Insurance is understood by many as a must have. However, the process of acquiring insurance can sometimes be difficult. The process of acquiring insurance has been simplified over time through insurance brokers that work with buyers rather than insurance companies. Insurance brokers make up one of the largest industries in the US. In 2018, the industry recorded $165.3 billion in revenue and a 2.9% growth rate. This growth rate is on par with the past five years annualized growth rate of 3.1%.

Although it may seem counterintuitive, the best time to sell a business is during a healthy economy.  If you currently own an insurance brokerage, consider the possibility of selling when cash flow is trending upward. Current industry trends point towards further growth, which provides a great opportunity to sell now.  The first step to selling your business is obtaining a business valuation. Whether you are looking to sell or hold on to your company, understanding the market value of your business is important. A valuation specialist will show you a range of values for your business and consult with you on how to increase the value of your business.

Over the past five years, I have provided business valuations for several insurance brokers for various valuation purposes. To give you an idea of each of those engagements, I will list out some of the key factors used in valuing an insurance brokerage. Keep in mind that the factors listed below are only a guide.

Market Multiples for an Insurance Broker
  • 1.70x – 2.75x Sales
  • 3.40x – 5.00x Sellers Discretionary Earnings
  • 3.70x – 5.70xx EBITDA

With a clearer understanding of what your business is worth, you can begin taking steps to increase the value of your insurance brokerage prior to a potential sell. I will touch on four ways in which you can increase the value of your business. There are many factors to take into consideration, but this will provide you with the basis of what your company is worth and a few ideas to increase your company’s value. If you are searching for a more extensive valuation, reach out to a valuation professional like myself.

1. Key Success Factors

There are several success factors that help distinguish an insurance broker:

  1. Insurance Products
    • Insurance brokers must establish relationships with underwriters to increase the number of insurance products they can offer. A diversified portfolio of products allows for increased customization for each client.
  2. Government Regulations
    • Insurance brokers must comply with state and federal legislation which impacts the entire insurance sector.
  3. Technical Knowledge
    • Having a solid understanding of the products offered that are distributed will separates the most successful brokers from less successful brokers.
2. Client Diversification

Insurance brokers have the ability to diversify clients through policy offerings. Insurance policies can range from health and medical to life and accident. In addition, insurance brokers can diversify through focusing on individuals and companies. For instance, health insurance policies apply to everyone while large corporations need access to group insurance plans for employees. However, in order to expand policy offerings, insurance brokers need to establish the proper relationships with underwriters to increase the number of insurance products.

If you or your firm offer a handful of insurance policies, you may want to consider expanding the offerings to encourage growth and customer acquisition.

3. Technology and Systems

Insurance brokers rely heavily on technology for their business operations. Technology is used to maintain customer records, process financial transactions, provide sophisticated advisory services and assist in marketing products to customers. There are several advantages to technology for insurance brokers:

  1. It enables brokers to reduce process time of insurance policy sales
    • It improves access to insurance carrier information and source insurance policies with underwriters
    • It enables customized policies
    • It provides timely information to customers

Overall, any online technology that enables customers to easily select and purchase insurance coverage from a variety of underwriters will benefit insurance brokers. As such, make the investment in technology. Invest enough to support your ability to act as an advisor to customers.

4. Revenue

Revenue for insurance brokers is relatively stable. Revenue is generated from commissions related to insurance policy sales and fees. Due to the nature of insurance policies, revenue fluctuates with macroeconomic trends. As such, insurance brokers need to develop programs to ensure continuous sales and revenue streams. One way to do this is by offering diversified insurance policies which tend to offset each other during periods of economic downcycles.

In addition, build a sales team that focuses more time and energy on target accounts. Learn to build appropriate marketing plans that attract certain cliental. Regardless of how you approach sales and growing revenue, you must never stop selling.

Understanding the value of your insurance brokerage is important, regardless of any near future transactions. Even if you have not thought about selling your business, consider the future of your business; it is never too early to start planning. The first step in that process is a business valuation, which we are happy to provide you with. We can also help to identify ways to increase the value of your business.

We at Peak Business Valuation work with a handful of insurance brokers. We welcome any questions you may have. Feel free to reach out by email or through a phone call.