Before you sell your insurance book of business, consider this first:
Many larger agencies are purchasing smaller ones primarily for their revenues. Legacies
are no longer considered and ultimately its the economies of scale that are the most
appealing in these transactions. The acquiring agency typically will transfer the
accounts to their office, maintain the key staff, and even keep the producer on for
a transitional period.
Then the cost cutting come in.
The accounts are then transferred and producer contracts are renegotiated or terminated,
and employees are let go. What’s left of all the years of hard work? The blood,
sweat, and tears that go into building an insurance agency goes in vain as the only
value left is the commissions generated from whatever relationship is salvageable.
If you’re getting ready to retire, relocate, step down from management, or just want
out of the business, contact us for a competitive offer for your insurance office.
We are interested in all types of agencies and are primarily seeking those located
in the New York tri-state area. We offer flexible terms and would consider partnership
Types of insurance that is most appealing include group benefits, workers’ compensation,
and specialty lines such as errors & omissions, bonding, and wholesale insurance
Insurance Brokers and Producers are also welcome.
Selling an Insurance Agency?
We work as a team,
We are proud of what we do,
We are Group Coverage, Inc.
How is the Value of an Insurance Agency Determined?
There are many methods to determine the value of a book of business, or an entire
brokerage, such as basing the sale on a percentage of gross commissions, using a
multiple of EBITDA, or a placing a flat figure determined by the number of markets,
producers, staff, and location. However, equally as important in quantifying the
cost for the sale of an agency is to establish the terms. For instance, will the
payment be made all at once or spread out over a number of years? Is there a claw
back clause or retention agreement, will liability be absolved once the transfer
occurs, will the owner stay on for a period of time, or any other contingency attached
to the sale?
Percentage of Commissions
This method is probably the simplest as the value is based on a percentage of the
gross and/or net revenues or any combinations of income streams. An example of this
would be to establish a percentage of gross commissions generated from house accounts
and add to the net commissions of accounts brought in by producers. Obviously different
values should be applied to accounts owned by the agency versus those that are partly
owned by others. Hence, once the percentages are established, the next factor is
to establish the terms.
ABC Agency agrees to pay 200% of the gross commissions for accounts solely owned
by XYZ Agency and 100% of the gross commissions of the accounts shared by their producers.
They also agree to pay 75% of the net commissions generated by outside brokers that
a completely owned by independents. The percentages are based on a three year retention
basis and will allow the owner of XYZ to stay on and receive the standard producer
commission for any new accounts.
Multiple of EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization)
Recently more and more large transfers are using this method for a full takeover
of an insurance office. The buyer benefits if consolidating or streamlining the
operations reduce the expenses as the any decrease in operating costs would increase
the earnings. Since the purchase price is based on the net income before interest,
taxes, depreciations, and amortization, a small savings on the expense side can significantly
increase the value of the agency.
ABC Agency agrees to pay seven times EBITDA for XYZ Agency over a period of five
years with a claw back clause based on 200% of the gross commission adjusted on a
pro rata basis. The terms of the claw back clause reduce the purchase price based
on the percentage of the time remaining for the purchase. For example, if an account
is lost halfway through the seven year period, then half of the 200% gross commission
or 100% of the gross commission would be deducted from the purchase price. All the
adjustments would be calculated at the end of the seven year term providing there
are enough revenues generated from remaining accounts.
If the sale is for a franchise or an office that is subsidized by a larger agency
or if markets are provided by another, then a completely different method should
be used to determine the value. Projections of income can be used to determine the
cost or percentage of what expenses are shared between the parties. Either way,
this method often considers future earnings and how the operating costs are divided.
ABC Agency offers to provide XYZ Agency their markets, accounting, legal, and IT
support. Both agencies agree to pay half the expenses projected to amount to $ 250,000
for the first year each. The break even point is projected in the third year and
profitability expected to increase by 20% thereafter for the next five years. In
the eighth year, the projected profits are over $ 500,000 for each agency is the
commission split remains at 50% for each entity. The agreed startup costs for XYZ
are $ 100,000 for the usage of the markets and for a proven infrastructure. Both
agencies agree to share the net income with a buyout provision of 150% of gross commission
plus all initial investment capital.