Insurance Agency Valuation Calculators

When I am out speaking to agency owners, I hear all kinds of things from them when it comes to what they think about the value of their agency.  I am usually not surprised by some of the things I hear about as to how they arrived at the value.

Recently I visited a potential client and they told me they had used an “Agency Valuation Calculator” to get to the value of their agency.  First, that did surprise me because they are aware that Sukay & Associates offers Free Insurance Agency Valuations for qualified agencies. My second thought was there is no way a calculator can take into account all of the things that can cause distortions in the value of an agency even if they appear very similar in size and scope.

There are several factors to consider when trying to determine the value of an insurance agency and many options to turn to when trying to determine the value of your firm. Many agency owners look to establish a baseline by using old school methods such as multiples of revenue. Many agency owners are also educated and have gone to seminars where multiples of EBITDA are tossed out but not explained. While this can provide you with some general insight, it is usually a case where a little information can be dangerous. These revenue multiples and EBITDA multiples, without the detail of what they mean, can be extremely confusing but more importantly, buyers can be using the same multiple of revenue and the same multiple of EBITDA but the total consideration can be very different.

Multiple Distortion

The purchase price can be very different with each buyer. Even the multiple they apply can vary.  One very important part of the process is understanding the detailed description of the terms Revenue and EBITDA, and more importantly what other charges they might apply before applying a multiple. A simple revenue example is – does the buyer include contingencies and bonuses in the revenue before the multiple is applied?  It could also be the case that they are applied for the initial purchase price but not for the earn-out. To most agencies, this could be a difference of 10% to 12%of their revenue.  The EBITDA is really a challenge because this can be changed by doing several things before the multiple is applied.  One example is that many of the buyers apply an overhead charge.  This charge varies from buyer to buyer and needs to be understood and compared to other buyers before the multiple is applied because this can cause drastic variations in the total purchase price. Buyers could also have policies about other expenses that could cause the EBITDA to be reduced before the multiple is applied. This is a very strong reason that when agency owners are talking to their peers and using the term “Multiple” it creates distortions in how they value their agencies.

Fair Market Value

The fair market value of the agency will be based on its overall financial health. This includes its current portfolio of accounts, the reputation and experience of the agents, and the potential for growth in revenue over the next few years. All of the company’s tangible assets are also included in the equation and provides a fair estimation of the market value of the agency if it were to be sold or transferred. It is also important to note that there are different ways to value agencies for internal and external perpetuations, but that is a topic for another day.  An experienced consultant can give you an idea of the Fair Market Value, however, the only way to really know the fair market value is to test the market place.

Talk to an Experienced Consultant

If you want an accurate estimation of the value of your agency the speak to insurance agency merger & acquisition expert. An experienced consultant that is active in the market place will provide you with a fair estimation and can take into account all of the nuances of your business and the potential for success you may have in the future. If you really want to understand the strengths and weaknesses of your agency and how they affect its overall value, talk to Sukay & Associates. We are able to factor in many of the indicators that are often overlooked and sometimes misinterpreted. Plus, we offer free insurance agency valuations as a service to agencies who qualify.