Authored by David Leslie, CEO, Leslie James Acquisitions
At Leslie James Acquisitions we are often asked by prospective insurance business vendors, from the outset, how much their business is worth.
Of course, there’s no “one size fits all” answer to that question.
Valuation depends on a variety of factors, not least profitability, Unique Selling Proposition and growth potential but also on other acquirer appetite related factors such as a niche or specialisation, synergy, geography, market share etc.
Different levels of appetite from different acquirers will often result in a significant variance in valuations, which is why there is an advantage in employing a business broker, who can generate interest and valuations from a number of acquirers.
There is however a good guide to valuation based on current market conditions and that is to calculate earnings before interest, taxes, depreciation and amortisation (EBITDA) and apply a multiple to the end figure.
In the context of insurance businesses, EBITDA is essentially a simple calculation.
It is to take the current operating profit (pre-tax profit) and then to “add back” non-essential post acquisition expenses, the likes of:
- The salaries and benefits of departing Directors.
- Lifestyle expenses associated with the Directors.
- Office costs (if the business is to be amalgamated within the acquirer’s offices)
- Duplicated resources, possibly including Finance, Compliance etc.
The then increased profit figure is known as the “Adjusted Profit / EBITDA” and it is this figure to which acquirers will apply a multiple to arrive at a valuation and offer for the business.
Profitable, attractive insurance businesses are currently being acquired for around 7 to 8 times EBITDA/Adjusted Profit and sometimes up to 10 times or even more depending on synergies and the acquirer’s appetite.
In terms of multiples of earnings (commission and fee income), which is the normal valuation tool for smaller businesses (with incomes of roughly less than £1 million), subject again to profitability and the other factors mentioned, a good, profitable business will be valued at up to 2.5 to 3 times earnings (less for personal lines brokers) and for particularly attractive businesses, this could go even higher.
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