Critical Aspects Shaping Insurance Broker Valuations

By Team INEX |

When estimating what a business is worth, business owners may rely on industry best practices and rules of thumb — for example, calculating its value by subtracting liabilities from assets. However, simplistic calculations do not always paint a complete picture of a company’s true value, and that’s especially true when considering the value of an insurance agency.

A proper insurance broker valuation considers many additional factors outside the scope of a typical business valuation. When you understand these factors as a broker looking to sell or perpetuate your agency one day, you’ll have all the information you need to increase your business’s value and maximize its return.

Read on for the critical aspects involved in an insurance broker valuation.

Revenue and Profitability

First and foremost, insurance agency valuations must consider the revenue and profitability of the brokerage in question.

Generally, valuations will cover the following:

  • Premiums and commissions
  • Expense management
  • Growth rates
  • Balance sheet strength
  • Impact of economic cycles

The financial aspects of a valuation are generally prioritized by insurance agency valuation consultants, as these factors are the most concrete evidence of an agency’s monetary worth.

Valuations might not just focus on current and past finances but could widen their scope to include projected future finances as well, in particular future profitability, which is calculated based on past evidence.

Thorough documentation of these financial factors allows for strong valuations that reflect the agency’s worth more faithfully.

Client Portfolio and Retention

Beyond finances, insurance agency valuations consider the clientele history of an agency.

This includes scrutinizing factors such as:

  • Client base composition (type of insurance, industries served)
  • Client retention rates
  • Cross-selling opportunities
  • Long-term contracts and agreements

Client retention and satisfaction are excellent indicators of a firm’s current and future worth. In combination with financial history and track records, client-related information such as the above evidences the quality of rapport with and reputation among the agency’s clients.

It allows insurance agency valuation consultants to see firsthand how much effort (and therefore value) has been invested into building and retaining clients.

Beyond this, a sound customer base provides opportunities for potential buyers to access a new target market for similar or even other goods and services.

These buyers will also be willing to offer more if they can see that the agency in question has an established client base and an excellent track record of retaining them.

Competitive Positioning and Differentiation

Competitive positioning and differentiation are examples of intangible valuation factors. They aren’t quantifiable but can be reflected in both client- and finance-related documentation.

These factors include:

  • Unique value proposition (UVP)
  • Market reputation and branding
  • Specialized expertise
  • Competitive advantages
  • Competitive threats

These factors all contribute to the strength of the insurance agency’s brand and demonstrate how well they are established as unique in customers’ and competitors’ eyes.

Those considering the purchase of the agency will be more interested in owning a well-established brand because this means that existing and prospective customers will recognize, gravitate toward, and remain loyal to it.

Insurance agency valuations will be greater if the agency in question has a clear UVP, excellent branding, notable specialized expertise, and a low number of competitive threats.

The Goodwill Factor

Another intangible asset, goodwill, is a business’s value based on future patronage expectations. It’s the result of branding and client-related efforts overlapping and can be reflected in metrics such as client retention and profitability.

As an intangible asset, goodwill introduces more complexity and layers to the insurance agency valuation process.

When we perform valuations at INEX, we look at personal as well as business goodwill when it comes to a company, using a weighted process to evaluate facts and circumstances surrounding the company, its operation, and its owners, in tandem with its clients’ revenue stream and profitability.

We conduct up to four distinct evaluations of the potential goodwill allocation:

  • INEX Goodwill Evaluation MatrixTM
  • Account Origination Analysis (from non-principal producers or principal producers)
  • INEX Competitive Compensation AnalysisTM
  • Account Reconstruction Analysis (if applicable)

Simplifying Valuations With INEX

There are many factors that go into an insurance agency valuation, which can make it a confusing and sometimes arduous process, from revenue and client retention to branding and goodwill.

The key to making valuations more straightforward is to have thorough documentation so that even if there is uncertainty as to what is required of the business when the valuation is underway, there won’t be an accompanying lack of evidence to aid the process.

After all, the importance of an accurate and precise valuation can’t be understated. Insurance agencies should invest in the right professional valuation services so they can obtain a faithful representation of the hard work and effort that has gone into their company, bargain confidently when discussing potential mergers, and only consider deals that reflect their true worth.

For an accurate valuation, companies should trust a professional service provider with a proven track record and excellent, in-depth knowledge of the process, such as INEX.


About INEX

Founded in 2000, INEX Capital & Growth Advisors is a multi-disciplinary firm providing management consulting to the owners of insurance agencies throughout the United States. Our senior principals have participated in more than 500 perpetuation, merger, or acquisition transactions over the past two decades.

We are thought leaders and agency experts in several initiatives — from providing agency succession plans to valuation services to assisting with strategic planning and mergers and acquisitions, financial structure optimization, revenue maximization, and others to help agency owners seize opportunities that will bring current and future rewards. We also provide support in areas such as staff development and operational improvements.

The consulting arm of our company works with the management of insurance agencies and provides expert witness services and insurance coverage analysis in various insurance litigation cases.

To learn more, call us at 603-665-6000 or visit our website.