Insurance broking businesses can be attractive acquisition targets. They often have recurring renewal income, strong client retention and relatively predictable revenues. As a result, insurance brokers and books of business are often discussed in terms of a multiple of annual commission and fee income.
Depending upon the quality of the business and prevailing market conditions, you may hear indicative valuations of around 2 to 2.75 times recurring commission income.
So, if your brokerage generates £300,000 a year, does that mean it is worth somewhere between £600,000 and £825,000? Possibly, but it isn’t quite that simple.
Commission income versus EBITDA
While commission multiples can be useful, purchasers will also want to understand the underlying profitability of the business. One of the most important measures is EBITDA - earnings before interest, tax, depreciation and amortisation. Put simply, the purchaser isn’t only asking: “How much commission does this business generate?” They are also asking: “How much sustainable profit will be left after paying the people and other costs required to service those clients?”
For smaller brokers, those two approaches can produce very different answers.
Consider an owner-managed brokerage generating £300,000 of annual commission and fee income. It may have an excellent client base and strong renewal rates. But it still has to pay for staff, FCA compliance, professional indemnity insurance, software such as Acturis or another broking platform, premises, accounting and general administration. The owner may also perform several important roles within the business such as managing clients, winning new business, supervising employees and dealing with insurers. Once you calculate the genuine market cost of replacing the owner’s contribution, the sustainable EBITDA might be only £30,000 or £40,000.
That creates an interesting valuation problem. A commission multiple of 2-2.75 times might imply a value of £600,000-£825,000. An EBITDA-based valuation of the standalone business could suggest something considerably lower.
So why might someone still pay a substantial commission multiple?
The answer is often synergy. A larger broker acquiring the business may already have a finance team, compliance function, management structure, premises and technology platform. It may not need all the existing overhead associated with generating that £300,000 of commission. If the purchaser can migrate the clients onto its existing infrastructure and retain most of the revenue, the £300,000 income stream could generate substantially greater profit in the purchaser’s hands than it does for the existing owner. That is one reason why a book of insurance business can sometimes appear more valuable than the company currently operating it. But there is an important catch for the seller - the fact that a purchaser can generate substantial synergies doesn’t necessarily mean that it will pay all of that additional value to you.
What determines the multiple?
Not every £300,000 commission book is worth the same amount. A purchaser is likely to look closely at the quality and sustainability of the income, including:
A business with excellent retention, clean data, limited owner dependency and a high-quality commercial client base may command a very different multiple from one where most relationships depend personally upon the retiring owner.
Build the business before you sell it
For broker owners contemplating an exit, perhaps the most important lesson is not to wait until the year of sale to find out how a purchaser will look at the business.
Understand both numbers - your recurring commission income and your sustainable EBITDA. Then ask why the gap between them exists. Can processes be automated? Can administrative costs be reduced? Is the owner doing work that could be delegated? Can income per client be increased? Can the business demonstrate strong retention and organic growth? Can management information and client data be improved?
If you can increase sustainable EBITDA while preserving the quality of the recurring commission book, you make the business attractive under both valuation approaches. A £300,000 commission brokerage might look like a £600,000-£825,000 asset when viewed through a revenue multiple, but understanding why a purchaser should pay towards the top of that range - and preparing the business accordingly - is where the real work begins.
At SWLA Accounting, we work with insurance businesses to understand their profitability, improve their financial information and plan for growth, succession and eventual exit - ideally several years before a sale is contemplated.