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How to value an insurance agency

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If you want to sell something, you need to know what it’s worth. For example, to determine the value of your car, you might look the model up on Kelley Blue Book. But what about selling an insurance agency? Determining the value of a company can be complicated. If you’re planning to sell yours, you first need to know how to value an insurance agency.

Why Agency Owners Choose to Sell

Building an independent insurance agency is hard work. Meeting with clients is only part of the job: insurance agents also need to devote time to prospecting and marketing activities. On top of that, there’s considerable paperwork. As the U.S. Bureau of Labor Statistics (BLS) explains, many insurance agents spend business hours meeting with clients and then spend evenings completing paperwork and preparing presentations.

All this work can pay off. Successful agents can build companies that generate significant revenue, and, since they own the agency, they’re in control of everything.

It’s a good situation to be in, but all good things end eventually. At some point, most agency owners will decide they want to sell their agency. There are a few reasons why you might want to sell:

  • You want to retire. You don’t want to work forever – and thanks to the value of your agency, you don’t have to. By selling your agency, you can fund your retirement and say goodbye to the daily grind.
  • You want to cut back on your working hours. Maybe you’re not ready to retire yet, but you do want to take things easy. You might be experiencing health issues or simply want to spend more time with your family, traveling or enjoying your hobbies. After all the work you’ve put in, you deserve a break. Selling your agency is one way to do this.
  • You’ve taken the agency as far as you can on your own. Even if you have no intention of leaving the insurance industry yet, you may be interested in selling your agency as a way to level up. You’ve done an impressive job building your agency, but your resources are limited, and you’re competing against much bigger companies. By selling your agency to a partner, you can gain access to the resources you need to take your company to the next stage.

If you’re ready to sell now, you want to make sure you secure a good deal. Your agency is your baby; you’ve worked hard to build it into something wonderful and don’t want to sell it for less than it’s worth. Before you agree to sell to a willing buyer, you need to know the value of your insurance agency.

What are independent insurance agencies really worth?

Determining the value of something as complicated as a company isn’t usually straightforward. Although there are some hard facts and numbers, not everything is objective. You need to consider multiple factors. Since different people might give these factors different weights, two people might come up with completely different values.

You also have a choice of approaches and calculation methods to use. Some of these are simple and give you a basic idea of your agency’s value. Others are more complicated and nuanced. The method you use may have a significant impact of the valuation your agency.

Quick Insurance Agency Valuation

If you want a rough idea of how much your insurance agency is worth, take the earned commission and multiply it by 1 or 1.5 times. According to an article in the Insurance Journal, this approach can provide a “quick and dirty” estimate of your agency’s value, but it’s not always accurate. It doesn’t take many other variables into account, such as whether your agency has been growing and whether it has any debt.

EBITDA Calculations

Another way to calculate an agency’s value based on income is to calculate the EBITDA, which stands for earnings before interest, taxes, depreciation and amortization. You can multiply this figure by an agreed upon number to determine a selling price.

According to Investopedia, EBITDA is a measure of profitability that aims to measure cash profit. However, critics of this metric point out that it omits capital costs, and it has been used to exaggerate the financial performance of companies in the past.

Market-Based Insurance Agency Valuation

It makes sense to check selling prices of similar agencies: this is the market approach. It gives you an idea of what potential buyers might be willing to pay. Although this option is most common for real estate, it can be useful for other purposes, including business valuations.

According to Investopedia, the market approach tries to determine the fair market value of an asset. It’s a popular method, but because assets are not generally identical, you do need to make some adjustments.

The Asset-Based Approach

Another way to value a company is to focus on its assets. According to Deloitte, the asset-based valuation approach focuses on the fair market value of the company’s assets minus its liabilities. It’s generally easier to apply this approach than income-based and market-based approaches.

Although this method is simple, some of the calculations are subjective. A company’s assets may include physical assets – such as equipment and real estate – which are often fairly easy to value. However, assets will also include intangibles, such as customer relationships and even the good will the agency has developed over the years.

Valuation Considerations for the Insurance Industry

At this point, you have probably realized that it’s not always easy to determine the value of an insurance agency. However, regardless of the method you use, several factors stand out as being important:

  • Your revenue
  • The assets you have
  • The debts and other liabilities you have
  • Whether your insurance book of business growing, shrinking or stable
  • The current market conditions

Finding the Right Valuation Method for Your Company

It’s helpful to know how to value an insurance agency. If you decide to sell your insurance company, this information can help ensure you receive a fair market evaluation.

Depending on your situation, some methods might give you a higher valuation that others.

When you determine your agency’s value, you do not have to stick to one method: you can use a combination – including market-based, income-based and asset-based approaches – to obtain a nuanced picture of your agency’s true value.

The good news is you do not have to carry out the business valuation calculations yourself: a certified business appraiser can determine your agency’s value for you.

Are you ready to sell?

You’ve worked hard to build your insurance agency. When you sell it, you want to make sure you’re receiving a good deal – knowing how to value an insurance agency is key. You also want to make sure your agency will be in good hands. Whether you’re interested in succession planning or want to take your agency to the next level, Higginbotham can help.

If you’re interested in discussing a partnership with Higginbotham, please contact us.

Not sure where to start? Talk to someone who wants to listen.

A great plan starts with a conversation. Let’s talk about what you need.

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