How to enhance the curb appeal of your independent insurance agency when preparing for a sale.

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Not unlike the work done in preparation for the sale of a high-value home, staging and preparation for the sale of your business are essential for receiving the highest possible value for what is likely to be a life-changing financial event. While bankers may help identify comparative sale ranges for firms of similar size, there are many other factors to consider in negotiating the most favorable consideration from potential buyers.

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Before we dive into details, first, some good news:  the insurance brokerage aggregation space has created significant value for investors, and many newer firms have entered the market with considerable acquisition capital to deploy. Also, investors consider insurance distribution to be resilient, if not flashy, and likely to outperform many other industries in the event of an economic recession – a near-term expectation on the part of many leading investment firms and economists. Put differently, even with higher debt financing costs tied to financial policy response to inflation and a probable recession, there will absolutely be a market for your business – providing you play it right.

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In the world of luxury real estate, professional advisors evaluate the home being sold for its intrinsic characteristics (location, size, architecture, space allocation, land, etc.) and develop a set of target buyers for whom those attributes would most likely appeal based on their anticipated use cases. They then redecorate and refresh the property's contents (“staging”) to reflect its most positive and attractive elements for the intended buyers. Am I suggesting that you should redecorate your agency offices prior to sale? I am not. What I am suggesting is that you go through a staging process with regard to the financial outputs of your business to ensure that you realize the most significant value for what you have built!

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The financial “staging” here relates to creating a “pro forma” set of financial statements describing your business's financial outputs with a trailing 12-month view. In most cases, potential buyers for your business will make offers using your 12-month “EBITDA” (Earnings Before Interest, Taxes, Depreciation, and Amortization) as the basis on which they build an offer to buy. EBITDA, as the preferred measure for earnings or profit in the insurance distribution industry, reflects the revenue you generate within an annual period, less the expenses booked to the business over that same period.

As you think about maximizing the value you receive, you can be thinking about any additional revenue that you already know you will be realizing based on work you’ve already done or deals that have closed, but the inflow of income has been deferred. Equally, you can be thinking about your expenses:  specifically in the categories of compensation (yours, your producers, your other staff), selling / account management, administration, and occupancy / rent. Could you realistically reduce expenses in these categories without harming your business or making the new performance profile unsustainable? If the answer is yes, seek these adjustments to your agency’s pro forma – every dollar of revenue not accompanied by additional expense, and every dollar of expenditure credibly eliminated within your 12-month run-rate adds to your EBITDA.

In making offers on your business, buyers will commonly be offering to pay you six or more times your reported EBITDA, so these efforts make a real difference in the wealth you create for yourself. An additional benefit – the better and more efficiently an agency is believed to operate, the more favorably the agency is regarded as a potential asset, likely lifting the “EBITDA Multiple” market for your business higher. Imagine two $2MM agencies, one with $500k in pro forma EBITDA, the other with $800k in pro forma EBITDA. Now imagine the former receiving a multiple of 7x and the latter receiving a multiple of 8x. One business sells for $3.5MM, the other for $6.4MM… for the same “sized” business.

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Given the significance of this wealth-generating opportunity for the seller, it is probably worth a look.
Size, profitability, and productivity (the latter two can be thought of as “performance”) certainly influence the value you will receive for your business, but they are far from the only attributes that can have a meaningful impact on valuation.

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Dimensions like growth rate, perpetuation situation, systems and business information practices, client and premium portfolios, and insurer relationships can all have a meaningful impact on how a business is valued. Therefore, an owner considering selling their business should have a clear plan concerning how best to emphasize what will be regarded as strengths in the business while having ready solutions for anything that might be seen as reducing its value. A skilled, experienced advisor with knowledge of the insurance brokerage aggregation industry can be very helpful in navigating these considerations to ensure that an owner selling their agency receives the greatest financial outcome for what they’ve built.