The Price of Your Insurance Agency: Do the Math

Posted by on May 2, 2009 at 9:29 pm

Insurance agency owners who are considering selling their agency, are obviously very curious about the price they can sell their agency for.  It’s the single most asked question of Acquisition Brokers like Ganis Consulting, “How much can I make if I sell my agency?”  But those same owners also think they have a pretty good idea about their insurance agency’s value based on old concepts of multiplying the agency’s annual revenue by some number between 1 and 3.  We hear it all the time: “I think I can get one-and-a-half times”, or “I know someone who sold for two- times”, or “I only want one-times for my non-standard business but I should get three-times for my preferred commercial lines.”

Sellers always try to calculate the value of their agency based on a multiple of revenue.  Unfortunately for them, Buyers never do.  It’s the great divide in insurance agency acquisitions and can be a significant hurdle in trying to bring Buyer and Seller together to complete a transaction.

Buyers more typically calculate insurance agency value by using a multiple of the agency’s annual earnings, not the annual revenue.  And while Sellers frequently talk about 1-times and 2-times revenue multiples as the ideal price for their agency, Buyers keep their intentions about earnings multiples to themselves, not revealing what they are willing to pay for an agency until they have considered every possible factor.  Some of the dozens of factors Buyers use to determine that multiple include: 

  • Non-Standard vs. Preferred Business
  • Direct vs. Agency Bill
  • Carrier Appointments and Concentration
  • Reputation of Agency
  • Quality of Staff
  • Deal Structure 

Buyers are less concerned about gross revenue (the total commission income and fee income generated annually) and are more concerned about the agency’s earnings, sometimes referred to as “cash flow”, or “profit”, or “EBITDA” (Earnings Before Interest, Taxes, Depreciation and Amortization).  Earnings are simply the amount left over after all expenses are paid.  The simple arithmetic looks like this: 

REVENUE (Total of commission and fee income)

         – Expenses  (Less all operational, payroll, and selling expenses)

            EARNINGS 

Here is an example of how Sellers and Buyers could view the value of an insurance agency with $1 Million in Revenue and $700,000 in Expenses:

 REVENUE:   $1,000,000

Expenses:   – $   700,000

EARNINGS:  $   300,000

Seller:  “I want 1.5 times my revenue.”     Price = $1,000,000 x 1.5 = $1,500,000

Buyer:  “I will pay 5-times earnings”         Price = $   300,000 x 5    = $1,500,000    

In this example, both Buyer and Seller reached the same sales price even though they wanted different things and used different calculation methods to get there.  This actually happens fairly often, but if Sellers and Buyers don’t understand each others’ pricing methods, the deal can get hung up on simple arithmetic.


Leave a Reply