VALUATION:  How do I Value My Book of Business?

One of the most critical, if not THE most critical question both buyers and sellers face is how to value the agency (or book of business if buying only the book).

  • What are the basics of Agency/Book Valuation?
  • What should I look for to find the value of my book of business?
  • How can a Seller alleviate the concerns of a Buyer?
  • How can a Buyer alleviate the concerns of a Seller?

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Methods To Value My Book of Business

There are typically two primary methods to deriving the value of an agency / book of business; (1) a multiplier of revenue, or (2) a multiplier of profits (a.k.a. “EBITDA”)[1].  Similar to composite rating of various insurance products, both multipliers of Revenue and Profits can be converted to a function of the other. 

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 also an easier method to deploy when dealing with less sophisticated/experienced buyers and sellers as it is the easiest 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 or book of business.  This method is commonly used when acquiring an entire operation, functioning component/division of an enterprise (i.e. the entire personal lines book of another agency), or a larger book of business that carriers with it a sizeable amount of expense and/or complexity. 

Although this method requires much, 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.

[1] EBITDA:  Earnings Before Interest, Taxes, Depreciation or Amortization. 

value of my book of business

Direct Comparison:  Revenue vs. EBITDA

value of my book of business

Time Value Concerns

Most transactions contain some form of “backend” portion to the transaction in terms of an Earnout, a Royalty, etc., or a combination of multiple.


An Earnout is where the seller is paid a portion of their payment in arrears; many times, as a Percentage of Renewals[1].  This enables the Buyer to protect against attrition as the Seller is incentivized to aid in the retention of the business.  Further it allows the Buyer the opportunity to terminate futures payments due to conflict/breach of contract should the Seller break from the agreed upon terms of the sale.  There are downsides to an earnout for both the Buyer and the Seller.  The downside for the Seller is that their payout is tied to the success/failure of the Buyer, and the downside for the Buyer is the continued expense following the close of the sale.

Non-Recurring Income

It is common for Buyers to discount Non-Recurring income when deriving the value of an agency or book of business – such discount will be reflected in the overall multiplier used as the offer to buy, either as a multiplier of Revenue or EBITDA.  Common non-recurring income includes; (1) Fees, (2) Non-Renewing Commission Revenue, and (3) Contingency Income[2]

  1. Fee Income may include; Broker Fees, Additional Service Fees, Consulting Fees, and other Fee-for-Service Revenues. 
  2. Non-Renewing Commission Revenue may include; Life Insurance Commissions, First Year Commission Bonuses, etc.
  3. Contingency Income may include; Profit Sharing, Growth Bonuses, Agency Loan Forgiveness etc.

[1] Percentage of Renewals:  An Earnout method where the seller is paid a percentage of each renewal received by the buyer for an agreed upon period of time.

[2] Contingency Income:  Includes Profit Sharing, Performance Bonuses, Growth Bonuses and other incentives.

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EQUITY:  Do you want to be RICH or Do you want to be KING? 

When becoming an agency principal or if you happen to already be one, you need to know what you goal(s) are and where you want to be.  And by asking yourself what you would rather be – Rich or King? – you can instantly get some clarity on the subject.  Look at the following scenarios.

Would you rather have Option #1 or Option #2?

value of my book of business

Most people would say option #2 as they would believe it to be the richer of the two options – which it is today – and they wouldn’t have any other owners to deal with.  However, if Option #1 can only grow at 10% per year for 5 years while Option #2 can benefit from economies of scale and can grow at 15% per year for the same period, here’s what the equity would look like:

value of my book of business

By looking at the figures, the Owner in Option #1 would end up owning 100% of $1.61M as compared to the Owner in Option #2 owning 50% of $3.52M (which would equate to 100% of $1.76M). 

If we extrapolate the figures for five more years (total of 10 years) and the growth rates remain 10% and 15% respectively, the Owner in Option #1 would have 100% ownership of an agency with $2.59M in revenue whereas the Owner in Option #2 would have 50% ownership of an agency with $7.08M in revenue (which would equate to 100% of $3.54M) – a difference of nearly $1M or 36% in equity value over 10 years.

value of my book of business

The answer to the question of whether it is better to be RICH or to be KING is truly based on the individual.  For some, working as part of a team is a necessity for them to maintain their energy and enthusiasm to continue to promote the business.  Whereas for many others being part of a team hinders the organization’s growth, especially when the individual does not like being a team player.  Neither option is right and neither is wrong, except for what is best for each individual in their own circumstance.

A Message From Our President

I am personally a product of a family agency and an avid student of the industry. What better industry is there other than insurance? I’ll tell you that there isn’t one. Here’s a link to my bio in case you want to look me up – Matt’s Bio.

Work with a Professional

GDI Insurance Agency, Inc. has been in business for nearly 30 years and have bought, sold and merged with various entities for over 20 years.  We pride ourselves on providing accurate and honest opinions to our friends and partners and invite anyone looking to sell in the states of California, Arizona, Nevada, and Oregon to reach out to us for a consultation.

For a Confidential and Professional Conversation

Contact Matthew Davis to discuss Agency Perpetuation in detail. Matthew Davis, MBA, CPCU, AAI