Selling Health Insurance Agency – Sold

Selling Health Insurance Agency

If you’re looking to sell your health insurance company, there are a few things you’ll need to do in order to prepare. First, you’ll need to find a buyer who is willing to pay fair market value for your business. You’ll also need to have all of your financial documents in order so that the buyer can due diligence on the company. Finally, you’ll need to negotiate a sales contract that is agreeable to both parties. With these steps in mind, selling your health insurance company can be a relatively easy process.

Insurance Agency Valuation

Insurance agency valuation means estimating the worth of an insurance agency. Insurance agency owners usually follow the industry rules of thumb when valuing their company. According to Live Oak Bank, insurance agencies are worth 2x-3x the revenue or 6x-9x EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization). But this isn’t always accurate, and blindly accepting these valuations can lead to selling your business for significantly less than it’s worth.

Why You Need to Determine Your Insurance Value

There can be several reasons for figuring out the value of your insurance agency. These include…

For an agency with multiple shareholders, a buy-sell agreement establishes how the business will be valued if there is any dispute. This agreement is also good to have in case of the death or departure of any shareholder.

In the event of mergers, sales to family, death of the owner, divorce, or forced restructuring, you will need to transfer the agency’s ownership. In these situations, business valuation acts as a tool for creating ownership stability and assessing management performance.

Evaluating business performance

You can’t truly understand how well your business is performing until you know its value. It’s important information to have while managing your business.

Common Approaches for Insurance Agency Valuation

Industry experts have identified three common methods for industry agency valuation.

The Market Approach

This method looks at the market data from comparable public companies or transactions of similar companies. Most mid-size to larger agencies use this approach. It determines the company’s worth according to what interested parties are willing to pay. When using these market-derived valuation ratios, you can see what the investors in the market want as a return on investment in insurance agencies.  

There are two versions of the market approach:  

Mergers and Acquisitions Method

This method is a constructive way of determining a value for sale because it represents true market-based pricing based on recent transactions in private markets. The method considers how similar companies have been valued and the prices they have been sold for to profit a specific company.

Guideline (Comparative) Public Company Method

The guideline public company method is a way for businesses to determine their value using pricing multiples at which publicly traded equity securities are traded relative to the various earnings or balance–sheet parameters of that particular business. The pricing multiples measure how much an investment pays out relative to its worth. It’s developed by dividing comparable stock prices with economic variables like net income or operating cash flow.

The Income Approach

This valuation method is based on the concept that the value of a business is equal to the present value of its future earnings. In other words, this approach estimates what a company is worth by projecting its future earnings and discounting those earnings back to the present day. The income approach is most commonly used for small businesses because it requires less information than the market and asset approaches.

There are two versions of the income approach:

Discounted Cash Flow (DCF) Method

The discounted cash flow method estimates the value of a company by projecting its future cash flows and discounting them back to the present day. This method is based on the idea that a business is worth the sum of all its future cash flows, discounted at an appropriate rate.

Capitalization of Earnings Method

The capitalization of earnings method estimates the value of a business by dividing its current earnings by an appropriate rate of return. This method is based on the idea that a business is worth the present value of its expected future earnings.

The Asset Approach

This valuation method is based on the idea that a company is worth the sum of its parts, or the value of its assets. This approach is most commonly used for businesses with a large number of physical assets, such as manufacturing companies.

There are two versions of the asset approach:

Book Value Method

The book value method estimates the value of a company by subtracting its liabilities from its assets. This method is based on the balance sheet, which is a snapshot of a company’s financial position at a given point in time.

Replacement Cost Method

The replacement cost method estimates the value of a company by calculating the cost to replace its assets. This method is based on the idea that a business is worth the cost of replacing its assets, not its historical cost.

Key Takeaways

The three most common methods for valuing an insurance agency are the market approach, the income approach, and the asset approach.

The market approach is the most common method for valuing larger agencies.

The income approach is the most common method for valuing small businesses.

The asset approach is the most common method for valuing businesses with a large number of physical assets.

When selling your insurance agency, it is important to consult with a professional valuation expert to get the most accurate estimate of your business’s worth.

If you are looking to sell your health insurance agency feel free to reach out to iHealthBrokers.com!

Owner and CEO of Smedley Insurance Group, Inc. at iHealthBrokers | Smedley Insurance Group, Inc. | Website | + posts

Jesse Smedley is the Principal Broker for iHealthBrokers and the founder, president, and CEO of Smedley Insurance Group, Inc. and iHealthBrokers.com. Since the inception of SIG in 2007, Jesse has been dedicated to helping people save money on their health insurance by providing them with resources to educate themselves on all their health insurance options, both under age 65 and Medicare beneficiaries. He is featured in many publications as well as writes regularly for expert columns regarding health insurance and Medicare.