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In the early days – say 10 years ago – in terms of broker valuation, the rule of thumb might have been 4x brokerage income. For some businesses it may even have been more. Nowadays, think in terms of 1.2x as a rule of thumb. Occasionally we hear of deals where the multiple is more than 2x, but these are the exceptions – the VC funds wishing to make a splash with their first insurance industry acquisition or the insurer determined to control its distribution. Vendors of today are receiving between 1x and 1.4x. Of course, specific valuation will depend upon who the acquirer is and what business you have . For some, a higher proportion of personal lines business depresses the value – of course, for others the converse is true. There are multiple additional variables to add into the mix too – and no acquirer is going to tell you exactly how they arrive at their valuation.
So how do you know that you are getting the right price for your brokerage?
According to Lucas Parris of Mercer Capital...
“A revenue-based multiple makes for a good shorthand way of expressing value, but it is rarely the method that savvy acquirers with full information will actually use. Most buyers tend to focus on earnings and margin rather than on top-line revenue and base their analysis on a discounted future benefits method”.
In other words, a buyer will project a future-model of your business based on a realignment of the business running costs and the uplift (or dip) in brokerage and commissions which they receive for each line of business from insurers or capacity providers. (And don’t forget they will have standard models for fees to add on top too).
From this calculation, the ROI can be determined and thus the valuation. Believe it or not, this will come out at a ‘rule of thumb’ almost every time of between 1x and 1.4x brokerage. It is for the reasons stated above that pure profit based valuations don’t work in the insurance broking sector. It is all about the uplift and the ROI.
Your excellent staff, the IT system which cost you an arm and a leg, the intellectual property you sweated blood over, your newly refurbished premises, your fleet of company cars, your company golf club membership (where you meet your clients), your other business assets – be sure you know which add and which detract from the value of your business to the buyer. Also don’t forget that this method is based on the wholly intangible – the renewal book! You can’t see it, you can’t touch it and you can’t guarantee that it will be there next year or the year after. A big consolidator will assign Account Execs to your clients (now, of course their clients!) and be all over them – making them happy to renew by discounting their premiums where possible (or where necessary!), selling them add-ons and cross-selling new products – but despite these efforts, they are not guaranteed the renewal. This is why you are likely to have an earn-out as part of your payment. You’d do the same if you were buying a business wouldn’t you? It is the only fair way of increasing the chances of the intangible becoming the tangible.
Finally, the Insurance Industry is tightly-knit. People talk to each other. Therefore, we all know roughly how our businesses are valued – and therefore what the market rate is at any given time. Buyers know this too – and they talk to each other.
Use the rule of thumb and you won’t go far wrong!
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