Large Insurance Agency Valuation Done Right: Expert Advice

Large insurance agency valuation must be done right. When you’re the owner of a large insurance agency and you’re interested in selling, you must have a clear understanding of valuation. This is a crucial concept because selling for the right price could bring you financial stability for a very long time. 

We’re going to discuss some important topics:

  • What you should think about when you want to sell your insurance agency
  • How succession and valuation planning matter in agency valuation
  • Terms you should know related to large insurance agency valuation
  • Book of business valuation 
  • Other important considerations

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What Should Agency Owners Consider When Selling?

When you’re thinking about selling or getting ready to sell your large agency, there are some things you need to consider. Now, one of the things that really seems to be a problem for insurance agents who want to sell is this: they don’t look at it from the buyer's position. 

Why would you, as the seller, want to look at this situation from the other perspective? Because it helps you better understand what they’re looking for, including their rate of return. Understanding their position will help you improve your position as a seller. Improving your position as a seller means that you most likely have the potential to make more money on the sale. 

In addition to rethinking how you look at selling your agency, you should also consider these tips:

  • Know how to correctly value your large agency (which we will talk more about, of course).
  • Don’t pay yourself too much in salary or commission. This is a massive mistake that many agency owners make.
  • If you have an agency manager who you pay a salary, you shouldn’t take a salary yourself because you’re double-dipping for those management activities the agency manager does.

Focusing on these things can help raise your agency’s value. And these are things that a buyer would consider because it impacts that value and their return on investment.

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Agency Valuation: How Succession and Perpetuation Planning Matter

Agency valuation can be a confusing concept for agency owners. And some agency owners think they understand agency valuation but don’t quite get it, especially when succession and valuation planning are involved. 

So, what is the difference between succession and perpetuation planning? Perpetuation planning involves you as an agency owner trying to continue the agency internally. Maybe you hope you can continue it with an independent agent within your agency or a family member taking over. Succession planning involves you selling the business to another agency owner altogether. 

Your valuation should not be the determining factor of if you’re involved in your succession or perpetuation planning. And it could if you’re not careful. You may purposefully ignore an accurate agency valuation if you're considering succession to give them a break. Keep in mind that you’re impacting your own future financial stability by doing this because you won’t get what your agency is actually worth. 

If you don’t address these issues to maximize your agency value for the buyer, you won’t make as much as you think you will. Simply put, you aren’t giving the buyer the return they want on a significant investment.

Large Insurance Agency Valuation Terms an Insurance Agent Should Know

Before getting your large insurance agency valuation performed, even if you attempt to do it yourself, there are some terms that you should understand. Honestly, since you’re an insurance provider that serves your clients, you should know some of these already. If you don’t, that’s a bit of an issue because it impacts your net worth. 

Let’s start with commission. You should already know what this is. I hope you do. A commission is a percentage paid on a sale. If you use an agent to help you sell your agency, they will make a commission. 

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Then, there’s EBITDA. Not everyone knows what this is, and that’s fine. This means earnings before interest, taxes, depreciation, and amortization. It measures your insurance agency’s financial performance. I’ve said it twice, and I’ll say it again: making sure that you are paying yourself appropriately (meaning you aren’t overpaying yourself) is very important. I’ve written more extensively on this in a blog post where I discuss selling an agency. 

There are two more essential terms for large insurance agency valuations you should know. So, let’s talk about them briefly.

EBITDA Multiple

EBITA multiple means a financial ratio that compares your agency’s return on investment. It’s a ratio. Sometimes, it is preferred, and sometimes it isn’t. EBITDA is sometimes preferred over the multiple because it normalizes the differences found in capital structure, taxation, and certain types of accounting.

Commission Multiple

A commission multiple changes the commission rate for various deals. This is more commonly known as tiered commission. It may be based on a quota for insurance agents 

Book of Business Valuation for Agency Owners

What about a book of business valuation for insurance companies? How does that compare to large insurance agency valuation? Well, briefly, large agency valuation involves determining the worth of your entire business to help buyers and sellers get the best return on invested money. So, you sell your entire business operation after getting the valuation, finding the right buyer, and going through the legal process of making the sale. 

With a book of business valuation, this only involves your book of business, not your entire insurance agency. Once it is evaluated, you can find the right agency owner interested in buying just the book of business. You can continue to build a new book of business, or you could even go out and buy a book of business from another agency owner. 

The key to keep in mind here is a different valuation method for a book of business and an insurance agency, regardless of the size.

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Get More Expert Advice about Being an Independent Agent

There’s a lot to know about being an independent agent and an independent agency owner. You need expert advice if you want to be the best. Don’t forget to sign up for my email list so that you get the best possible experience and the latest advice. And if you have questions? Drop me an email. I’d love to hear from you.

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