There are many good reasons why owners should understand the dynamics that drive insurance agency value. First and foremost is the fact that the value of an agency is a direct reflection of how well-run the agency is from the market’s perspective. So, when one looks at “the factors that drive value,” that’s the same thing as looking at the factors that make a business great in the eyes of outsiders.
Why knowing your agency’s value matters
When insurance agency owners think of the value of their company, they most often think of it in terms of “What will it be worth when I sell it?” But most agency owners don’t launch (or run) their business with an exit strategy in mind. Put those two facts together, and we find that most owners don’t consider how to create value until they’re thinking of selling. But an agency is likely the owner’s largest asset, and its value impacts virtually every aspect of the owner’s life. Even if a sale isn’t imminent, understanding how to build value in an agency can help:
- Guide capital allocation
- Inform strategic planning
- Support partner buyouts or equity sharing
- Assist with tax planning or loan applications
Ultimately, an agency’s value is more than a number. It’s a lens through which an owner can assess and improve the business, which then further increases value – setting off a virtuous cycle.
What buyers really look for
A standard multiple of revenues is no longer a legitimate guideline for valuation. In fact, strategic buyers in the insurance M&A space aren’t just looking at financials. They’re evaluating the sustainability, scalability and risk profile of an agency.
Here are the primary dynamics that contribute to value beyond financials:
1. Strong leadership and talent bench – with ongoing adoption of automation
A deep and balanced talent pool is essential, as is a focus on incorporating tech efficiencies. Agencies with aging producer-profiles, no clear succession plan, and outdated platforms are less valued than those that:
- Invest in recruiting and retaining top talent
- Invest in timesaving/productivity-enhancing technologies
- Have compensation structures that encourage talent growth
- Demonstrate leadership continuity and development
2. Diversified lines with organic growth among multiple carriers
Revenue concentration is a red flag, as is growth that results primarily from “hard market” rate increases. Agencies with a large portion of income tied to a small client base, aging clientele, a single line (or limited number of lines) and/or concentration among a few carriers may struggle to sustain growth. Value is enhanced by:
- A balanced client mix
- Multiple revenue sources
- Multiple carriers (e.g., less than 30% of business with any single carrier)
- Demonstrable organic growth
3. The inclusion of a niche focus
Agencies that serve specific markets or client segments – whether geographic, demographic, or industry-based – are often more attractive. Specialization signals expertise, loyalty, and pricing power.
4. Institutionalized client relationships
If most client relationships hinge on the owner or a few key advisors, the agency faces “key person” risk. Buyers want to see:
- Distributed client relationships across the team
- Systems and processes that ensure continuity
- A scalable service model
Valuation as the basis for better decisions
While financial metrics like EBITDA and revenue are foundational, they don’t tell the whole story. Two businesses with similar financials can have vastly different market values depending on all the factors listed above — and more. Buyers will assess both tangible and intangible factors to determine how sustainable and scalable a business is. Owners who regularly assess the value of their agency not only know their company’s worth but gain insights into the areas that are strong as well as those that can be strengthened.
Is FirstChoice, a MarshBerry Company, right for you?
FirstChoice is your go to resource to build agency value through our investments in carrier relationships, increased revenue, education, and technology. Learn more about FirstChoice growth solutions if you are not already a member and are interested in the nation’s number one agency partner.
