What's your insurance agency worth?

Understanding the value of your insurance agency is vital when planning for succession. Whether you are considering perpetuating internally or selling to a third party, , you should understand the value of your agency to help you make the best decision.  Often, the prospective buyer already has a price in mind, or they have a competitive baseline benchmark to guide their decision-making process. 

Either way, as the seller, you need to know your numbers and be prepared to negotiate the best deal for you.

Valuation is the method of determining the market value of an agency after considering multiple factors. This methodology can also be utilized to determine pricing for stock pricing and internal perpetuation. 

Most valuations of insurance agencies arrive at a value using a weighted average of the following three methodologies:

1. Discounted cash flow 
2. Market valuation  
3. Merger and acquisition basis 

Discounted cash flow

In this model, valuation is determined by EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). This is a common industry key performance indicator to evaluate operating performance and often serves as a proxy for cash flow during a specific timeframe. 

Market valuation

The competitive landscape may also drive the value of your insurance agency up or down, depending on the dynamics of the economy or industry. In this model, the current market prices for other sellers are utilized to determine the overall value based on comparables such as book of business, location, or other business assets. 

Merger and acquisition basis

The most frequently utilized model in the insurance industry is on a merger and acquisition basis, where similar companies based on size are merged or acquired, creating a new entity that demands a new value. Often, the calculation behind this model incorporates the discounted cash flow (i.e., EBITDA) and market valuation approach.  

Much like the unique dynamics of your insurance agency, valuation outcomes and deals are all unique, especially from the buyer’s perspective. Knowing the three models for valuation will inform your approach. However, understanding the deal from the buyer’s position will help you to achieve the desired outcome. The top considerations for buyers are: 

• Top Performing EBITDA: A key metric in valuations, most  are driven based on your EBITDA and optimizing from that baseline. 
• Strong cash flow: Targeting 20-30% of your revenue is how you get the optimal value for your business. When considering a private equity buyer, it’s important to understand that they may not have concerns over your EBITDA right now. However, they will consider  higher revenue and volume. Ultimately, they will conduct the aforementioned valuation models to maximize their return.
• Adequate liquidity: Available working capital to manage operations is essential
• Expense control: This correlates with EBITDA and focuses on ensuring compensation for your producers and staff reflects insurance industry standards.
• Diversification
  • Book of business breakdown: The mix of your industries or carriers will influence or limit your valuation – diversification is key.
  • Customer, carrier, or industry concentration: Similar to book of business breakdown, a balanced mix of client concentration is also important. Having top customers make up a disproportionate amount of revenue is a risk.
    • Example: If your top ten customers account for 70% of your revenue, there’s a higher degree of risk in your book of business  and it may impact the value.

In summary, remain confident and maintain the pride you have in your insurance agency. Collaborating with consultants, attorneys, or other advisers will help you to achieve your desired valuation. Most valuations take 60 days to conduct by an independent party. Upon finalization, Westfield Bank will collaborate with all partners to ensure your best interest is front and center.

We’re here to grow your book of business

Our agency banking team specializes in loans for insurance agencies, working solely with agents like yourself. Our bankers will work with you to understand your agency's unique needs, developing financial solutions to achieve your goals.