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Insurance agency owners who are considering the prospect of running an M&A deal process often have many concerns about the fate of their agencies, but the most common by far are those surrounding the agency’s purchase price at closing. In reality, this number varies according to a wide range of factors - buyer, deal structure, the market - however, the table below provides some generalized averages for small, mid-size, and large agencies:
Insurance Agency Purchase Price Averages By Agency Size
Agency Size | EBITDA | Multiple | Purchase Price |
Small | $750,000 | 6.1x | $4,500,000 |
Mid-Size | $3,000,000 | 7.6x | $22,800,000 |
Large | $25,000.000 | 9.3x | $232,500,000 |
The rest of this article breaks down how to calculate an insurance agency purchase price using the small agency listed in the table above as an example. We’ll also detail some of the factors affecting these calculations. Use the following links, if necessary, to jump to the relevant section:
How To Calculate Your Insurance Agency Purchase Price
Calculating purchase price is a simple formula:
Purchase Price=EBITDAMultiple
The real challenge to this calculation is determining the EBITDA and appropriate valuation multiple for your agency. The following subsections explain the theory behind this calculation and offer an example of an insurance agency purchase price calculation.
Note: Although a small number of insurance agency M&A transactions are conducted using revenue rather than EBITDA, it is a small enough percentage (~5% of all total deals) that we do not discuss it here. For those wishing to calculate their agency’s value from revenue, the same basic formula of revenue x multiple applies. If you’d like to discuss your agency’s valuation in further detail, however, consider speaking with our team here. |
Determine EBITDA
Earnings before interest, taxes, depreciation, and amortization (EBITDA) is used as a measure of the profitability of an insurance agency while adding back interest, taxes, depreciation, and amortization - all of which will vary depending on the circumstances of the new owner. M&A professionals prefer it over other valuation methods for this reason, because it provides buyers with a clearer picture of how much the agency is worth to them.
The formula for calculating EBITDA is as follows:
EBITDA=Earnings-Operating Expenses+Interest+Taxes+Depreciation+Amortization
Let’s look at a real-world example of how EBITDA might be calculated for a smaller insurance agency making roughly $700K in revenue:
With your EBITDA determined, the next step in calculating your insurance agency’s purchase price is figuring out the valuation multiple that would apply to it. The following section describes this process in further detail.
Determine Valuation Multiple
Figuring out the approximate EBITDA multiple (the actual multiple for your agency won’t be determined until you have a formal valuation done - see note below) hinges on doing a great deal of market research. While valuation multiples – especially for private companies – have been a hidden source of information for decades, it has become more transparent in the last few years.
Insurance Agency Purchase Price: Valuation Multiple Averages By Size
Agency Size (EBITDA) | Average Multiple |
Small ($500K-$2M) | 6.1x |
Mid-Size ($2M-10M) | 7.6x |
Large ($10M+) | 9.3x |
Using the example from the section above, we can determine that the valuation multiple for a smaller agency making ~$750,000 EBITDA is approximately 6.1x. From here, consider how your agency (see “Factors Affecting Valuation Multiples” section below) varies from this average. Some smaller agencies, for example, might get a higher multiple than 6.1x if they have an especially high growth potential or future marketing plan that would entice buyers into a more lucrative sale.
Note: Insurance agency valuations make up the first step in running an M&A deal and are typically conducted by either 1.) your M&A advisory firm or 2.) a 3rd party agency specializing in valuations. If you are interested in having a formal valuation done, consider working with an insurance sector specialist like Sica | Fletcher to ensure you get the most accurate valuation possible. You can reach out to our team here. |
Calculate Purchase Price
As stated in the section introduction, the formula to calculate insurance agency purchase price is relatively simple compared to what we’ve already done:
Purchase Price=EBITDAValuation Multiple
An actual example of this, albeit simplified, is presented below:
In the circumstance of our fictional insurance agency, the purchase price would come in at roughly $4.5M. It’s important to remember that this does not necessarily indicate the exact amount that will be paid for the insurance agency, but rather a general guideline of what that owner should expect when entering the market. Actual offers will vary depending on the buyer, the market, and the advisor, in addition to the agency itself.
Factors Affecting Insurance Agency Purchase Price
The following sections detail the factors affecting insurance agency purchase price amount in terms of both EBITDA and the valuation multiples themselves. They include factors that impact M&A transactions in general, as well as those specific to insurance agencies.
Factors Affecting EBITDA
Because EBITDA refers to a general assessment of an insurance agency’s profitability, factors affecting it are those that relate to the agency's bottom line. This means taking a close look at revenue, operational expenses, interest, taxes, depreciation, and amortization as they relate to insurance agencies. Although you could choose from a wide variety of general examples, some of the most common for insurance agencies include:
EBITDA Factors and Benchmarks
Agencies performing above these benchmarks should expect a slightly higher valuation in the long run, because buyers are likely to pay more for an agency with a stable cash flow and a foundation for long-term growth. In contrast, agencies that perform below these benchmarks should consider waiting to enter the market to shore up their operations – or be prepared to face a lower valuation.
Factors Affecting Valuation Multiples
Because valuation multiples are a reflection of how the M&A industry views insurance agencies as an investment, understanding the factors affecting them are less about changing your operations and more about determining when is the right time to enter the market. The qualitative nature of these factors, which do not leave room for benchmarks, makes the timing more difficult to assess.
The most important factors to keep in mind when considering valuation multiples are:
Industry Landscape. Developments within the insurance industry (e.g., new technology, active competitors, regulatory/compliance changes) can affect the market shares of all participants.
Interest Rates. Although we’ve written before about how high interest rates do not necessarily mean lower valuations, the reality is that many buyers are likely to wait for more favorable financial conditions before buying. If you are considering selling while interest rates are high, expect buyers to offer a lower valuation to make up for money lost on interest.
Buyer Activity. Sometimes, an especially aggressive buyer can make an impact on insurance agency valuations by rolling up several small agencies over a short period of time, creating a higher short-term demand for agencies of that size.
The best course of action for insurance agency owners wanting to stay ahead of these trends is to subscribe to M&A data sites (e.g., S&P Global Data, PitchBook, PWC) or through M&A indexes provided by M&A advisory firms.
Negotiating Your Insurance Agency Purchase Price
Even after you’ve determined the most likely insurance agency purchase price, the reality is that the rest of the M&A deal process is highly nuanced and requires a great degree of skill. Sica | Fletcher is the #1 M&A advisory firm for insurance agencies on the market today, representing everything from boutique agencies to $1B deals. If you are ready to discuss bringing your agency to market, you can reach our team via the contact page for this website or through 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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