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This article presents a step-by-step guide on how to value an insurance agency - both in the sense of how a valuation agency/M&A advisor goes about valuation, and also in terms of what insurance agency owners can do to maximize their valuation prior to running an M&A deal.
Speaking broadly, insurance agency valuations take three main steps.
01 | 02 | 03 |
Examination | Valuation Method | Valuation Multiple |
The valuing party analyzes documentation provided by the owner to get a sense of what the agency is worth | The valuing party determines whether EBITDA, revenue, or SDE will provide the best outcome for the agency owner | The valuing party calculates the average expected payout using average market multiples for insurance agencies of the same size |
From there, the valuing party (typically your M&A advisor) takes the agency to market with the average expected payout in mind, advertising to various prospective buyers. Before this happens, however, agency owners must ensure they are prepared for the valuation to take place.
Preparing for an Insurance Agency Valuation
Because the valuation process is really about determining the profitability of your insurance agency, any and all efforts should be made prior to the valuation to reduce costs and generate revenue. This means:
Eliminating redundancies in your agency's tech stack
Identifying and eliminating excess spend in your company's infrastructure
Improving carrier relations
Diversifying your client base and policies offered
One of the central challenges involved in preparing for an insurance agency valuation is compiling all the information required to conduct it. The following table contains a comprehensive list of the documents our teams use to value an insurance agency.
How To Value an Insurance Agency: Required Documentation
Financial Statements | |
P&L Statement | A calculation of revenue based on expenses and profits over a given period of time (typically annual) |
Balance Sheet | A snapshot of the company’s financial standing based on assets, liabilities, and equity |
Cash Flow Statement | The agency’s liquidity, based on inflows and outflows of cash |
Business Tax Returns | 3-5 years of tax return documentation to verify reported income and expenses |
Operational Records | |
Production Reports | A summary of operational metrics including sale volume and # of new policies written |
Client Lists | Client information including retention rates, average customer lifespan, and purchasing habits |
Commission Statements | Carrier earnings as expressed in existing client documentation |
IT System Reports | An overview of the agency’s tech stack, including information on the software licenses and data security |
Legal Documents | |
Incorporation Documents | Articles of incorporation, business licenses, and registrations |
Partnership Agreements | A document detailing the rights/responsibilities of each partner in the agency |
Insurance Contracts | Records of policies issued to clients, including terms of the policy, level of coverage, and commission rates |
Human Resource Documents | |
Employee Records | Information on salaries, benefits, and roles of existing employees |
Employment Agreements & Policies | The circumstances of employment at the agency and an overview of the agency’s policies |
Marketing & Business Development Materials | |
Marketing Plans and Strategies | A 1st-party overview of the existing market, as well as the agency’s place within it. This will be compared with a separate market analysis conducted by the valuing party |
Business Plans | A one- to five-year plan detailing the agency’s strategic goals and objectives for future growth |
Compliance & Regulatory Documentation | |
Compliance Certifications | A list of any certifications necessary to verify that the agency meets all regulatory requirements |
Audit Materials | Documentation from any previous audits to verify a pattern of maintaining compliance |
Litigation Records | A summary of any existing or past legal action taken by or against the agency that might affect the valuation moving forward |
Your M&A advisor will use these documents to value your agency, as detailed in the sections below. It’s critical to have these documents prior to valuation, however, to avoid protracting the process unnecessarily.
How To Value an Insurance Agency
The basic steps of how to value an insurance industry closely mirror those of M&A valuations in any other industry:
Specialists examine several elements of your agency
They determine the best valuation method for your agency (usually EBITDA)
They determine the most likely multiple of that method
Insurance agency valuations sometimes take place through a specialized firm, but often they are performed by your M&A advisor, who represents you during the marketing and negotiation process. While several aspects of each step deserve more focus (see: Insurance Agency Valuations 101), the following section discusses these three steps as a general process to paint the broad strokes before readers can dive into the specifics on their own or speak with our team.
1. Examination
When your M&A advisor examines your company, their primary goal is to determine its overall profitability, meaning that they look very closely at:
Cash flow
Operational expenses
Carrier relations
Diversification of policies offered
These factors demonstrate not only how profitable your company currently is, but it can also indicate how well it will fare into the future, which is ultimately the most important aspect for prospective buyers.
This process typically takes a few weeks, as the valuating party dives into the documents listed in the table above to get a sense of how much the company is currently worth as well as the sustainability of the business model. Once completed, they should have a reliable grasp of the agency’s revenue and EBITDA, which leads to the 2nd step of the valuation process.
2. Selecting the Valuation Method
Insurance agency valuations typically occur in one of the following four methodologies
EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization): A calculation of an insurance agency's profitability calculated by subtracting taxes and operating expenses from its overall revenue. This figure is often averaged by calculating EBITDA over the course of several years.
EBITDA = Earnings - (Interest + Taxes + Depreciation + Amortization)
Revenue: The net gross of a company's earnings over a given period of time. Typically calculated annually.
Revenue = # policies sold x price per policy
SDE (Seller's Discretionary Earnings): A multiple of the owner's annual salary.
SDE = Net profit - owner's compensation - One time expenses + Discretionary expenses
Although there are several methods to value an insurance agency, the most common by far is EBITDA. Revenue sees occasional use but is often rejected because it does not take the operating expenses required to keep an agency running into account, which can create
unreliable valuations. SDE is even rarer, and only typically used for very small agencies in which the owner is attempting to close quickly for a smaller payout.
In contrast, EBITDA offers both buyers and sellers a reliable depiction of an insurance agency's long-term value by subtracting operational expenses and taxes from its calculations. This provides sellers with a higher payout (EBITDA multiples are universally higher than revenue multiples) and buyers with peace of mind when considering a future purchase.
3. Determining Your Agency's Valuation Multiple
The majority of insurance agencies typically fall somewhere between 5x-9x EBITDA, although these figures can vary depending on the relative size and profitability of a respective agency.
The following table provides a few averages for EBITDA, revenue, and SDE, respectively, which we've broken down further based on agency size.
How To Value an Insurance Agency: EBITDA, Revenue, & SDE Multiples Q2 2024
Multiples | Small | Mid-Size | Large |
EBITDA | 5.2x | 7x | 8.6x |
Revenue | 1.9x | 2.7x | 3.4x |
SDE | 8.1x | 10.4x | 11.8x |
You can find a more comprehensive breakdown of EBITDA multiples for insurance agencies in our thorough analysis of the subject here.
Using the multiples in the table above, we can calculate the following payout averages for three fictional insurance agencies:
Payout | Small EBITDA: $150,000 Revenue: $450,000 SDE: $90,000 | Mid-size EBITDA: $600,000 Revenue: $1,750,000 SDE: $400,000 | Large EBITDA: $3,500,000 Revenue: $10,000,000 SDE: $2,500,000 |
EBITDA | ~$780,000 | ~$4,200,000 | ~$30,100,000 |
Revenue | ~$855,000 | ~$4,725,000 | ~$34,000,000 |
SDE | ~$729,000 | ~$4,160,000 | ~$29,500,000 |
It's important to note that the list above is not necessarily what an agency owner will get at closing. That amount is trickier, often subject to negotiation and various deal structures consisting of cash vs. equity and post-closing consulting/employment agreements. Instead, these amounts represent an average of what your insurance agency is worth - with this information, you can get an idea of what you are willing to sell for once the marketing phase of the deal process begins and offers start coming in.
Sica | Fletcher Knows How To Value an Insurance Agency
We've represented thousands of insurance agencies and brokerages since our founding in 2014 – so much so, that we are considered a “market maker” within our industry. Our teams know how to value an insurance agency and can handle the process for you from start to finish, ensuring that your agency gets the best possible payout upon closing. Contact us to discuss a future partnership.
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