Buyers and sellers of insurance agencies for sale in Dallas/Fort Worth, TX, face this critical question: how do I value a book of business? Luckily, we’ve pulled together the two primary methods used for valuation – a multiplier of revenue and a multiplier of profits or EBITDA.
Primary Methods to Value a Book of Business
Multiple of Revenue
Multiple of revenue is equivalent to the insurance agency’s selling price divided by the company’s revenue for the past 12 months or the prior fiscal year. Precedent transaction multiples or comparable public companies are used to obtain the appropriate revenue multiple to apply to an insurance agency.
As the name implies, this method is essentially where the value that was agreed upon is expressed as a percentage of revenue. Since this multiplier is the easiest to explain and understand, experienced buyers and sellers often use it. Furthermore, those who acquire a book of business as a specific asset tend to use this valuation method more than those looking to purchase an entire operation.
Multiple of Profits
Also known as Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA), this valuation method uses the multiplier based on the agency’s operating cash flow or book of business. EBITDA can be helpful to those who are looking to acquire a division of an enterprise, an entire operation, or a larger and more complex book of business.
Since this method requires a great deal of effort, analysis, and due diligence, it offers more accuracy and information than the multiplier of revenue. Moreover, EBITDA measures the probability that buyers can use it to ensure a good deal.
Are You Looking to Purchase Insurance Agencies for Sale in Dallas/Fort Worth, TX?
At Energia Consulting Partners LLC, we offer a well-established approach to the insurance agency sales process. Contact us today to learn more about what we can do for you.