Last Updated: April 19, 2022

Insurance Agency Valuation 101

So, you’ve decided to sell your insurance agency. Now, what’s the next step?  Before getting out on the field and starting the process, you will need to know your business’s worth. It’s crucial to accurately determine your insurance agency valuation so you can gain maximum returns.   

Not sure how best to go about that? No worries. We have designed this blog to help you gain the knowledge and confidence to start your insurance agency’s valuation.

Insurance Agency Valuation

Insurance agency valuation means estimating the worth of an insurance agency. Insurance agency owners usually follow the industry rules of thumb when valuing their company. According to Live Oak Bank, insurance agencies are worth 2x-3x the revenue or 6x-9x EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). But this isn’t always accurate, and blindly accepting these valuations can lead to selling your business for significantly less than it’s worth.

Why You Need to Determine Your Insurance Value

There can be several reasons for figuring out the value of your insurance agency. These include…

Buy-sell agreements

For an agency with multiple shareholders, a buy-sell agreement establishes how the business will be valued if there is any dispute. This agreement is also good to have in case of the death or departure of any shareholder.

Ownership transfer

In the event of mergers, sale to family, death of the owner, divorce, or forced restructuring, you will need to transfer the agency’s ownership. In these situations, business valuation acts as a tool for creating ownership stability and assessing management performance.

Evaluating business performance

You can’t truly understand how well your business is performing until you know its value. It’s important information to have while managing your business.

Selling your insurance agency

You’d be a fool to try to sell your business without knowing how much it’s worth. How else can you evaluate the offers you receive from potential buyers and decide what price you should ask for it in the first place?

Common Approaches for Insurance Agency Valuation

Industry experts have identified three common methods for industry agency valuation.

The Market Approach

This method looks at the market data from comparable public companies or transactions of similar companies. Most mid-size to larger agencies use this approach. It determines the company’s worth according to what interested parties are willing to pay. When using these market-derived valuation ratios, you can see what the investors in the market want as a return on investment in insurance agencies.  

There are two versions of the market approach:  

Mergers and Acquisitions Method

This method is a constructive way of determining value for sale because it represents true market-based pricing based on recent transactions in private markets. The method considers how similar companies have been valued and the prices they have been sold for to profit a specific company.

Guideline (Comparative) Public Company Method

The guideline public company method is a way for businesses to determine their value using pricing multiples at which publicly traded equity securities are traded relative to the various earnings or balancesheet parameters of that particular business. The pricing multiples measure how much an investment pays out relative to its worth. It’s developed by dividing comparable stock prices with economic variables like net income or operating cash flow.

The Income Approach

This is the most common approach. It considers the characteristics specific to a particular business, such as its risk and growth prospects.  

There are two different valuation methods under this approach:

Capitalized Earnings Method

The single period capitalization of earnings or capitalized earnings method, estimates a base level for annual revenues and applies a multiplier to them predicated on market returns. This can result in overvalued or depressed prices because it doesn’t consider how quickly things will grow (no exponential growth).

Discounted Future Earnings Method

To determine the value of an agency, you first need to know what its future earnings will be. The discounted future method helps do this by looking at multiple years and predicting how much money they’ll make in those periods based on past performance. To mitigate the risks for the buyer, the annual forecasted earnings are discounted to a present value by using the rate of return.

The Asset-Based Approach  

This is an accounting method for determining the value of a company by subtracting the market value of the company’s assets from the company’s liabilities.   

Insurance brokerages generate value mainly from the assets’ income rather than the assets themselves. But for investors, assets are the only source of the rate of return. That’s why this approach is not the primary indicator of value.  

There are two methods under this approach: 

Adjusted Net Asset Value Method  

This method is a great way to measure and capitalize on the value of your business. It starts with bookkeeping beginnings, converting all assets/liabilities into their market values before accounting for intangible properties like brand name or customer list. 

Book Value Method 

This method purely relies on the historical costs included in the company’s balance sheets. It is most accurate if used right after a transaction when costs represent the fair market value.

Increasing The Value of Your Insurance Agency

When you sell your agency, you of course want to get the best value possible. Here are a few simple ways to maximize profit before selling your business, thereby raising its value.

Work on client retention  

Accumulating new customers is essential, but so is retaining the ones you already have. Retaining customers is great because it costs you nothing, and you won’t have to spend as much money to get new clients from scratch.   

Whether you are just starting or have been in the business for a long time, you can use these tips to work on your client retention:  

  • Start strong. Optimize your onboarding process with all your customers. Help them feel welcome and comfortable from the very beginning. Make sure they feel appreciated and acknowledged from your very first interaction with them. 
  • Personalize your services whenever possible. Let your customers know that you are working to meet their specific insurance needs. Match your products with their requirements.  
  • Try applying automation and user-friendly technology wherever you can. Customers prefer fast and convenient processes for purchasing their insurance policies.  
  • Reward your customers. When they renew their policies, acknowledge them by sending gifts or incentives that they might enjoy.

Build a robust referral system  

This is one of the most important ways to grow your book. Eighty-eight percent of people trust their friends or family with buying a policy, but how do you create an effective referral system?  

Here are a few tips that can come in handy:   

  • Customer service is a crucial element of any company. It’s imperative that you provide fantastic customer service, which will help secure sales and encourage positive online reviews from your clients/customers.  What’s more, customers who have an exceptional experience with you will not shy away from talking about you and recommending your services to their family and friends.  
  • Maintain a good relationship with other agents. If they come across customers who request policies that their firm does not offer, they will remember to recommend yours!  
  • In addition to selling your services, it’s essential that you keep in touch with current clients. Be sure to follow up on any questions or concerns they have or risk losing their business.   
  • Make your products the best they can be. Devote time and effort into providing and tailoring exactly the right policies to make sure a customer’s needs are met or exceeded. When clients see how hard you’ve worked for them, you won’t have any problem getting recommendations. 
  • Don’t forget to reward your customers. Let them know that if they refer to someone who becomes a customer, you’ll give them something in return for their effort and time.

Establish your presence online  

Digital platforms have made it possible to purchase virtually anything online, including insurance policies. Commercial buyers and individuals alike want their transactions done digitally to compare prices on different products or services while handling other business affairs from the comfort of home. The convenience is unbeatable. Establishing your digital presence will help give your business an additional push.  

A digital platform also offers another opportunity for growth in your company. You can enhance your website’s user interface to attract more customers who are comfortable buying through multiple methods and make them feel valued when engaging with your business.

Use social media  

Taking advantage of social media is a great way to stay in touch with your clients and learn about their lives. If they post pictures or updates on Facebook that show off a new car, for example, you can contact them to offer an appropriate car insurance policy.   

Social media is a great way to promote your business too. For this strategy to be effective, it’s essential that you keep up to date on all of the most popular platforms such as Facebook, Instagram and Twitter, where people often look for local businesses. You can present yourself on social media with an accessible contact information page so potential customers can easily reach you with questions. 

Try cross-selling

Cross-selling means selling additional products to your existing clients based on their needs. It’s a great way to boost your profits through your current customer base. If you have all your clients’ information on your Customer Relationship Management (CRM) software, cross-selling will be a lot simpler. It makes it easy to study the available information and look for coverage gaps. If you don’t have CRM, you can try asking relevant questions during a current sale to understand your clients’ needs. Providing information about all the policies you offer (without being pushy) can also help you cross-sell. Cross-selling will add policies to your business book and increase profits.

Find your Unique Selling Proposition (USP) 

Identify what makes you unique and how it sets you apart from your competition. Why should prospects choose you over any other agency they might be considering? Maybe your resources make you an expert for a particular niche market such as commercial insurance policies. Perhaps you have access to or knowledge of certain types of assets or events which help attract clients. To not just possess these strengths but to also recognize them fully, use your USP to improve your communication strategies and marketing campaigns.

FAQ

What is an insurance book of business?  

An insurance book of business refers to all the insurance policies that the agency or company has written. These books are beneficial when companies need to go through their customer data, identify which areas generate more sales, evaluate their sales decisions, etc.

What are the modes of payment while selling an insurance agency 

If you are set on selling your agency, here are three ways you can get paid. 

Lump-Sum Method  

The Lump Sum Method is the way to go if you want to close the deal quickly and get all your money at once in a one-time payment from the buyer.  

Over-Time Method  

Your buyer pays a certain amount upfront and gives you a note for the rest. This is slightly complicated, but it does take some pressure from the buyer. 

You can either continue to receive payments regularly or sell your note to any company specializing in note purchases.  

Earn-Out Method   

This method can be risky because it only involves paying you 60%-80% at once and the remaining 40%-20% as your former agency makes money. If you are not fully confident in your firm’s ability to generate profit in the future after someone else has purchased it, you should probably consider another option.

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