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?
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.
Direct Comparison: Revenue vs. EBITDA
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.
Earnout
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].
- Fee Income may include; Broker Fees, Additional Service Fees, Consulting Fees, and other Fee-for-Service Revenues.
- Non-Renewing Commission Revenue may include; Life Insurance Commissions, First Year Commission Bonuses, etc.
- 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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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
President
Matthew.Davis@gdiins.com