The current average valuation for large public insurance brokers is roughly 10 times EBITDA, as seen in the graph. However, the range is wide, ranging from about 7 times EBITDA to over 14 times EBITDA.
How do you value a brokerage company?
Given the current state of the real estate market, real estate brokerage valuations may be on the rise. Many business owners want to know how much their company is worth. You should know the answer, especially if you plan to sell the company.
Real estate brokerages have a lot in common with professional practices when it comes to valuation:
- The ability of competent real estate agents and brokers to generate revenue is critical.
- The importance of business goodwill, particularly for established organizations, cannot be overstated. The company’s key people own at least a portion of the company’s goodwill. This could make the transition to the new brokerage owners more difficult.
- The requirement for a broker license creates a barrier to entry, decreasing the pool of potential company purchasers.
Real estate company valuation approaches and methods best practice
- Asset – by keeping track of the assets and liabilities of the real estate agency.
Asset-based approaches are rarely used in real estate agency appraisals. That’s because the company’s fixed assets don’t tell the whole story. You’re talking about standard office furniture and fixtures, as well as computer hardware and software. It’s simple to calculate the individual asset values. It is, however, significantly more difficult to value the company’s crown jewels, such as market expertise, new listing generation, and so on.
Blue sky or business goodwill? Find out!
Blue sky may appear to be a derogatory term. A successful real estate brokerage, on the other hand, should expect goodwill. If that’s the case, it’s time to crunch the numbers on Capitalized Excess Earnings. It can be used to determine the value of a company’s goodwill based on so-called excess earnings. Mind you, these aren’t huge sums of money. Those over and beyond a reasonable return on the company’s tangible assets.
Valuation multiples
These can be found by looking at recent real estate agency sales. Business sale comps, like comparable property sales, provide a tool to determine the value of a real estate firm.
What do insurance brokerages sell for?
Depending on state restrictions, most commissions range between 2% and 8% of premiums. Health insurance, homeowner’s insurance, accident insurance, life insurance, and annuities are all sold through brokers.
What is a good EBITDA for an insurance agency?
A few publications published by agency valuation experts have questioned the usage of EBITDA multiples in values. It might be claimed that EBITDA isn’t a true cash flow indicator. It may be claimed that such a form of valuing ignores an agency’s intrinsic factors. The difficulty with their reasoning is this: Buyers and their financiers talk about EBITDA multiples, and they are the only two groups that matter when trying to figure out how much an agency is worth.
Earnings Before Interest, (Income) Taxes, Depreciation, and Amortization (EBITDA) is the acronym for earnings before interest, (Income) Taxes, Depreciation, and Amortization for mid-sized to bigger agencies.
Larger agencies usually have solid financials and the owners are paid market rates, so there isn’t much fluff in the income statement.
However, for smaller agencies, particularly those with a single owner, the EBITDA calculation requires more investigation and is referred to as “adjusted EBITDA” because the owner’s personal expenses are often removed through a series of adjustments.
This is referred to as “undoing the owner’s tax approach,” and the tax strategy can be quite complex at times.
The following is an example of a possible analysis:
It’s vital to realize that EBITDA and the owner’s discretionary earnings are not the same thing.
This is a common source of miscommunication and conflict between agency owners and buyers.
I’ve even seen trained appraisers use the incorrect earnings and earnings multiple (e.g., utilizing an EBITDA multiple on DE or a P/E multiple on EBITDA) in their values.
The purpose is to estimate the buyer’s pre-debt, pre-tax earnings after all expenses have been paid, including the cost of replacing or keeping the owner.
Depending on what the owner(s) perform in the agency, the replacement cost could be similar to a manager’s salary, a percentage of the owner’s book of business if they need to transfer accounts to a producer, or a combination of both.
In addition, when dealing with a specific buyer, the EBITDA calculation is referred to as “pro forma EBITDA.”
The buyer is unlikely to offer you their synergies, which could include increased income from better carrier contracts or cost savings from job redundancies.
Many larger buyers, on the other hand, will want to cushion the EBITDA with corporate overhead expenses, typically a few percentage points on revenue, will need to raise employee compensation to match their corporate level, and will include a compensation package for the owner(s) to keep them on-board for a negotiated period.
The end result is a pro forma EBITDA figure that is likely to be lower than the owner’s estimate, perhaps by 10-15% of revenue.
So, in my previous example, if the owner’s earnings are $509,639, they may be tempted to value the agency at 6 times earnings, or around $3 million, because they were informed that was the prevailing rate.
With $150,000 in administrative costs, a buyer may arrive at a pro forma EBITDA of $353,639.
The agency is worth $2.1 million when valued at 6 times, which is a 30% difference from the owner’s estimate.
This doesn’t happen very often, but it does.
Because capital investment in an agency, including depreciation expense, is negligible, the inverse of an EBITDA multiple is the pre-tax, pre-debt return on investment.
A five-times EBITDA valuation, for example, offers a 20% projected return on investment (i.e. 1/5).
The market competitiveness, perceived risk of revenue and profitability, which has several variables of its own, cost and availability of capital, and potential synergies all influence the multiple a buyer is ready to pay.
The market value of an agency as a function of pro forma EBITDA multiple has historically been a sliding scale that grows with the agency’s size.
A small insurance agency is typically valued at 4-6 times pro forma EBITDA, a mid-sized agency at 6-8 times pro forma EBITDA, and a large agency at 8-10 times pro forma EBITDA. However, in today’s market, high values are nearly the norm.
I’ve mentioned before that valuations are nearing historic highs.
Because the buyer pool has swelled in recent years, owing in large part to the capital markets, competition is fierce across the board (i.e. low interest rates and low returns on alternative investments).
Agencies that could have had offers at 6-7 times EBITDA in the past are now getting offers at 8-9 times.
1) The percentage of the value beyond the standard amount is predicated on a 2-3-year earn-out (i.e. it is not guaranteed). An earn-out, to be clear, is a payment dependent on future performance.
2) Growth targets may be included in the earn-out; what appears to be 8-9 times on paper may actually be 7-8 times the agency’s EBITDA at the end of the earn-out.
3) The earn-out could include a claw-back clause, in which the price is reduced if the target EBITDA is not met (for example, $7 every $1 of EBITDA failure).
4) The agency owner is rewarded for locating fold-in acquisitions, which are typically at a lower multiple, and may receive credit on the acquisitions’ earn-out.
5) Revenue and expense synergies are realized by the buyer as a result of the acquisition that are not included in the pro forma.
6) The buyer’s valuation multiple is increasing each year, which is significant to private-equity backed brokers who recapitalize PE partners every 4-6 years.
Using a multiple of pro forma EBITDA to value an insurance agency is a viable technique because practically every buyer does so.
The key is to comprehend how EBITDA is computed as well as the payment structure on a potential acquisition price.
P.S. In the headline image, I did utilize a heart.
Please don’t hold it against me in any way.
How do you value a life insurance company?
The Embedded Value of a Life Insurance Company is a measure of its worth. This is a crucial indicator since it indicates the predicted profitability from current underwritten policies as well as current net worth.
The sum of adjusted net worth (ANW) and discounted value of earnings from in-force policies yields EV (VIF).
How do you value a broker dealer?
The business worth of an RIA/Broker Dealer is generally calculated using a rough rule of thumb of two times revenues. Rules of thumb, on the other hand, can be complicated and are frequently misapplied.
Consider the following scenario: RIA “A” and RIA “B” both have $5 million in annual revenue based on the most recent TTM data (Twelve Trailing Months).
The average age of RIA clients, on the other hand, is 45 years old “A” is 70, and during the last few years, there has been a 5% yearly client attrition rate. Furthermore, RIA “A” has a far greater rent expense and overall overhead, and the owner can only afford to pay himself $150,000 from the business, leaving him with nothing. Finally, the assets under management (AUM) are divided throughout a large number of clients, with a typical portfolio size of $400,000.
RIA is an acronym for “Research Institute of “B” has been growing clients at a rate of 5% per year for several years, the average age of the client base is 49, and the owner earns $300,000 per year with cash left over to reinvest in the company.
In addition, each client’s average AUM is $1,000,000.
So, which RIA would you like to buy, and should they both be valued at the same amount because their revenues are equal?
The majority of people will agree that RIA is a good idea “B” would be far more appealing to a potential buyer, but a simple multiple of revenues does not accurately reflect the true value of a business.
A revenue multiple would equalize the worth of both enterprises.
Unrealistic assumptions about the value of the business are one of the most common blunders we see from sellers. Another common blunder we see is when business owners fail to take steps to increase the worth of their company so that they may get the best price in the market. The following are some actions that investment advisers can take to increase the value of their RIA/Broker Dealer while lowering the risk for a possible buyer.
- Consider altering the name of your firm to something more general if it is named after you. This may appear to be a harsh step, but if taken well ahead of a potential exit, it will make the company more appealing to outside purchasers.
- Is it possible for the company to function without you for an extended length of time? If you respond no, the amount of transferable goodwill in your company falls, making your company less appealing. Begin making changes right once to reduce the company’s reliance on you. Invest in your personnel and teach them to be knowledgeable advisors to your clients. Ensure that your clients have various points of contact inside the firm in addition to their principal advisor. It’s critical for a prospective buyer to see these personnel as revenue providers and supporters rather than as overhead.
- If the average age of your client base has been continuously rising over the last several years, make an effort to attract younger clients. An outside acquirer will be less interested in a firm with largely retired clientele who will begin drawing down on assets.
- Return free cash flow to the company. You are not maximizing the worth of your firm if you keep all of the profits for yourself instead of reinvesting in personnel and infrastructure.
- Work hard to keep the company growing. If a potential buyer notices a decline in revenue, you’re increasing the risk of the business and lowering the price multiple.
- Begin the selling process sooner rather than later, pledging to stay with the company for a longer period of time to ensure a smooth transition and lower the risk for the buyer. If an adviser waits too long and can only commit to a transition time of 6 months or less for to personal reasons, the buyer runs the risk of clients not being adequately transitioned and leaving when the primary advisor retires.
Working with an experienced appraiser rather than relying on a simple rule of thumb to evaluate your RIA/Broker Dealer is just as important as working with a business advisor or consultant to enhance the worth of your firm. An professional appraiser will conduct a more thorough investigation, taking into account at a minimum both a market and an income approach. After normalizing earnings, a market method may consider not only multiples of revenue, but also multiples of earnings. Overhead expenses are carefully benchmarked, and cash flows are normalized to remove any non-operating or one-time expenses. Adjustments to the owner’s pay are another frequent normalizing adjustment. In an income method, a valuation analyst calculates a discount rate based on the perceived riskiness of future cash flow streams and estimates the fair market value of a company using either a capitalization of earnings or a discounted cash flow analysis.
It’s natural to want to save money wherever possible, and employing a simple revenue multiple is a simple and straightforward way to do it. Take the time up front to optimize the worth of your firm and acquire a good valuation if you are truly committed to getting the most out of a sale. Otherwise, you risk having unreasonable expectations and investing a lot of time on a deal that doesn’t go through. Also, make sure your exit is well-planned in advance so you can take the necessary procedures to optimize its worth.
Jeff Plank, MBA, CVA, CEPA, is the Director of Consulting Services at HLB GrossCollins, a full-service Certified Public Accounting firm. He specializes in the valuation of businesses and business interests for financial reporting purposes, as well as transaction, trust, and estate problems. Jeff is also a Certified Exit Planning Advisor (CEPA) who helps business owners transfer to optimize the value of their company. Jeff may be reached at
How are real estate agencies valued?
The Income Approach is the most typical way for valuing a residential real estate services company, such as real estate, mortgage, title, and escrow services. It’s also known as the EBITDA method (earnings before interest, taxes, depreciation, and amortization).
Do insurance brokers have to disclose their commission?
All insurance brokers are required to publish the “Nature (kind of remuneration i.e. commission) and Basis (source of remuneration i.e. insurer)” of their remuneration, but they are exempt from disclosing the actual earning figure in monetary terms.
The FCA suggested many compliance-friendly wordings in the Consultation Paper. We’ve listed them here for your convenience:
On your behalf, we negotiate the insurance with the insurer. You don’t have to pay us anything to accomplish this. The insurer pays us a commission that is a percentage of the total annual premium.
We charge a £50 fee when you take up a policy with us. In addition, 14 days after the insurance begins, the insurer pays us a share of the annual premium (the date can be amended as needed).
The insurer gives us a percentage fee from the total premium when we sell you a policy. The insurer also gives us a bonus if the type of coverage we sell meets certain profit benchmarks.
To handle claims on their behalf, the insurer pays us a set fee per policy. The insurer assesses the earnings on the insurance we administer every month. They also pay us a share of this if it exceeds a specific level.
Any third-party premium finance provider we may engage to fund your insurance premiums will pay us a commission represented as a percentage of the loan issued to you.
Naturally, you must still disclose all fees “up front” and in addition, as you do currently.
As a result, we propose utilizing terminology that is similar to the above, but customized as appropriate. Include a declaration, as you do currently, that the customer has the right to inquire for details on all of your revenues at any time (remember this will include profit shares, premium finance commission, overrides and so on).
The text should be included in all quotations, new business and renewal letters, and reports once you’ve agreed on the right structure. Simply including wordings in any client TOBA will not be compliant.
How do I sell my insurance products?
An insurance adviser is a person who works for a certain insurance company and contacts with customers to assist them sell insurance products, file claims, and more. To obtain your license and become an advisor, you must complete a training program and pass an exam set forth by the IRDAI.
Is buying an insurance agency a good investment?
Purchasing an insurance agency is a significant financial commitment. It’s a calculated financial risk that could pay off in the long run. However, it’s a good idea to budget for both the original purchase and continuing overhead costs. Always ensure that your business is lucrative.