While selling may seem like a good option, you won’t get the valuation you want if your agency isn’t growing.
The last five years have seen an explosion in the value of Property & Casualty insurance agencies. Much of this notable boost in valuation is due to private equity firms, which have become aware of the financial value associated with those businesses.
Engaging in what they often call a “roll-up strategy,” those PE firms buy up smaller agencies and build larger agencies that have the benefit of scale, skill, and capital.
The reliable nature of P&C insurance commissions provides a solid basis for the ability to finance these acquisitions.
This environment around the valuation of independent insurance agencies has created a bonanza for longtime agency owners, who continue to see increased competition to buy their businesses. Yet not all of them have received the valuations they thought they would – and independent agency principals have become acutely aware of the one key lever in achieving high valuations: demonstrable growth.
Those buying independent insurance agencies value them as a function of revenue, or EBITDA (earnings before interest, taxes, depreciation, and amortization), and the multiple that appropriately reflects their perceived value. As a result, any agency principal looking to maximize the value of his or her family’s largest asset will need to demonstrate high levels of growth.
How much can Renaissance help your agency grow? Calculate your agency’s projected cumulative earnings and valuation here: Calculate Your Growth Potential
The multiple – which helps determine the agency’s ultimate value – is also driven by growth.
An agency growing at 7% annually will get a higher multiple than an agency growing at 2% annually. An agency that has $3 million of annual revenue will be valued at a higher multiple than an agency with $1 million of revenue – and an agency with a 35% profit margin will receive a higher multiple than an agency with a 25% profit margin.
It’s important to recognize that the agency principal is in full control of enhancing the multiple applied during their agency’s evaluation – and driving growth is the key to optimizing that assessment.
An agency with $10 million in premium and a 3% growth rate will have approximately $13.5 million in premium in 10 years. That company will be valued at 9 to 10 times EBITDA, and will likely have a value of approximately $5 million.
That same independent agency, if it grew at 7% per annum over the 10-year time period, would have $20 million in premium at the end of that 10 years and would likely have an 11 to 12 times multiple of EBITDA, being worth approximately $12.5 million.
The difference between 3% growth and 7% growth over a 10-year period is 2.5 times the value of that agency.
If you want to start more effectively driving your premium growth, making these 7 things part of your routine is the best place to start. Always bear in mind that if you can’t show that your agency is growing, you’ll get paid a lot less for it in a sale than you would otherwise.