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​Why Relying Solely on “Industry Standard” EBITDA Multiples Can Cost You When Selling

Overview

One of the most common mistakes people make when selling their agencies is relying on what they believe to be “industry standard” EBITDA multiples to dictate the agency's value. The EBITDA multiple is certainly important, but so is what you multiply against it: the EBITDA itself.

 

The days of valuing agencies at 2x commissions are long gone. Institutional investors which is whom you want to sell to – use EBITDA to value an agency. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) is an accounting term, but is really a proxy for an agency’s profits.

 

With an EBITDA in hand, just applying a multiple to it to arrive at a valuation is not enough. Before you try to use any multiple to value your agency, there are three points to think through: 

 

  1. What Multiple? What multiple are you applying, and how did you arrive at that multiple?

  2. A Multiple of What? While the multiple is obviously important, we would argue the multiple of what is far more important.

  3. You Name the Price, I’ll Name the Terms: While getting the price you want may be a moral victory, it’s the terms of a transaction that are most important.

 

Let's discuss all three in turn.

What Multiple?

Unfortunately, outside of the mid-market publicly traded insurance brokers — which include Brown & Brown and AJG — there isn’t reliable public data that points to multiples of recently-traded insurance brokers.

 

A seller who is not using an advisor is relying on either industry publications or word of mouth from other industry participants to figure out the appropriate multiple to apply. Fortunately for us, we have real-time data on exactly where private agencies are trading on a given day.  Since January 1st, 2019, we have advised over 170 sellers on their insurance transactions. These include general P&C agencies, benefits brokers, MGA’s, wholesalers, self-insured specialists, stop loss brokers, etc. 

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During that period, the smallest deal was around $1.2 million in value, and the largest was $2.2 billion. In terms of EBITDA multiples, the lowest was 7.7x — and the highest was 13.7x. It's important to note that in nearly all cases, the final EBITDA multiple described above was the result of a competitively run process with an average of 8 offers per transaction.

 

And even so, there is still a massive gap between multiples. Since there are hundreds of variables that impact the multiple – nearly every one can be viewed through the lens of risk and growth. An agency with little to no growth or even negative growth is going to trade at a different multiple than one growing at 20%. The risk profile of that particular agency has just as large of an impact on multiples. For example…

 

  • Who controls the books of business?

  • Does the agency own the business?

  • What is the client concentration of the agency?

  • Do continents make up a large percentage of revenue?

  • What is the annual volatility of those contingent payments?

  • Who are the largest markets?

  • Are they a generalist?

  • Or do they sell a specialty product that requires a certain market appointment

 

The list of risks can go on and on, but it obviously impacts the value it will have on the agency’s multiples. So as a result, it is even challenging for professionals like us to figure out a likely multiple range for any particular agency. It's nearly possible for a seller to figure out a multiple that’s appropriate for their own agency, which brings us to our next point. 

A Multiple of What?

Sophisticated institutional buyers understand that agency principals will think they have a general knowledge about what constitutes a strong EBITDA multiple. As a result, they will present the seller with what appears to be an abovemarket multiple, which eventually leads the seller to accept the offer. But whose version of EBITDA are you applying this multiple to? If the buyer dictates the EBITDA to which the multiple is applied, there is a good chance the valuation is not as high as you might think, despite the multiple.

Which agency landed the better deal? One’s natural instinct is to point to Agency A. But as you noticed, we don’t know what Agency A’s EBITDA was vs. Agency B’s. You might think if they have the same book of business and are both at $5 million of revenue, the EBITDA for each agency should be around the same --- but the reality is that they rarely are.

 

It turns out Agency A worked with the seller to come up with the EBITDA – and as a result, the buyer and seller both determined it was around 25% of revenue or $1.25 million. Applying a 10x multiple equals a $12.25 million purchase price. However, it turns out Agency B was able to show the real economic earning power of their business was closer to a 45% margin or $2.25 million. Applying an 8.85x multiple to that figure equals a purchase price of $19.91 million, or 62% higher than Agency A’s deal.

 

This means that while Agency A sold for a higher multiple, they sold for close to $8 million less despite having similar businesses. This mistake is catastrophic and is a case in point to a multiple of what being more critical than the actual multiple. 

You Name the Price, I’ll Name the Terms

Let’s go back to Agency A – who sold their $5 million business for $12.25 million, or what they thought was an impressive 10x EBITDA.  

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While the headline multiple is 10x, the seller actually received $10 million at close and would receive the other $2.25 million in equal payments over 3 years as long as the agency grew at 5% per year. Although these terms may sound reasonable, there certainly is a risk at closing that the seller never receives the $2.25 million down the road. Even if they meet the 5% revenue growth hurdle, they are also incurring the buyer’s credit risk.

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Although the seller will view this as a 10x deal, we see it as 8x guaranteed — with the seller never even realizing the trap they walked into. From Seller A’s perspective, they negotiated a spectacular deal by selling their agency for 10x EBITDA. But was it really a great deal? Not when compared to Agency B, who while “only” selling their agency fee for 8.85x EBITDA, received $19.9 million at close or nearly 100% more than Agency A. 

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The above example is not a worst-case scenario or an extreme example – it represents actual deals we have seen and advised on. Sellers like Seller A never even know what happened to them.

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If you are considering selling your agency and want to learn more about how our proven process can dramatically increase your odds of a successful transaction, connect with us – and we’ll talk with 100% confidentiality. 

About Sica | Fletcher

ica | Fletcher has been the #1 advisor to the insurance brokerage space for the past 7 consecutive years, having advised on over $11.6 billion in brokerage deals since 2014. We are a PE and M&A analytics platform that goes beyond just transaction data and are designed to optimize deal generation and business development through customized data, automation, and one-of-a-kind networking functionality.

 

On average, our process leads to valuations that are 30% higher than when agency principals negotiate sales on their own.

 

If you’d like to discuss your strategic options, please email or call us:

 

  1. Al Sica: al@sicafletcher.com (201) 805-1561

  2. Mike Fletcher: mjf@sicafletcher.com (516) 967-1958

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