How To Do An Insurance Brokerage Valuation Based On EBITDA
If you're considering selling your insurance brokerage or investing in a brokerage, you will need to know its value. Unfortunately, evaluating insurance brokerages or any other types of businesses can be challenging. There are a lot more moving pieces with a business than there are other types of assets such as homes or cars, which are relatively easy to evaluate.
Investors and mergers and acquisitions (M&A) specialists use a range of techniques to evaluate businesses. One popular option is EBITDA with a multiplier. So that you know what to expect, this guide explains that valuation method.
What Is EBITDA?
EBITDA stands for earnings before interest, taxes, depreciation, and amortization. In other words, this metric takes into account all of your brokerage's revenue and expenses. But it doesn't include the interest you pay on loans, your taxes, and any depreciation or amortization related to your tangible or intangible capital assets.
How Do You Calculate Your EBITDA?
If you use bookkeeping software for your insurance brokerage, it will generally have a function that allows you to create an EBITDA report. If you track your numbers on a spreadsheet, you will need to manually calculate EBITDA by removing interest, depreciation, and amortization from your net profits. The tax is usually already excluded from that number.
When trying to evaluate a brokerage you're thinking about investing in, you simply need to ask the seller about their EBITDA. Keep in mind that some companies will only give out this info if you're a qualified buyer. They won't share it with just anyone.
What Is the Multiplier?
If you have the EBITDA of two businesses in the same industry, you can compare their value using just this number. However, if you want to compare multiple investment opportunities from different sectors, you need to use the multiplier.
In this case, the multiplier is just a number that you multiply by the EBITDA. There is a certain element of subjectivity here — different M&A specialists use different multipliers.
The Stern School of Business at NYU suggests using the multiplier of 10 for general insurance brokerages. It uses a multiplier of 9.18 for life insurance brokerage and a multiplier of 7.03 for property insurance brokerages. These numbers are relatively close together because they are for similar businesses.
In contrast, if you were evaluating a business in the consumer electronics sector, the multiplier would be 18.95, and a hotel/gaming company would use a multiplier of 27.82. As you can see, the multipliers vary a lot.
To learn more, contact a company that handles insurance brokerage valuations or M&A transactions in general, like Insurance Agency Appraisal.