How to Value an Insurance Agency
Insurance agencies generally sell insurance policies as well as annuities. IBIS World notes that the insurance industry has seen healthy growth over the past several years. Moving forward, we can expect growth to remain steady as consumer disposable income increases. As such, it may be a good time to buy, expand, or sell an insurance agency. However, this industry is very competitive. To succeed, it is beneficial to learn how to value an insurance agency.
The best way to learn how to value an insurance agency is to receive a business appraisal. As part of a business appraisal, you will learn the fair market value of an insurance agency. In addition, business appraisers may discuss the strengths and weaknesses of your insurance agency. This information can help you take the next step to maximize the value of an insurance agency.
Peak Business Valuation is happy to help! As a professional business appraiser, Peak provides business appraisals for insurance agencies on a regular basis. We are happy to provide you with a business appraisal. In addition, Peak can discuss any inquiries you may have on how to value an insurance agency. Schedule your free consultation with Peak below!
How to Value an Insurance Agency
There are many common business valuation approaches to consider when valuing an insurance agency. At Peak, our business appraisers often work with the market approach and/or the income approach. Both of these methods provide a different perspective on the value of an insurance agency. As such, valuation experts will determine which method is best as part of the valuation process. This may include using a combination of valuation approaches.
Valuing an Insurance Agency Using the Market Approach
The market approach is one of the most common approaches when valuing an insurance agency. This approach is similar to how a real estate appraiser values a home. As part of the real estate appraisal process, experts look at similar properties that recently sold in the area. This helps the real estate appraiser accurately determine a fair value for the home. Similarly, the market approach requires valuation experts to assess similar brokerages that were recently sold when valuing an insurance agency. If the agency is private, business appraisers gather data from private transaction databases.
Multiples for an Insurance Agency
When working with the market approach, business appraisers utilize valuation multiples. Multiples are financial ratios that assess a business’s value in relation to metrics such as cash flow, earnings, or sales. To find the proper valuation multiples for an insurance agency, valuation analysts apply an NAICS or SIC code. Below, we highlight SDE, EBITDA, and REV multiples for an insurance agency.
SDE (Seller’s Discretionary Earnings) Multiples for an Insurance Agency
- The SDE multiple measures an insurance agency’s value based on its seller’s discretionary earnings. This is a common valuation multiple in small business valuation.
EBITDA Multiples for an Insurance Agency
- EBITDA multiples reflect the earnings before interest, taxes, depreciation, and amortization of an insurance agency. This indicates the return on investment (ROI) an insurance agency can expect.
REVENUE or SALES Multiples for an Insurance Agency
- REVENUE or SALES multiples measure an insurance agency’s value in relation to the total amount of revenue it generates.
To learn more on how to value an insurance agency using the market approach, see Valuation Multiples for an Insurance Agency.
Valuing an Insurance Agency Using the Income Approach
The income approach is another common business valuation approach. When using the income approach, valuation analysts assess the earning potential of an insurance agency. In addition, the income approach considers any risks that may affect an insurance agency. We discuss a few common risks below.
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- Key Personnel: Insurance agencies need to hire individuals with sufficient education and experience. This can have a significant impact on the insurance agency’s productivity and reputation.
- Location: The location of an insurance agency has a strong influence on its success. It is ideal for insurance agencies to locate near major markets for this industry such as areas with a large amount of businesses.
- Competition: The insurance industry is very fragmented and competitive. As such, operators need to find ways to differentiate from competitors.
- Financial Performance: In the coming years, insurance agencies may experience slight profit declines. To succeed, it is important to have strong financial planning and budgeting skills.
Methods to Value an Insurance Agency Using the Income Approach
There are several variations of the income approach. The most common income approaches are the capitalization of cash flow method and the discounted cash flow method. Below, we discuss how to value an insurance agency using the capitalization of cash flow method and/or the discounted cash flow method.
Capitalization of Cash Flow Method
The capitalization of cash flow method is best for insurance agencies with stable financial histories. When using the capitalization of cash flow method, business appraisers determine an appropriate amount of earnings for one period. The earnings are then divided by a capitalization rate which indicates the rate of return an investor can expect. In addition, the capitalization of cash flow method assesses the risks associated with buying, growing, or selling an insurance agency. We highlight a few of these risks above.
Discounted Cash Flow Method
The discounted cash flow method is ideal if your insurance agency has a strong financial history or a reliable forecast. The discounted cash flow method involves projecting future cash flows over a 3-5-year period. The income is then divided by a discount rate rather than a cap rate. This process measures the value of an insurance agency by taking the time value of money into account. Keep in mind, the discounted cash flow method is less reliable since it relies on future earning estimates which can be inaccurate.
Summary
If you are looking to buy, expand, or sell an insurance agency, it is helpful to understand how to value an insurance agency. There are several approaches that business appraisers can use to value an insurance agency. To learn which method is best for your brokerage, receive a business appraisal. During a business appraisal, you will learn the fair market value of an insurance agency as well as the associated risks and opportunities. With this information, you can begin to increase the value of an insurance agency.
Peak Business Valuation, business appraiser, is happy to help! At Peak, we work with insurance agencies throughout the country. As such, we can provide you with a business appraisal for an insurance agency you are buying or selling. In addition, we can discuss any questions you may have on valuing an insurance agency. Start now by scheduling a free consultation with Peak Business Valuation below!
For more information see Valuing an Insurance Agency, Valuation Multiples for an Insurance Agency, and Value Drivers for an Insurance Agency.
