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When insurance agency sellers have already met with prospective buyers, they may have been offered a valuation based on their “adjusted EBITDA.” Insurance agency valuations can be tricky in their own right, but adjusted EBITDA (also known as “pro-forma” EBITDA) can pose additional challenges for sellers attempting to get an accurate agency valuation, as it pertains to both personal and business expenses.
The following article provides a brief overview of EBITDA and adjusted EBITDA valuations for insurance agencies. We also discuss the differences between these metrics and follow up with some essential tips from our teams to help you ensure a smoother deal process.
What Is EBITDA?
EBITDA is an acronym for “Earnings Before Interest, Taxes, Depreciation, and Amortization.” This valuation model is used largely in M&A settings to determine the value of a company as it would appear to a prospective buyer by adding interest, taxes, depreciation, and amortization costs back into the business’s profits, since these elements will be fundamentally different post-closing.
EBITDA=Revenue-Operational Expenses+Interest+Taxes+Depreciation+Amortization
Calculating EBITDA is relatively simple. Take the agency below as an example:
Calculating EBITDA: Insurance Agency Example
Element | Associated Cost | Running Total |
Revenue | $5,000,000M | $5,000,000M |
Operational Expenses | -$3,000,000M | $2,000,000M |
Interest | +$120,00 | $2,120,000 |
Taxes | +$400,000 | $2,520,000 |
Depreciation | +$280,000 | $2,800,000 |
Amortization | +$240,000 | $3,040,000 |
Total EBITDA | - | $3,040,000 |
In this case, the agency gains back $1.04M in the total valuation, ultimately leading to a higher payout at the end of the deal. This model also benefits the buyer, as it provides them with a clearer picture of the agency’s actual value before they agree to the sale.
So, if EBITDA already comprises several adjustments to your valuation, what does an adjusted EBITDA insurance agency valuation look like?
What Is Adjusted EBITDA?
Like EBITDA, adjusted EBITDA valuations are provided in order to normalize the earnings of what the business will be post-closing. While EBITDA measures “core profitability,” adjusted EBITDA measures the normal recurring profitability by also adding back non-recurring expenses associated with the business. The formula is as follows:
Adjusted EBITDA = Revenue - Operational Expenses + Interest + Taxes + Depreciation + Amortization + Personal Expenses
Let’s take the same $5M agency from the previous section. To calculate their adjusted EBITDA, we need to look at any additional expenses that might distort the value of the company.
Calculating Adjusted EBITDA: Insurance Agency Example
Expense | Associated Cost | Running Total |
EBITDA | - | $3,040,000 |
Sales Commissions | +$30,000 | $3,070,000 |
Company Car | +$12,000 | $3,082,000 |
Legal Fees | +$24,500 | $3,106,500 |
Charitable Donations | +$10,000 | $3,116,500 |
Restructuring Costs | +$52.520 | $3,169,020 |
Reduced CEO Salary | -$47,630 | $3,216,650 |
Country Club Dues | +$5,000 | $3,221,650 |
Rent Adjustments | -$19,000 | $3,240,650 |
Recruitment Costs | +$15,000 | $3,227,000 |
Adjusted EBITDA | - | $3,255,650 |
As a result of the adjusted EBITDA valuation, the estimated worth of the company increases by $215,000 – from $3.04M to $3.25M. It should be noted that adjusted EBITDA valuations often do include deductions that can reduce the company’s value. This is why it’s so important to have an experienced partner on your team handling the valuation and all associated negotiations.
It’s also worth pointing out that there are certain circumstances in which a buyer may not want to add back certain costs. For example, let’s say that half the agency’s clientele are members of the local country club. This means that the annual dues listed above represent a potentially critical business expense that the buyer may want to continue paying for, resulting in its removal from the adjusted valuation amount.
All of this raises another important question.
What Elements Are Included in Adjusted EBITDA for Insurance Agencies?
What qualifies as a non-recurring expense when calculating the adjusted EBITDA for insurance agencies is often enthusiastically negotiated by your team and the buyer’s. The following list provides a thorough – but not necessarily comprehensive – list of the most common expenses in an adjusted EBITDA valuation:
Typical Expenses in Adjusted EBITDA Valuations
Expense | Typical Adjustment |
Recurring | |
Owner’s Personal Expenses | + Total dollar amount of personal expenses |
Country Club | + Total annual dollar amount of dues |
Company Car (Ins. & Repairs) | + Total dollar annual dollar amount |
Below Market Rent | - Total difference between market & prevailing rent |
Below Market Salaries | - Total difference between market & paid salaries |
Non- Recurring | |
Legal Fees | + Total dollar amount of legal fees |
Company Car (Purchase) | + Total dollar amount of the company car |
Restructuring Costs | + Total dollar amount of restructuring costs |
Short-Term Marketing Campaigns | + Dollar amount of the campaign |
M&A Costs | + Total dollar amount of M&A costs |
Asset Sale Gains or Losses | +/- Total dollar amount of gains or losses |
Deferred Maintenance | - Total cost of repairs |
One-Time Revenue Gains | - Total dollar amount of one-time gains |
As mentioned above, this list is by no means comprehensive. When evaluating their own adjusted EBITDA, insurance agency owners should prioritize the concept of normalization – or identifying whatever expenses effectively disrupt an accurate picture of the agency’s earnings under standard operating conditions.
The Sica | Fletcher Take
In our time as one of the leading insurance M&A firms, we’ve overseen thousands of deals utilizing adjusted EBITDA. Insurance agency owners often take a few things for granted in these scenarios, which prompts us to issue the same advice to all our prospective clients:
You don’t want the buyer dictating what the EBITDA is. Often, sellers first hear about adjusted EBITDA from a prospective buyer who has made an offer based on what they think the agency is worth. Before accepting their adjustments, work with your advisor to determine the proper calculations to start yourself off on a strong foot.
The pro-forma or adjusted EBITDA is just as important as the multiple. At Sica | Fletcher, we talk a lot about the “multiple of what” principle, reminding clients that 30 x 0 is still 0. When working with adjusted EBITDA, insurance agency valuations must be kept as high as possible.
From step one, however, our most essential piece of advice is to work with an advisor who is experienced in adjusted EBITDA insurance agency valuations. Our data has conclusively shown that self-represented agencies earn about 30% less on average than deals with professional representation, which makes it important – now more than ever – to have an expert on your team. If you are interested in learning more, reach out to us here or use the contact information below.
About Sica | Fletcher: Sica | Fletcher is a strategic and financial advisory firm focused exclusively on the insurance industry. Founders Michael Fletcher and Al Sica are two of the industry's leading dealmakers who have advised on over $16 billion in insurance agency and brokerage transactions since 2014. According to S&P Global, Sica | Fletcher ranked as the #1 advisor to the insurance industry for 2017-2023 YTD in terms of total deals advised on. Learn more at SicaFletcher.com.
Contact: Mike Fletcher
Managing Partner, Sica | Fletcher
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