 15 years, which improves the buyer's returns dramatically and allows the buyer to price the deal more aggressively.

However, these tax savings can only be achieved in certain cases and depend on the seller's corporate structure. (For example, C corporations typically cannot sell their assets without creating a nightmarish tax burden for the sellers.)

Given the advantages noted, experienced buyers have some powerful tools to enable them to aggressively price acquisitions--but even with these tools, not all agency acquisitions turn out well.

Certainly there are plenty of examples of poorly structured deals resulting in frustrations for buyer, or seller, or both. "Hypothetical" expense reductions that never materialize, pie-in-the-sky growth assumptions and poorly designed earn-outs can result in bad feelings on both sides.

Nevertheless, for most of the industry's experienced buyers--even at today's high prices--acquisitions still provide an effective way to grow shareholder value.