Goosehead Insurance Franchise Justifies Costs in Short Period (2024)
In 2003, real estate investor Robyn Jones and her husband Mark Jones, a senior partner at Bain & Co., established Goosehead Insurance. They aim to transform the insurance industry by providing clients with transparent pricing and information to help clients make informed decisions.
Goosehead Insurance franchise is an affiliate of its parent company Goosehead Insurance, Inc. (“GSHD”), which is publicly traded on the NASDAQ stock exchange. Goosehead Insurance was publicly traded in 2018 with a price of $15.75. The price as of August 31, 2022, is $52.00, a beta of 0.99, which is relatively stable compared to the market, and a market capitalization of $1.935 billion.
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How is Goosehead Insurance Positioned in the Insurance Industry?
In 2021, the deployment of vaccination and the loosen restriction in every aspect of the world, which has helped rebuild confidence among people. However, the uncertainty of COVID-19 is likely to persist, Deloitte estimates that the insurance industry in general can expect more rapid growth in 2022. According to the graph below, the demand for insurance in every market is expected to grow rapidly. The insurance industry also faces multiple challenges, including economic hurdles such as the potential for inflation.
What is the Goosehead Insurance Franchise Cost?
The total investment necessary to begin the operation of a Goosehead Insurance franchise ranges from $40,000 to $118,500, including $27,000 to $65,000 that must or may be paid to the franchisor. For a single franchise, the initial franchise fee ranges between $25,000 and $60,000, depending on the geographic region where the unit is located. If the franchise store operates in Louisiana, Oklahoma, or Texas, the initial franchise fee will be $60,000; otherwise, it will be $40,000.
Once the operation begins, the franchisees are expected to pay a royalty fee of 20% of gross revenues on approved insurance products in their initial term and 50% of gross revenues on approved insurance products in their renewal terms. Additionally, the franchisees also need to contribute 2% of gross revenues to marketing.
How Much Do Goosehead Insurance Franchise Owners Make?
Although Goosehead Insurance franchisor provides financial information in the FDD, it provides us with the gross revenues of franchise producers, which are individuals who work for a franchisee as agents, not the gross revenues of franchisees. There were 986 franchise producers presenting 744 franchised businesses. The gross revenues earned by each franchise producer were increasing rapidly with more experience.
Gross Revenue Per Franchise Producer (2021)
| Ternure | Average | Average of top 25% | Average of bottom 25% |
|---|---|---|---|
| 1 year | $62,758 | $129,373 | $20,073 |
| 2 years | $116,557 | $220,491 | $43,948 |
| 3+ years | $234,376 | $453,769 | $82,371 |
Although Goosehead Insurance does not provide a holistic overview of its financial information, we can estimate with the above information. Assume each franchise has 2 franchise producers and each producer has a 2-year tenure experience. The average gross revenue for each franchisee will be $233,114.
| Initial investment (Midpoint) | %Profit margin of average franchise sales | Estimated Profits | Time to recoup investment |
|---|---|---|---|
| $79,250 | 30% | $69,934 | 2.6 years |
| 40% | $93,245 | 2.3 years | |
| 50% | $116,557 | 2.1 years |
In 2021, at an average 40% profit margin, it will take around 2.3 years to recoup your investment. This is short compared to other franchise opportunities. You may not get a 40% profit margin which would elongate getting a return on your investment. The time to recoup investments incorporates roughly a 1.5-year period to scale up the store. This includes finding the location, building the store, passing break even, and then reaching significant income.
Is the Goosehead Insurance Profit Worth the Franchise Cost?
Based on our evaluation, the resale price for a single Goosehead Insurance is 4 times the estimated profits. If you own a single unit of Goosehead Insurance and a profit margin of 40%, the unit would sell for $372,980, which is already higher than the midpoint investment of $79,250.
How Many Goosehead Insurance Franchised Units Have Opened and Closed?
Status of Franchise Outlets for Years 2019 to 2021
| State | Year | Outlets at the Start of the Year | Outlets Opened | Terminations | Non-Renewals | Reacquired by Franchisor | Ceased Operations – Other Reasons | Outlets at End of Year |
|---|---|---|---|---|---|---|---|---|
| Totals | 2019 | 457 | 249 | 60 | 0 | 0 | 32 | 614 |
| 2020 | 614 | 339 | 44 | 0 | 0 | 18 | 891 | |
| 2021 | 891 | 415 | 62 | 0 | 0 | 46 | 1198 |
The number of Goosehead Insurance franchised units is rapidly increasing over three years. In 2021, there were 415 units newly opened, 62 terminations, and 46 units that ceased operations, resulting in a failure rate of 9%. The three years average failure rate is 10.3%. Additionally, there are 953 franchise agreements signed but not opened and 274 projected new franchised outlets in 2022.
Goosehead Insurance Income Statement Takeaways
Although the net income in 2021 decreased compared to 2020, the total revenue increased accompanied by an increase in operating expenses. Goosehead Insurance earned its revenue through commissions and agency fees and franchise revenues, both of which contribute approximately the same. In 2021, Goosehead Insurance spent an increasing amount on general and administrative expenses. On the other hand, the net income in 2020 increased significantly compared to 2019. While in an industry susceptible to economic conditions, Goosehead Insurance proves a viable business model.
Goosehead Insurace, Inc. Consolidated statements of operations
| Years ended in December 31, | |||||
|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | |||
| Revenues | |||||
| Commissions and agency fees | $82,651 | $71,811 | $46,366 | ||
| Franchise Revenues | $67,508 | $44,390 | $30,503 | ||
| Interest Income | $1,153 | $813 | $617 | ||
| Total Revenues | $151,312 | $117,014 | $77,486 | ||
| Operating Expenses: | |||||
| Employee compensation and benefits | $93,038 | $66,819 | $41,715 | ||
| General and administrative expenses | $41,729 | $25,532 | $19,042 | ||
| Bad debts | $2,999 | $1,576 | $725 | ||
| Depreciation and amortization | $4,873 | $3,147 | $1,931 | ||
| Total operating expenses | $142,639 | $97,074 | $63,413 | ||
| Income from operations | $8,673 | $19,940 | $14,073 | ||
| Other Income | |||||
| Other income | $185 | $90 | – | ||
| Interest expense | $(2,854) | $(2,310) | $(2,387) | ||
| Income before taxes | $6,004 | $17,720 | $11,686 | ||
| Tax expense (benefit) | $(2,292) | $(1,035) | $1,304 | ||
| Net Income | $8,296 | $18,755 | $10,382 | ||
| Less: net income attributable to non-controlling interests | $2,893 | $9,468 | $6,815 | ||
| Net Income attributable to Goosehead Insurance Inc. | $5,403 | $9,287 | $3,567 | ||
| Earnings per share | |||||
| Basic | $0.28 | $0.55 | $0.24 | ||
| Diluted | $0.26 | $0.51 | $0.22 | ||
| Weighted average shares of Class A common stock outstanding | |||||
| Basic | $19.181 | $16,785 | $14,864 | ||
| Diluted | $20.813 | $18,383 | $16,100 | ||
Goosehead Insurance Cash Flows Statement Takeaways
Liquidity is one of the most important measurements of a company’s ability to meet potential cash requirements, including ongoing commitments to repay borrowings, fund business operations, operations, and expansion of franchised locations. According to the cash flows statement, Goosehead Insurance has a $4,243 thousand increase in cash and cash equivalents. At the end of the fiscal year, its total cash and cash equivalents amounted to approximately $30,479 thousand.
Goosehead Insurace, Inc. Consolidated statements of cash flows
| Years ended in December 31, | |||||
|---|---|---|---|---|---|
| 2021 | 2020 | 2019 | |||
| Cash flows from operating activities | |||||
| Net income | $8,296 | $18,755 | $10,382 | ||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||
| Depreciation and amortization | $5,117 | $3,570 | $2,145 | ||
| Bad debt expense | $2,999 | $1,576 | $725 | ||
| Equity based compensation | $7,292 | $4,745 | $1,526 | ||
| Impact of tax receivable agreement | $40,759 | $48,760 | $11,676 | ||
| Deferred income taxes | $(43,277) | $(49,066) | $(11,382) | ||
| Noncash lease expense | $5,949 | $13,623 | – | ||
| Changes in operating assets and liabilities: | |||||
| Receivable from franchisees | $(10,599) | $(7,085) | $(5,161) | ||
| Commissions and agency fees receivable | $4,722 | $(12,909) | $2,474 | ||
| Prepaid expenses | $(1,080) | $(1,718) | $(877) | ||
| Other assets | $(805) | $(2,581) | $(346) | ||
| Accounts payable and accrued expenses | $2,956 | $2,541 | $913 | ||
| Deferred rent | – | $(7,365) | $2,389 | ||
| Contract liabilities | $14,407 | $11,406 | $6,281 | ||
| Premiums payable | $629 | $400 | $541 | ||
| Unearned revenue | – | – | $(51) | ||
| Payments pursuant to the tax receivable agreement | $(1,921) | $(9) | – | ||
| Net cash provided by operating activities | $35,444 | $24,643 | $21,241 | ||
| Cash flows from investing activities: | |||||
| Proceeds from notes receivable | $32 | $35 | $19 | ||
| Purchase of software | $(2,669) | $(393) | $(403) | ||
| Purchase of property and equipment | $(12,738) | $(9.975) | $(3,694) | ||
| Net cash used for investing activities | $(15,375) | $(10,333) | $(4,078) | ||
| Cash flows from financial activities: | |||||
| Cash flows from financing activities: | $(666) | $(677) | – | ||
| Debt issuance cost | $(4,369) | $(27,821) | $(2,500) | ||
| Repayment of note payable | $44,619 | $64,821 | – | ||
| Proceeds from notes payable | $4,590 | $5,040 | $325 | ||
| Proceeds from the issuance of Class A common stock | $(60,000) | $(44,697) | $(18,739) | ||
| Member distributions and dividends to stockholders | $(15,826) | $(3,334) | $(20,914) | ||
| Net cash used for financing activities | $4,243 | $10,976 | $(3,751) | ||
| Net increase (decrease) in cash and cash equivalents, and restricted cash | $26,236 | $15,260 | $19,011 | ||
| Cash and cash equivalents, and restricted cash, beginning of period | $30,479 | $26,236 | $15,260 | ||
| Supplemental disclosure of cash flow data: | |||||
| Cash paid during the year for interest | $2,351 | $1,887 | $2,173 | ||
| Cash paid for income taxes | $272 | $270 | $1,175 | ||
Conclusion
Goosehead Insurance is definitely worth a look if you are interested in the insurance industry. Besides its reputation and the number of stores operated in the United States, the lower initial investment and short payback period make it attractive to prospective franchisees. The relatively low infrastructure and labor investment are also an advantage for beginners in the franchise world.
