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Securing an accurate valuation is an important step for those who are looking to buy, sell or merge an insurance agency. Without an accurate valuation, you’ll be leaving money on the table during the negotiation and transaction processes – but how do you best go about measuring the value of your business? Valuations are complex, and different organizations use varying methodologies to conduct them, resulting in a wide range of possible values. In this post, we’ll take a look at how to value an insurance agency, and why you definitely want to consider partnering with a professional if you need one.

Reasons Why You Might Need an Independent Insurance Agency Valuation

There are many reasons why you might need to establish an estimate of the value of your insurance agency.

Selling Your Insurance Agency: This is the most common reason owners seek out a valuation. If you don’t know how much your agency is worth, it will be nearly impossible to go through the sales process, navigate offers from potential buyers, and eventually negotiate for a fair price without leaving money on the table. 

Ownership Transfer: When they retire, some owners decide to transfer ownership of their agency to a family member. Divorce or the death of an owner is two other common reasons for ownership transference of an insurance agency. 

Evaluating Your Business’s Performance: Some owners seek a valuation simply because they want to know how their business is truly performing. 

How to Value an Agency in the Insurance Industry

There are many ways to establish the value of your insurance agency. 

“Quick and Dirty” Approach: If you’re looking for a rough estimate, the industry standard is to take the revenue from your earned commission and multiply it by 1.5. This is commonly referred to as the “quick and dirty” method, and as that name would imply, is a wildly inaccurate way to determine the value of your agency. 

EBITDA Approach: The EBITDA valuation method works on similar principles in that you apply a multiplier to determine an average value. In this method, you would multiply your EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) by 6x–9x to estimate the value of your insurance agency. Although this valuation method takes additional factors into account, it still provides a wide margin for error in determining the true worth of your insurance agency. 

Market-Based/Fair Market Value Approach: Another way to evaluate your agency’s worth is by taking a market-based approach. Similar to when a real estate appraiser looks at what comparable properties in a neighborhood have sold for to determine the value of a home, this valuation approach looks at what similar insurance agencies have sold for on the market to determine what a reasonable sale price might be for your agency. However, your insurance agency will never be exactly the same as another, meaning this method once again has a certain margin of error to it.

Asset-Based Approach: Another approach determines value by subtracting an agency’s liabilities from its assets. Assets can be tangible, physical things like real estate property and office equipment, but often assets are intangibles that are hard to put a price on. To account for those intangibles, a valuator might “convert” those intangible assets into values. 

Other Factors to Consider When Conducting An Insurance Business Valuation

While revenue, assets, and liabilities are all important in determining the value of an insurance agency, a truly good valuation also takes risk factors into consideration to judge the future profitability of a business. Some risk factors might include competition and opportunity for growth in the area where your agency is located; the age of your employees; customer demographics; and much, much more.

Determine the Worth of Your Agency Today

If there is one thing you should take away from exploring different valuation methods it’s that the valuation process is incredibly nuanced and complex. To determine the true value of your insurance agency, you’ll want to factor in something from all of the above methods. Income and assets are key, but risk factors can also determine future earnings and help with growth projections. If you are selling your insurance agency, you will also want to know what other similar agencies are going for, too, to better set your expectations going into the sales and negotiation process. So how do you combine all these methods into one to determine the true value of your agency? The answer: Partner with a valuation professional.

At Energia Consulting Partners, our team has decades of experience in conducting valuations. We have spent years honing our valuation process, which has helped us to accurately determine agency values and close millions of dollars in transactions. If you are looking to sell or restructure your insurance agency – or need a valuation for other purposes – our experts are here to help. Visit our Valuations page to learn more and get in contact with one of our professionals to start the valuation process today.