If you’re an insurance agency owner thinking about selling your business, you’ve likely seen headlines saying that sale prices—or “multiples”—haven’t changed much in the last two years. But at INS Capital Group, we know that’s not the full story. As leading insurance M&A advisors, we’ve helped many owners like you get the best deal when selling your business. In this first part of our series, we’ll explain why those steady multiples can trick you and how buyers are changing the game.
Why Steady Multiples Are Misleading
For insurance agency M&A, buyers often use an EBITDA multiple to set the price. The range for agency multiples have stayed steady, ranging anywhere from 7x to 14x, depending on the size and other characteristics of your firm.
Here’s why that can be misleading: Buyers now look harder at your “proforma EBITDA margin.” This is your predicted profit percentage after the sale, adjusted for how the buyer will run things. A few years ago, buyers accepted high margins without much pushback. Today, buyers will question if your budget allocates adequate money for growth, like marketing, hiring or new technology. They might lower your projected margin, which cuts the final price—even if the multiple stays the same.
Here’s an example: Your agency makes $3.0 million in revenue and projects $1.3 million in EBITDA (a 43% margin). A buyer offers 10x EBITDA, so that’s $13 million (or 4.3x revenue). But during the due diligence process, after you agree to terms, they say your plan doesn’t include enough for future costs or growth investments. They drop the margin to 33%, making EBITDA $1.0 million. Now the price is $10 million—still 10x, but $3 million less.
This equates to sellers receiving 23% less than before, even with the same EBITDA multiple.
What’s Causing the Shift in Insurance Agency Valuations?
Back in 2019-2022, capital was accessible and cheap due to low interest rates. Buyers purchased agencies as quickly as they could. The primary focus was on growing topline revenue to boost their own company’s valuation, oftentimes with very little back end integration. But today, rates are higher, and investors want proof of organic growth and an integrated business model, not simply growth via acquisition.
Buyers have shifted to make sure that future projections allow for future growth investment. This helps to avoid overpaying or operating on a shoestring budget after closing. Common areas for expense adjustments include:
- Marketing to grow the business
- Technology upgrades for better operations
- Hiring and retaining good staff
- Additional corporate overhead after the sale
If they skip this, their profit margins shrink down the road and their own value suffers. This adjustment in approach protects buyers and their shareholders but can surprise sellers who aren’t ready or weren’t realistic in their own projections.
In part 2, we will explore the changes in buyer tactics and how to protect the value of your insurance agency.