As an example, let's say your agency's revenues approach $10 million annually and your EBITDA margin is at 15 percent. Multiply the two, and your EBITDA is $1.5 million. If the current trend is for agencies like yours to sell at 10.6 times EBITDA, the market value of your firm is $15.9 million.
The average insurance agency wants to make 20 to 25% EBITDA, which means that $1 in expense savings is worth many dollars of revenue. Many agency owners focus on the top line when they really need to focus on their expenses.
According to industry experts, most insurance agency owners operate with an average profit margin of 2% to 10%.
The valuation of insurance companies should take into account the specifics of insurance activities and should look for the optimal approach. There were different approaches available – the income approach, the market comparison approach, the assets-based approach and the Bond Pricing Model.
The formula for valuation using the market capitalization method is as below: Valuation = Share Price * Total Number of Shares. Typically, the market price of listed security factors the financial health, future earnings potential, and external factors' effect on the share price.
Replacement cost is the most popular property insurance valuation method. It covers the cost to repair or replace a building with materials of the same or comparable quality; replacing old with new.
When valuing insurance agencies, the most prevalent rule of thumb is to apply a multiplier to the company's total annual commissions, usually a 1.0x to 1.5x multiple. For better-performing insurance agencies, the total annual commission multiplier can be as high as 3.5.
The key is to keep total overhead within 20% to 30% of your agency's gross income. Maintaining overhead costs within this range ensures your agency has sufficient funds to cover operating expenses while leaving a healthy profit margin of 20% to 30%.
EBITDA has never been accepted as a generally accepted accounting principle, so companies can report EBITDA in whatever fashion they wish. It doesn't give a complete picture of the company's performance.
The Rule of 40 states that the sum of a healthy SaaS company's annual recurring revenue growth rate and its EBITDA margin should be equal to or exceed 40%. It is a measure of how well a SaaS balances growth with profitability.
Insurance brokers can save you time and money, get you the best deal available, and help keep your business and personal data safe and secure. The services are some of the most valuable you will ever use.
Agencies usually sell between 5-7x EBITDA, so multiplying this number by 4-8 can give you a better idea of the high and low ends of your possible valuations. Based on our formula, the average spread for this insurance agency is between $14-30M, with a median valuation of $21.7M.
A gross profit margin of over 50% is healthy for most businesses. In some industries and business models, a gross margin of up to 90% can be achieved. Gross margins of less than 30% can be dangerous for businesses with high gross costs.
You may be asking yourself, “what is a good profit margin?” A good margin will vary considerably by industry, but as a general rule of thumb, a 10% net profit margin is considered average, a 20% margin is considered high (or “good”), and a 5% margin is low.
Commissions can vary widely, but it's common for independent carriers to pay 12% to 15% on new business and 10% to 12% on renewals. So, being independent and working with more insurance carriers will almost always mean you'll make more money.
The Multiplier Method
The multiplier typically ranges from 1.5 to 5, depending on the severity and long-lasting impact of the injury. Imagine your economic damages total $10,000, and the insurance company uses a multiplier of 3. Your non-economic damages would be calculated as $10,000 × 3 = $30,000.
An agent selling one or two policies per week at this commission level could make $50,000 to $100,000 in their first year as an agent.
Buffett understands that the true measure of an insurance company's worth is not just its ability to generate a large float, but to make an underwriting profit while doing so. Berkshire Hathaway's insurance businesses have, for many years, generated underwriting profits, allowing Buffett to play with “house money”.
Typically, the Discounted Cash Flow (DCF) method tends to give the highest valuation. This method calculates the present value of expected future cash flows using a discount rate, often resulting in a higher valuation because it considers the company's potential for future growth and profitability.
Insurance Valuation means any assessment of the cost of replacement of destructible improvements to real property undertaken for the purpose of advising on the insurable value of such property in connection with the entry into, or proposed entry into, a contract of insurance.