12 Steps to Sell an Insurance Agency [Valuation Methods Included]

Selling your insurance agency can be liberating yet terrifying. You've kept this business on the road for years, guiding it to success. Now, it's time to let someone else take the wheel.

Where do you start? How do you ensure you get maximum value for your agency?

Don't worry. In this guide, we'll walk you through the key steps to selling your agency while minimizing headaches. We'll share insider tips to accurately value your agency, find ideal buyers, negotiate like a shark, and transition smoothly into the next chapter of your life.

Sound good? Then, let's get started!

TL;DR - 12 Steps to Sell an Insurance Agency

Here is a quick overview of the steps we'll cover:

Determine your reasons for selling.
Calculate the value of your insurance agency.
Prepare your agency for sale.
Research potential buyers.
Hire M&A advisors with Exitwise's help.
Create marketing materials.
Sign confidentiality agreements.
Send out teasers to gauge interest.
Negotiate price and terms.
Allow for due diligence review.
Obtain necessary consents and approvals.
Close the sale and transition.

We’ll explore each of these steps in more detail. Proper planning and execution can help you maximize your insurance agency's sale price and equip the buyer for future success.

At Exitwise, we leverage our global network to connect you with the most qualified M&A advisors who can help you sell your agency for up to 28% more than market value. Send us a message, and one of our advisors will walk you through the process.

Insurance Agency Valuation Methods

Before listing your agency for sale, you need an accurate valuation. This helps you set a fair asking price.

There are a few common methods professional appraisers use to determine value:

The Market Approach

This method looks at actual sale prices of comparable agencies to estimate value based on what other buyers have recently paid.

The appraiser identifies similar agencies sold in your region over the past 1-2 years. These must be comparable in size, client base, products, and other factors.

For example, if 3 agencies with $5M in annual revenue were recently acquired for 8x EBITDA (earnings before interest, taxes, depreciation, and amortization) in your market, your $5M agency would likely receive a similar 8x multiple.

The Income Approach

This method projects future earnings to estimate value based on income potential. It answers the question - "What returns can this agency generate?"

The appraiser:

Forecasts future revenue and cash flows
Applies risk factor and discount rate
Estimates value today based on expected future income

For example, if your agency's discounted 5-year earnings projection totals $4M in today's dollars, a buyer may offer $4M to acquire your agency.

The Asset-Based Approach

This method tallies up all of your business's tangible assets, like furniture, equipment, licenses, client lists, and intellectual property.

Then, total liabilities (accounts payable, mortgage debts, taxes owed, etc.) are subtracted to determine net asset value.

For example, your agency may have $500K in assets but $100K in outstanding debts. So, the net asset value would be $400K.

This approach is best for asset-heavy businesses, which insurance agencies generally are not.

Seller's Discretionary Earnings (SDE) Method

Some smaller insurance agencies may consider using a Seller's Discretionary Earnings (SDE) valuation method. This indicates how much income the agency owner takes home each year after accounting for expenses.

The SDE formula is:

SDE = Net Profit - Owner's Compensation - Owner's Benefits + Non-Recurring Expenses + Non-Operating Expenses

SDE aims to show the true earnings power of the business for a new owner.

This method is rarely used for insurance agencies and is more applicable to M&A deals under $5M.

How to Value an Insurance Book of Business

Valuing the book of business uses either a revenue multiplier or an EBITDA multiplier:

Revenue Multiplier: Annual revenue generated by the book x a multiplier percentage (typically 1.5-2.5x revenue)
EBITDA Multiplier: EBITDA x a multiplier based on profitability and cash flow (typically 4-8x EBITDA)

These can provide rough estimates but don't reveal the full agency value buyers may pay.

When evaluating your book, buyers will dig deeper and consider metrics like:

Size and Growth: Larger books with strong growth trends are valued more.
Profitability: Books with higher profit margins and EBITDA percentages warrant higher multiples. Buyers aim to optimize EBITDA.
Strong Cash Flow: Buyers want to see cash flow representing 20-30% of your revenue. To some buyers, like private equity firms focused on return potential, cash flow may matter more than current EBITDA.
Retention Rates: High customer retention indicates stability and future renewals.
Adequate Liquidity: Buyers want assurance that their business produces sufficient working capital to continue smooth operations after acquisition. Too little liquidity is a risk they'll account for.
Product Mix and Demand: Books heavy in profitable, in-demand products bring higher value.
Diversification: Buyers prefer books with diversified business lines, carriers, industries, and customers. Heavy concentration in any area poses risks. For example, if your top 10 customers represent 70% of revenue, it signals higher client risk requiring a discount.
Cross-Selling Potential: The opportunity to cross-sell more to existing clients adds value.
Referral Opportunities: Easy referral potential from loyal clients offers upside.
Expense Control: The compensation of staff and producers should align with insurance industry norms. Outsized expenses undermine profitability and, thus, valuations.
Competitive Advantage: Unique products or services command higher pricing.

While simple rules of thumb exist, it's best to work with a qualified M&A advisor to determine the most accurate valuation. Also, remain confident in your value to demonstrate it to buyers. Independent appraisals often take 60+ days, but the legwork pays dividends in deal terms.

12 Steps to Sell an Insurance Agency

Now, let's get into the step-by-step process of selling your insurance agency:

1. Determine Your Reasons for Selling

First, be clear on why you want to sell your agency. Common reasons can include:

Retirement
Burnout
Pursuing other interests
Bringing in more resources to grow
Financial needs
Relieving stress

Understanding your motivations will help guide decision-making throughout the process.

2. Calculate the Value of Your Insurance Agency

As discussed above, work with appraisers and advisors to determine your agency's fair market value using multiple methods.

This gives you a value range to start negotiations.

3. Prepare Your Agency for Sale

To maximize value:

Retain key employees with incentives.
Boost retention rates to demonstrate stability.
Cross-sell to increase commission revenue.
Trim expenses without impacting operations.
Organize financial statements and legal documents for due diligence.

A clean operational structure and healthy financials will attract buyers.

4. Research Potential Buyers

Brainstorm categories of prospective buyers such as competitors, private equity firms, individuals in the industry, or your own management team.

Reach out to your network and advisors to identify specific companies or buyers that may be interested.

5. Have Exitwise Find and Hire Top M&A Experts

Selling an insurance agency requires specialized expertise. At Exitwise, we can connect you with pre-vetted, industry-specific M&A experts who will maximize your sale price.

Our global network includes the best:

Investment bankers
M&A attorneys
Tax accountants
Wealth managers

We take care of the heavy lifting to interview, select, and hire each M&A expert tailored to your needs. And these experts do the valuation, negotiations, due diligence, and documentation on your behalf.

Additionally, your team will be with you every step of the way until closing. To facilitate a smooth, profitable agency sale, schedule a chat with one of our advisors to answer all your questions about the M&A process.

6. Create Marketing Materials

To introduce your agency to potential buyers, create materials like:

A sale overview with business description, strengths, and value drivers
Financial and operational data summarizing performance
Accounting statements illustrating revenues, expenses, and profits
Information on products, services, systems, and intellectual property

7. Sign Confidentiality Agreements

Before distributing your confidential business information to potential buyers, have them sign NDAs to protect your interests.

8. Send Out Teasers to Gauge Interest

Send teasers with your marketing materials to interested buyers. Gauge their level of interest and narrow down the prospective buyer pool.

9. Negotiate Prices and Terms

Once you have an engaged buyer, work with advisors to negotiate favorable deal terms like sale price, payment structure, closing timeline, employment agreements, and more.

10. Allow for Due Diligence Review

Expect buyers to thoroughly review your agency's operations, finances, legal compliance, employee matters, and other areas during due diligence.

Being responsive to their requests and transparency builds trust.

11. Obtain Necessary Consents and Approvals

Depending on your agency structure, you may need consent from partners, shareholders, boards, or executors.

Regulatory approvals from insurance departments may also be required. Review carefully with your advisors before signing.

12. Close the Sale and Transition

With terms fulfilled, close the deal. Work closely with the buyer on transition plans to retain staff and clients. A smooth shift in ownership helps secure your agency's future.

Legal and Financial Considerations During the Sale

Some other important things to address during the sale process include:

Appointing advisors: Authorize your advisors as representatives to act on your behalf.
Tax implications: Work with CPAs and legal counsel to minimize tax liabilities based on deal structure.
Licensing: Ensure the buyer can obtain all necessary state insurance licenses before closing.
Lender approvals: If you have outstanding loans, get lender consent if required by loan covenants.
E&O insurance: Coordinate tail coverage and address any past liability issues.
Employee agreements: Review existing employment contracts and tailor new agreements for transitioned staff.
Employee compensation: Determine if any pay, commissions, or benefits will change under new management.
Confidentiality: Have strong non-disclosure agreements in place to protect customer data.
Continuity of policies: Ensure a smooth transition of existing insurance policies to the new agency owner.

Again, experienced M&A experts are invaluable here. They can guide you through legal and financial matters specific to your agency.

Frequently Asked Questions (FAQs)

Now, let's look at some common questions about selling an insurance agency.

Where Can I Find Qualified Buyers for My Insurance Agency?

You can tap into your network, use an industry exchange platform, or engage an M&A intermediary to connect with qualified buyers who meet your criteria. Exitwise can help you find the best M&A experts to guide you through this process.

What Should I Do to Get My Insurance Agency Ready for Sale?

Key preparation steps include:

Organizing financial records
Retaining key staff
Resolving legal issues
Optimizing operations and profitability
Segmenting sellable assets
Positioning your value drivers to buyers

What's The Average Timeline For Selling An Insurance Agency?

If thoroughly prepared, most insurance agencies sell in 6-12 months. However, the process may be shortened or extended depending on deal complexity, buyer financing, due diligence findings, and negotiation dynamics.

Conclusion

Valuing and selling an insurance agency is a complex process that requires strategic planning and execution. The most important step, however, is finding excellent insurance-specializing M&A advisors.

Exitwise makes this easy by introducing top experts to maximize your sale price. We work with you to understand your specific business and goals and then suggest the best investment bankers, attorneys, and accountants suited for you.

We also advise you through the entire sales process. This simplifies exiting your agency while optimizing for maximum value. If you’re ready to sell, book a consultation to understand the process, and let us guide you on your journey.