How to Value an Insurance Brokerage
Insurance brokerages play an important role in the United State’s economy. These businesses sell insurance policies and annuities to businesses, individuals, and the government. According to IBIS World, there are over 410,000 insurance brokerages in the United States. This industry has retained steady demand for several years. We can expect this trend to continue moving forward. As such, it may be an ideal time to buy, expand, or sell an insurance brokerage. Whether you are entering or exiting the insurance industry, it is essential to understand how to value an insurance brokerage. Knowing the value of an insurance brokerage can help you make informed business decisions and maximize your success.
The best way to learn how to value an insurance brokerage is to receive a business valuation. This can help you understand the strengths and weaknesses of an insurance brokerage. As a professional business appraiser, Peak Business Valuation is here to help you! We frequently work with individuals looking to buy or sell an insurance brokerage. Peak Business Valuation is happy to provide you with a business valuation. We can also answer any questions you may have about how to value an insurance brokerage. Start today by scheduling a free consultation with Peak below!
How to Value an Insurance Brokerage
There are various valuation approaches for valuing an insurance brokerage. Peak Business Valuation often uses the market approach and/or the income approach as part of the valuation process. Business appraisers use their expertise to determine which method is most effective for your insurance brokerage. This can involve using a combination of valuation approaches.
Valuing an Insurance Brokerage Using the Market Approach
Often, business appraisers at Peak rely on the market approach to value an insurance brokerage. To understand the market approach, consider the approach real estate appraisers use to value a property. Real estate appraisers assess similar properties that recently sold in the same location. This helps them calculate an accurate value of a property. With the market approach, a business appraiser considers similar insurance brokerages that were sold on the open market. If the insurance brokerage is a private company, the appraiser uses private transaction databases.
Multiples for an Insurance Brokerage
An essential component of the market approach is the use of valuation multiples. Valuation multiples for an insurance brokerage are similar to ratios. They compare the value of an insurance brokerage to a financial metric such as earnings, cash flow, or sales. To find the valuation multiples for an insurance brokerage, business appraisers use the applicable NAICS or SIC code. Below, we highlight valuation multiples for an insurance brokerage.
SDE (Seller’s Discretionary Earnings) Multiples for an Insurance Brokerage
- SDE multiples assess an insurance brokerage’s cash flow by multiplying its seller’s discretionary earnings by the multiple. This multiple is common when valuing an insurance brokerage.
EBITDA Multiples for an Insurance Brokerage
- EBITDA multiples measure the return on investment an operator can expect from an insurance brokerage.
REVENUE or SALES Multiples for an Insurance Brokerage
- Revenue multiples help determine the value of an insurance brokerage based on the amount of revenue it generates. This multiple is less common when deciding how to value an insurance brokerage. However, the multiple a business appraiser uses depends on various factors.
To learn more, see Valuation Multiples for an Insurance Agency.
Valuing an Insurance Brokerage Using the Income Approach
The income approach is another popular method to determine the value of an insurance brokerage. This valuation approach considers the risks of the insurance brokerage. Below, we list some risks that a business appraiser may consider during a business valuation for an insurance brokerage.
- Intense Competition: The insurance industry is extremely competitive. This may lead to pricing pressures and reduced profit margins.
- Client Loss: It is crucial for insurance brokerages to retain clients. Losing clients can negatively affect revenue and business stability.
- Technology: Having sufficient technology has a positive impact on an insurance brokerage’s efficiency. Failure to keep up with technological advancements may cause insurance brokerages to struggle.
- Regulatory Compliance: Regulations in the insurance industry can change for various reasons. It is vital for insurance brokerages to be aware of these changes.
Methods to Value an Insurance Brokerage Using the Income Approach
Under the income approach, there are two valuation methods that Peak Business Valuation often uses when deciding how to value an insurance brokerage. They are the capitalization of cash flow method and the discounted cash flow method. Below, we discuss the significance of these valuation methods for valuing an insurance brokerage.
Capitalization of Cash Flow Method
- The capitalization of cash flow method estimates a measure of economic income for one time period. This time frame is divided by a capitalization rate, which reflects a reasonable rate of return an investor can expect. This method also analyzes the risks a buyer may encounter. The capitalization of cash flow method is best for insurance brokerages with a long and stable history.
Discounted Cash Flow Method
- The discounted cash flow method uses 3-5 years of projections to calculate the value of future cash flows. The business appraiser divides the future cash flows using a discount rate rather than a capitalization rate. The discounted cash flow method is ideal for insurance brokerages with a strong financial history. In addition, this method benefits brokerages that have built reliable forecasts. It is important to note that the discounted cash flow method is less popular since it uses future cash flow projections which can be unreliable.
Summary
Business appraisers often use the market approach and/or the income approach when valuing an insurance brokerage. These valuation methods provide different insights into the performance of an insurance brokerage. To know which method is best for your insurance brokerage, receive a business valuation. As part of a business valuation, a business appraiser can determine the fair market value of an insurance brokerage. In addition, they can identify the strengths and weaknesses of your business. This is beneficial whether you are buying, growing, or selling an insurance brokerage.
Peak Business Valuation is a professional business appraiser. Peak works with insurance brokerages on a regular basis. We are happy to provide a business valuation for an insurance brokerage. Additionally, Peak can answer any questions you have about how to value an insurance brokerage. Start now by scheduling a free consultation with Peak Business Valuation below!
For more information see Valuing an Insurance Brokerage and Value Drivers for an Insurance Brokerage.
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