When it comes time to sell your insurance agency, you want to get top dollar for the business. Whether a prospective buyer agrees with you about what the agency is worth is a different matter. All too often, agency owners are amazed at the seemingly low-ball offers they receive when they put up their insurance agency for sale. Odds are, however, that the bids are fair, and they simply have overestimated the value of their business.
Those who have been in the industry a long time may have heard about other owners selling their insurance agency for more than two times annual retained commissions, and used that figure as a benchmark in their own calculations as they plan for retirement or a new venture. Unfortunately, the current practice for agency valuations is more complicated. Prospective buyers primarily will look at earnings before interest, taxes, depreciation and amortization (EBITDA), along with other detailed financial and market information, as they determine the price they are willing to offer.
The key to maximizing your profits is to increase earnings as much as possible in anticipation of a sale. Doing so will increase your chances of getting the most out of the business that you have built. Although several factors can have an impact on revenues, including your geographical location, marketing strategy, operations and sales staff, narrowing the focus of your offerings is a proven strategy to drive significant value for the business.
The Advantage of Specialization
It may seem contradictory to think that offering fewer or more specialized products can increase revenues more than delivering a broad range of coverages; however, concentrating on a niche can significantly increase your agency value. Many agency owners also mistakenly believe that specializing is only for large agencies or that the strategy will limit their producers, but focusing on a particular market niche offers numerous benefits for agencies of all sizes, including:
- More efficient prospecting and more relevant referrals
- Better carrier and underwriter relationships
- A well-defined customer segment that fosters higher hit ratios
- Increased productivity and streamlined operations
Focusing on one or more niches will also make your business more appealing to similar agencies looking to expand their market share, and attract buyers who are eager to see the agency continue to succeed.
A Roadmap to Success
Specializing your book of business also can help you guard against predators who may want to scoop up your customers before the new owner has had a chance to cement the personal relationships that will guarantee renewals. In some cases, a competitor may even try to ensure that existing accounts lapse after the acquisition, so they can move in to stake claim on those clients. A generalist agency is more vulnerable to that type of strategy than one that specializes in niche coverages, where competitors already are few and far between.
To maximize the profitability of your business, both from commissions and after you sell your agency, look for ways that you can specialize and reach a more targeted audience. You also want to make sure that you have all of your financial records in order, and can produce accurate balance sheets and P&L statements for the past three years. Buyers will want to know that the financials have been verified by an established CPA firm or a business broker, like Springtree Group. We can also help you identify and strengthen additional value drivers for your business and create a roadmap to transition the insurance agency to new ownership, so you can move on to the next season in your life. To learn more about our business transfer and acquisition services, as well as the financing solutions that we offer to both buyers and sellers, call Springtree Group at (972) 395-8811 or contact us online.
