Anyone who’s purchasing an insurance agency can benefit from knowing how to project cash flow from an acquisition. Working with a professional is equally as important. At Energia Consulting Partners, we are here for you every step of the way.
Steps in Projecting Cash Flow After an Agency Acquisition
STEP 1: Create a Pro Forma Income Statement
When it comes to business valuation, you should line up the agency’s income and expenses to get a clear snapshot of a three to five-year trend. Building a pro forma income statement off a recent TTM (trailing 12-month) income statement helps you gauge if the income and expenses are reasonable on the pro forma based on past trends.
Once you’ve done this, you can easily make adjustments that are based on realistic income and expense projections and post-close changes.
STEP 2: Calculate Your Annual Debt Service
You can use Excel to calculate your annual debt service. Simply enter the formula:
where ‘a’ is the annual interest rate
‘b’ refers to the number of years the loan is amortized
‘c’ is the amount that was borrowed
You’ll have to add the numbers together if you have more than a single loan, including one note with a traditional banking institution and another one with the seller. However, if you’re borrowing money from a lender, you should factor in at least one to two percent of the loan amount as further closing costs.
STEP 3: Make an Estimate of the Cash Flow After Debt and Taxes
Did you know that most buyers don’t even think about income taxes? This can become a huge problem if you have tighter cash flow on shorter-term financing. Income taxes have always been an important issue with the IRS that’s why they instruct taxpayers to write off their payments’ interest portion on a yearly basis.
Additionally, the intangible assets will also have to be amortized for a period of over 15 years. These assets make up most of the purchase price allocation for an acquisition of an insurance agency. You won’t want to pay income tax on more income than your insurance business is actually making.
Planning on Purchasing an Insurance Agency?
If you’re looking to buy an insurance agency, Energia Consulting Partners can assist you with each step of the buying process. Contact us now to speak with a consultant.