Understanding Insurance Agency Valuations: Factors to Consider
Insurance agencies are dynamic entities that continuously evolve and innovate over time, enabling them to not only adapt to changing industry trends but also potentially enhance their value in the process.
While the insurance industry continually faces new challenges, it continues on a moderate growth trend. For people operating a smaller insurance agency, the time may come to take advantage of that growth and consider selling. Because the process is full of complexities, it remains essential to consider what to know about insurance agency valuations when selling an insurance agency.
How Much Do Insurance Agencies Sell For?
The price of an insurance agency is determined by a variety of factors. Insurance agency valuations serve as the essential component of agencies getting sold. While profitability rules, different facets within that valuation play a vital role in the selling price of a company.
Size of the Insurance Agency
Along with revenue, the size of an agency factors in. Size matters both in the number of employees and the client base. An insurance company with a sole proprietor and employee can expect to receive significantly less than a company with numerous employees. A company with more employees can handle larger volumes of clients, which also means more claims experience. Those numbers speak volumes about the firm’s abilities for a potential buyer.
When an insurance agency has the right size, it appeals to larger firms. Cotton Coverage Insurance Agency, based in Farmingville, Illinois, grew from a two-person husband-and-wife team to a thriving company. The company’s more extensive offering of products made it an appealing option for World Insurance Associates LLC, a Top 50 brokerage, to acquire in 2022.
Growth of the Agency
While potential buyers look at the current numbers, they also want to see an established growth pattern. Generally, an insurance agency’s growth rate fluctuates between 5% and 10% annually. If it is on the lower side, it indicates that it has not established consistent and solid operations to sustain repeatable growth. That growth must also come in an organic form, such as gaining new policies and customers.
The ability to show substantial growth may lead to more prominent companies knocking on the door sooner than expected. Incorporated in 2019, New Jersey-based Transverse Insurance Group LLC caught the attention of MS&AD Insurance Group Holdings, a global company. That led to the former’s acquisition three years later.
Associated Risk Models of the Insurance Agency
Any insurance agency has risk factors that potential buyers will thoroughly investigate. The odds of the cash flow maintaining stability get determined by looking at profitably, personnel, retention, and agency image. If any areas show high risks, it will minimize the agency’s value. Typically, the risk model used to determine value includes the earnings ratio, discounted cash flow model, and capitalization rate.
Although not always the case, long-established companies often come with fewer risks. After many years of serving customers, they have crafted and sustained operations that help eliminate risks, even in ever-changing times. Abatelli Insurance Agency started in the New York area more than 100 years ago. It steadily grew to provide insurance needs in the tri-state area, which made it a company worth partnering with for the Hilb Group.
Many factors play into the value of an insurance agency. When selling, having a pulse on the factors behind the numbers provides a more realistic sale price.
INEX
INEX is a multi-disciplinary firm providing management consulting to the owners of insurance agencies throughout the United States, and real estate investment services. Our senior principals have participated in over 300 perpetuation, merger and acquisition (M&A) transactions over the past three decades. Staff professional designations include Chartered Property & Casualty Underwriter (CPCU), Certified Insurance Counselor (CIC) and Certified Commercial Investment Member (CCIM), as well as a variety of insurance and advisory licenses throughout the United States.To learn more, call us at 603-665-6000 or visit our website.