Every profession relies on a type of linguistic shorthand, and the mergers and acquisitions of independent insurance agencies are no exception. While Springtree Group will strive for total clarity and transparency in every interaction, there are moments when we use language that requires an explanation. Today, we’re breaking down several of the terms and acronyms you will encounter during your purchase or sale of an agency.
Non-Disclosure Agreement (NDA)
An NDA is commonly used in every type of private or professional transaction, so this is a term we all know. In our work on behalf of our clients, Springtree Group expects each potential buyer to sign an NDA. This step ensures that no information about an agency’s client lists, or financial history, or proprietary information becomes public knowledge.
Whether an agency is large or small, Springtree Group does everything in our power to assure that each of our clients experiences the highest level of confidentiality.
Multiplier (or Multiple)
Whether you plan to purchase or sell an agency, you’ll want to understand what a multiplier is, which factors we use in our calculations, and why multipliers are of central importance in agency valuation.
There are two multiples that are most commonly used for insurance agencies:
EBITDA means Earnings Before Interest, Taxes, Depreciation, and Amortization. Please note that the term taxes, in this case, refers to income taxes. Clearly, this figure must be disclosed before a deal can be struck. A pro forma (projected) and adjusted (historic) EBITDA are the agency’s discretionary earnings less the cost of replacing or maintaining the current owner.
Revenues are the top-line gross income of the agency. While a buyer may wish to consider the total premium volume, the premium includes the cost of the insurance program in addition to the distribution cost. Our focus is concentrated on the actual revenue to the agency, not on any pass-through of revenue that may be going to the insurance carrier. Revenues are the focus for most buyers and are therefore the more common multiplier used in the medium to smaller main street sellers. Also, revenues cannot be manipulated by the use of the expense structures cutting the way the EBITDA can be.
Letter of Intent (LOI)
A Letter of Intent, or LOI, is appropriate for all agencies, large and small. The LOI sets the deal structure for the transaction and is used by financial and legal support teams to build the purchase agreements and develop the loan structure for the transaction.
We will advise buyers on an ideal asking price to begin the onboarding and agreement process. A final price is not included on the agency listings we send to our clients; instead, we provide one of the above multipliers. Most commonly, we include a revenue estimate. One of the functions of due diligence is verifying the revenue numbers that are multiplied by the quoted multiple to arrive at the final purchase price.
Once an NDA and purchase agreement have been signed, disclosures have been made, and a buyer wishes to pursue an agency, we help build a Letter of Intent. Only when the LOI has been signed by both sides and a (refundable) security deposit has been presented do we withdraw an agency from our listings and withdraw from other buyers who are late arrivals to the process.
If a deal fails, we reintroduce the agency to our marketing processes and materials and begin to accept interested buyers once more.
Given the competitive, fast-paced acquisition market we have continued to experience, a LOI is an undeniably efficient method for locking in a motivated offer. Rather than requiring a protracted period of time to secure multiple offers, a LOI is a one-step process that is streamlined for all parties involved.
Springtree Group has extensive experience guiding agency owners toward the best sale process for them. If you are an agency owner, it’s important to know that when you are at or less than one year away from selling your insurance agency, you have arrived at the perfect time to engage our help.
Contact us today, and we can determine the strategy that will secure the offers you deserve.