How do I value my insurance broking business?

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!

When selling your business, brokers need to be realistic on price and put emotion to one side, says Paul Anscombe

Published in Insurance Age 05 May 2011

Link to original article:  http://www.insuranceage.co.uk/insurance-age/opinion/2068235/acquisitions-price-wrong

Paul Anscombe makes some very interesting points in this Insurance Age article which mirror our experience.  

Adequate preparation, a realistic appreciation of value and a degree of objectivity are key to getting the right deal.  There are many buyers out there and an equal number of acquisition models to choose from - and unlike buying most other things, it is the buyer who sets the price in this case.  An insurance business is genuinely only worth what a buyer will pay for it.  Each buyer has its own model for uplifting the book of business once they've bought it - so the business has a different value to each.  [John Mitchell]

 

"As a broker who has made acquisitions in the past and fully intends to do so in the future, I am often staggered by sellers’ expectations about the value of their business in the current climate. The big turnover-related multiples of years gone by are still quoted by sellers, even when their profitability is low or non-existent.

Some, after realising that the true market value is a fraction of their target price, decide not to sell now in the belief that “the good times are just around the corner” and that the ‘crazy’ prices will come back. I just do not agree with this. With funding issues persisting, insurers no longer ‘rolling over’ to pay enhanced earnings and the soft market continuing, pricing now needs to be increasingly linked to sustainable profitability rather than turnover. Some larger acquirers have bought businesses where they are very unlikely to ever recover their investment but, for most of us, we do need to show a return.

It is amazing how so few brokers adequately prepare their businesses for a sale. This should start at least three years prior to the sale – ideally longer. Professional help is readily available to identify objectives, potential purchasers and to plan communication with staff and clients to keep them ‘on-side’.

I have met with potential sellers who are clearly struggling with compliance issues, do not maintain proper staff files, do not have a clear insurer strategy and desperately need to improve their agency records. With some planning and forethought, a number of these issues can be addressed to help encourage purchasers to pay the best price possible.

The other big obstacle is that, for some owner-managed businesses, they are too close to the business to objectively negotiate the price. The firm they have built up over many years is more than just a company. It is an extension of their family, with staff and clients often becoming lifetime friends. Therefore, any negative aspect of a discussion can be regarded as a personal criticism.

What frustrates me most are brokers who want the highest multiple price and the least change to their business. Common sense dictates that a higher price generally equates to greater change. What buyers try to do is find a balance between retaining the good and changing areas which need improvement.

The bottom line for me is that sellers need to find a way of getting the emotion out of the sale process. It takes objective planning, preparation and clarity of what they want to achieve in the sale process for themselves, their staff and their clients. If the above are addressed adequately then the price takes care of itself".

Paul Anscombe, MD, James Hallam

Slow deal flow after hanging up the bikinis....................

The summer is coming to an end and it is time for those of us who have been away to hang up our Bikinis and concentrate on sorting out the usual raft of travel and accident claims which insureds bring back with them.  So, it is back to life and work as usual.

 

We and others have been predicting abundant activity on the mergers and acquisitions front during 2011 – but we probably all agree that the wave has yet to break.  A great deal of talking, but not much action so far.  Towergate, CCV, JLT, Oval, AJG, Willis, Giles, Bluefin, Swinton  - among others  - are keen buyers this year, but where are the deals?

Usually September to December prove to be fast moving months – deals and activities are completed in time for the start of the new calendar year.  Let’s hope that those conversations have been taking place and that there is a raft of deals about to be announced.

Chasing down a bikini-insurance link for this story I came across the following link:  

http://www.telegraph.co.uk/travel/weird-wide-world/5119218/Ten-ridiculous-travel-insurance-claims.html?image=4

Certainly an insurance story related to bikinis and therefore worth a look!