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The following article details the process of selling an insurance agency book of business in 2024, including deviations from the process of selling an agency, the valuation process, and common payout structures.
Why Sell Just the Book?
Selling an insurance agency book of business has a few advantages over selling the agency in total.
It’s an easier overall sale
Post-closing, the process allows the seller to maintain their input in the agency’s future
It may lead to liquidation, which can be more profitable in the long run
Although it’s easy to compartmentalize the transaction as being just about the book itself, the reality is that buyers will initially assess the value of a book of business based on the performance of the agency as a whole. This is especially true for all things client-related since clients determine its overall value.
The table below contains a few recommendations to make your business more profitable.
Consider Digitization
Focus on Your Unique Selling Points (USP)
Improve Client Retention
Vet Prospective Clients & Carriers
The Steps of Selling an Insurance Agency Book of Business
Selling an insurance agency book of business shares all of the major steps of any M&A transaction and often involves the same team members.
The Steps of Selling an Insurance Agency Book of Business
The process differs from selling an agency, however, in the details. The following sections detail which steps are added when selling an insurance agency book of business as well as those which typically don’t require as much attention.
Added Steps
There are a few additional steps to selling an insurance agency book of business, most of which focus on the transfer of direct client relationships. As a result, agencies selling their book should be prepared to spend more time with:
Client Consent. Getting client consent is not always necessary, but some types of insurance (e.g., life, health) may have stricter requirements for policy transfers.
Policy Assignment. Because your BoB is essentially being handed over to another agency, you must often perform additional work to assign or formally novate your contracts.
Transition Support. Typically more client-facing than internal, having additional hands on deck to support clients can help reduce churn when policies are handed over to the new agency.
What You Don’t Need To Worry About
While there are a few extra steps involved in selling an insurance agency book of business, there are also several factors that will not be affected by the transaction, most of which have to do with the actual operations of the agency. These include:
Employee Transition Planning
Asset Transfer
Brand Transition
Regulatory Approvals
Operational Continuity
The first step in the process, however, is knowing how much your BoB is actually worth. This means getting a formal valuation done - typically through your M&A advisor, but sometimes through a third party. The following section provides a brief overview of how these valuations are performed.
How To Value an Insurance Agency Book of Business
The first step in selling an insurance agency book of business is knowing what the book is actually worth. When buyers consider purchasing a BoB, they consider several major associated factors, such as:
There are certain elements in the graphic above (e.g., YoY growth, profitability, agency structure) that don’t necessarily result directly from the BoB. These factors are important nonetheless, since they reflect the impact on the agency overall.
Knowing how to value your BoB means understanding:
The valuation method
The multiple of the valuation method
The associated risks
The tax and legal implications of the transaction
EBITDA vs. Revenue
Valuing an insurance agency book of business typically consists of a multiple of one of these two valuation models:
Earnings before Interest, Taxes, Depreciation, and Amortization (EBITDA). How much profit the agency makes, with interest, taxes, depreciation, and amortization added back in, since they will likely be different under the buyer. This model is typically used to give the buyer the most accurate idea of how much their agency is actually worth.
Revenue. The total amount of revenue generated by the agency before any operational expenses are removed. This model usually benefits smaller agencies or agencies with a high operational spend.
EBITDA makes up the vast majority of insurance M&A transactions (as well as the majority of M&A transactions across various industries), as indicated in the graphic below. Revenue comes in at a distant 2nd, making up less than 5% of transactions, and alternative valuation methods (typically Seller’s Discretionary Earnings, or SDE) make up a negligible portion of annual deals.
Once the valuation method has been determined, the next step is to determine what multiple you are most likely to receive. Multiples themselves are determined ultimately by precedent; current multiples are based on previous deals for agencies of a similar size.
The following table provides examples of EBITDA and revenue multiples for small, midmarket, and enterprise-level businesses as of Q3 2024.
Agency Size | EBITDA | Revenue |
Small (SMB) | 4.9x | 2.1x |
MidMarket | 7.1x | 2.5x |
Enterprise | 9.4x | 2.9x |
For example, a small agency making $5M in revenue and $2M in EBITDA would be likely to earn $11.2M from a revenue-based sale and $9.8M from an EBITDA-based sale. This is, of course, before any of the risks associated with the agency are taken into account.
Common Risks in BoB Transactions
The biggest concern that prospective buyers usually have once they learn the value of an agency’s BoB is what could potentially detract from it. The risks associated with selling an insurance agency book of business vary slightly from selling the agency total, but we list the most common in the table below.
Risks When Selling an Insurance Agency Book of Business
Risk | Description | Mitigation |
Client Retention | If the original agency has poor client relationships, they may not welcome new management. | Improve the client experience with referral programs, loyalty awards, and improved customer service. |
Revenue Streams | A strong BoB needs strong policy diversification and carrier relations to be worth the transaction. | Diversify the agency’s client base and policy type prior to taking the book of business to market. |
Regulatory Considerations | Consent for policy transfer or contract novation can pose potential legal challenges that may disrupt a sale. | Establish clear lines of communication with clients to ensure a smooth transition post-closing. |
Valuation Discrepancies | An insurance agency book of business is particularly hard to value, which sometimes leads to conflicting valuations that can prolong negotiations. | Prioritize extensive due diligence in the valuation process to avoid conflict. Emphasize earnouts or milestone deal structures to ensure performance-based payments. |
Once it’s been valued, marketed, and reviewed, the final steps in selling an insurance agency book of business are the final negotiations and closing. The following section outlines common payment structures in BoB transactions.
Common Insurance Agency Book of Business Payment Structures
Insurance agency M&A transactions are typically going to happen through a financial buyer, which is almost always a private equity company. Strategic buyers very rarely (we estimate less than 10%, based on information sourced from the SF Index) get involved in insurance deals, and even less so when the transaction involves selling an insurance agency book of business.
Deal structures for a BoB deal are typically a bit different than selling the agency outright, as the graphic below indicates:
Earnouts. Payments in accordance with the performance of the book over time, typically with a small upfront payment.
Milestones. Payments based on the passage of a certain amount of time or the transfer of a certain percentage of clients.
Financing. Financing options offered by the seller, based on the book's performance over time.
Lump Sum. A single payment made at the time of closing. Much rarer in BoB sales.
Retention Bonus. Bonuses granted to owners or key employees for staying on post-closing. These are much more rare in BoB sales, since the agency will remain otherwise intact following the transaction.
In short, earnouts and milestones are the most common deal structures when selling an insurance agency book of business. Lump sum, seller financing, and retention bonuses make up a significantly smaller percentage of all deals, in contrast to agency-based deals.
Selling an Insurance Agency Book of Business?
As the article above details, the process of selling an insurance agency book of business is an extensive process almost as complicated as selling the agency itself. With that in mind, one of the biggest mistakes we see from sellers is the attempt to try and represent themselves. On average, these attempts garner 30% less than sellers who seek professional representation.
Sica | Fletcher has extensive experience helping insurance agencies sell their books of business, having represented thousands of agencies over the last decade. Whereas many other M&A advisory firms cast a wide net by serving a large number of industries, our teams specialize specifically in insurance deals, giving us the experience and expertise that provides our clients with the edge to secure a more favorable payout at closing. Contact us here or use the 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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