Question About Agency Valuation

[Agent12345]

I have a question about why an insurance agency is valued the way it is. From everything I can tell, the market says an agency is worth 1.5 - 2 times commissions. Why is this? The industry's retention ratio seems to be 85%-90%. I understand you have certain cost to service the accounts but doesn't this seem low when any other private business is worth 5-7 times earnings?

I am sure I am missing something. I could see paying off a new acquisition in 3ish years assuming little to no growth. What am I missing?

 

[wolf183]

This is actually no longer the case. If someone is telling you 1.5 or 2 times your annual commissions - I would look into a new company to represent you in buying or selling your agency. Yes, it is true you may be able to buy an agency for this but that is an old school way of thinking. It may be worth much more or much less. You need to look at it like any other business and evaluate the business income, assets and debt. Hope this helps

 

[Agent12345]

Thanks for that. That was exactly what I was looking for. I am not currently in the industry, however I have seen those numbers (1.5 - 2) thrown around frequently. On average, would you say that the value of a insurance agency resembles 5-7 times earnings before taxes? I understand a lot, that we couldn't cover in this hypothetical, goes in to the valuation.

 

[djs]

The 1.5 to 2 times is just a general ballpark. Much more goes into it, such as what the retention ratio has been, how many policies have been added recently (worth less, more likely to lapse), is it just the policies or does the building / location / phone numbers come with it? Staff? Has the book been growing? Shrinking? Overall market in the area growing? Shrinking?

Businesses as a whole sell from far below 5-7 times earnings to well above 30 times earnings, but everything is different. For instance, companies might have patents that help protect their business or they may have exclusivity on something they can control. An insurance agency has very little protection on its value of the policies. They are a service business which tend to have lower valuations overall.

Dan

 

[shawnmwalker]

Agent12345,

As stated there are a lot of factors that go into the valuation of an agency. Many of whick have not been mentioned yet like type of book (Non standard vs Preferred, bonuses, overrides, ext.

I will say that 1.5-2.0 is very normal in the industry. I often meet captive agents that think their book is worth more because they have been told this by their leadership and when it comes time to sell and go independent they end up selling for 2.0 or 1.9.

 

[plewi003]

It depends on the situation. If the agency suffering from attrition, small book, mostly nonstandard, then 1 time or less is what I would pay. If you have a nice standard book, with great retention 1.5 to 2x is pretty accurate valuation.

 

[jf1816]

New here, but from what I have seen there isnt a simple hard rule for valuation. 1.25x-1.5x is sort of a starting point. Larger books >3M with good retention can go for over 3x. Small ones for sale >1M are not worth as much since there are tons out there and often are owned by people who want out of the business. They can have terrible retention however often have great opportunity for cross selling. This is just what I have seen in Texas. I am by no means an expert, there are plenty of those here though. I have seen them sold for 1.25 before as well. Mostly seems like it depends on how motivated the seller is. Good luck!

 

[Brelsford]

The 1.5 - 2 times is regarding the top line of commissions, and does not take into account the profitability of the business. When you say 5-7 earnings, this is normally referred to as SDE - sellers discretionary earnings- and takes into account the profitability of the business. You are comparing apples to oranges here. Current agency mults are as followed below. Please message or reply if you would like any more information regarding valuation.

Revenue/Commission Mults/(no prem included in top line) = 1x - 2.5x
Seller Discretionary Earnings (SDE) = 3x - 5x
EBITDA= 4x - 8x

 

[ModernInsurance]

The 1.5 - 2 times is regarding the top line of commissions, and does not take into account the profitability of the business. When you say 5-7 earnings, this is normally referred to as SDE - sellers discretionary earnings- and takes into account the profitability of the business. You are comparing apples to oranges here. Current agency mults are as followed below. Please message or reply if you would like any more information regarding valuation.

Revenue/Commission Mults/(no prem included in top line) = 1x - 2.5x
Seller Discretionary Earnings (SDE) = 3x - 5x
EBITDA= 4x - 8x

Dropping knowledge on 'em!

 

[Brelsford]

Dropping knowledge on 'em!

I've heard a lot of different agency multiples, some being upwards of 4-5x. In my experience this has NEVER happened. The highest multiple I've seen in the last 3 years is 2.75x of commissions. How does one achieve the rumored 3x or higher? Simple. The two other multiples are well within parameters (Ebitda 4x-7x & SDE 3x-5x) which, when an insurance agency is ran profitable, drives the revenue multiple up higher than 2.5x.

I'm looking forward to weighing in on current topics and sharing a little of what I've seen with being closely involved in agency acquisitions.