Many insurance agency leaders tend to rely on industry rules of thumb when estimating what their business is worth. Aren’t insurance agencies worth 1x or 2x revenue? Or is it 7x EBITDA? Insufficient knowledge regarding the value of your business could be costly, leading to missed opportunities. Take for example, the valuation of your business is $1,000,000 when it is 1x of a million in revenue but it could also be worth $2,000,000 when it is 2x in revenue, leaving you a potential opportunity cost of $1,000,000.
Understanding how insurance agencies are actually valued will also help you understand how to increase the value of your business and maximize your return when the time comes to sell or perpetuate your agency.
Multiple of Revenue
As the name implies, the Multiple of Revenue method is where the value agreed upon is reported as a percentage of revenue. The revenue reported is typically in terms of either prior fiscal year or the trailing 12 months. This method is commonly used when acquiring a book of business as a specific asset and as compared to purchasing an entire operation. When acquiring a book of business to assimilate into an existing operation, it is often times a simpler conversation/negotiation to keep in terms of Revenue. This method is an easier method to deploy as it is simple to explain and understand.
Multiple of EBITDA
A multiple of Earnings, also known of EBITDA, is a method of valuation where the multiplier is based on the operating cash flow (or Earnings) of the agency. This method is commonly used when acquiring an entire operation, functioning component/division of an enterprise, or a larger book of business that carriers with it a sizeable amount of expense and/or complexity. Although this method requires much more analysis, due diligence and overall effort, it is one of the more exact and informing of the two methods. Full proforma financials can be analyzed and the outcome of an acquisition or merger can be extrapolated to ensure the Buyer that the deal is worth doing.
When it comes to valuing a business, numbers are not the only consideration, in fact, culture, leadership, and modernization matter just as much. Here are 3 ways to increase the worth of your insurance business:
1. Increase sales, lower expenses and boost your profits
Analyze your processes and look for ways to increase operational efficiency, cut costs and control inventory without affecting your operations. Brush up your marketing strategy and find new ways to boost sales. New business will naturally follow when you're growing. Don’t be satisfied with the same production levels. Evaluate your business strategies and streamline your sales process.
2. Continue to invest and improve
Agencies that continue to invest in new technology (modern agency management systems, social media, web and mobile-friendly marketing, etc.) can further differentiate themselves from the competition.
3. Own your database
Last but most importantly, you have to own your database. Most agencies rely on excel and their insurer's portal to track and manage their database. This however is not ideal in the event you plan to switch agencies or insurers. In addition, owning your database, allows you to engage your customer base better, translating to higher revenues. So invest in an independent CRM system which allows you to manage and interact with your customer base at a higher level.
Raise your Business Value Today
Remember, your insurance business is not just a sales job. Insurance agents are recognized as entrepreneurs because you are building a sustainable business and one of value not just to your clients but to yourself.