Insurance brokerage is a growing business. In the US, for example, there are nearly 220,000 insurance brokerage firms.
The industry employs some 1,232,000 people and generates total annual sales of over $355 billion. Most insurance agencies are small businesses with an average staff of 6 and annual revenues of around $1.8 million.
These businesses continue to provide excellent financial rewards to agency owners in return for investment in modern financial management systems, client management and new business development.
Insurance brokers tend to have highly recurring income stream. Attracting and retaining long-term growth clients is very important.
If you are valuing an insurance agency, consider these key business value drivers:
1. Product mix
Insurance agents can offer products in a wide range of markets. Among these are the property and casualty commercial lines, personal, health insurance, and life insurance products.
Group health and consumer insurance lines are frequently more profitable than commercial contracts. Agencies that specialize in health benefits often show good, steady cash flow which drives their business value.
2. Whether the policies are direct or agent-billed
Direct-billed policies tend to have higher client retention rates. As a result, your will find that insurance agencies with high direct-bill rates often command higher business valuations.
3. Contract renewal rates
Existing client policy renewals are critical to the insurance agency’s ability to generate stable cash flow. Renewal rates may be affected by the client base characteristics and client concentration. Agencies whose income stream depends on a few large clients are likely to have business value below the peers with diversified customer base.
4. Licensed employee percentage and tenure
Professional insurance agents are in great demand. If you are looking at an agency whose staff is largely composed of highly skilled, long-term insurance professionals, the valuation multiples tend higher.
This is due to both the expectation of better client retention and ability to develop new business.
5. Independent or captive insurance agencies
Independent agents frequently command higher valuation multiples. This is because some major carriers limit the product choices that their captive agents can offer.
Independent insurance brokers can capitalize on this reduced competition by offering profitable products that are highly customized to meet their clients’ needs. This leads to better client retention, steady profit growth and higher business valuations.
Business valuation techniques for insurance brokerages
You have a number of solid choices to determine the value of an insurance agency. Some guidelines:
Market approach to valuing insurance agencies
Multiples of gross sales commissions are the preferred way to determine business market value in this industry. Again, valuation multiples for agencies with high client retention rates tend to be at the top of the range.
Agency valuation under the Income approach
Because many smaller insurance agencies are acquisition targets for larger firms, business valuations should factor in the potential synergies. The Discounted Cash Flow business valuation method, which enables you to account for key business value drivers directly, is an excellent choice here.
Asset approach to business valuation
Insurance agencies tend to have a large intangible asset base and business goodwill in the form of established clients and carrier relationships. The method of choice here is the Capitalized Excess Earnings – it lets you calculate the business value as the sum of its tangible assets and business goodwill.
Need to determine the market value of an insurance agency? ValuAdder Business Valuation Market Comps Tools give you the facts – based on the recent business sales.
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There are over 50,000 bars, pubs, microbreweries and night clubs in the US alone. These businesses tend to generate good cash flow and attract loyal customer following, especially if the bar concept is well-focused on a particular demographic.
With health benefits of moderate wine drinking planted in the public subconscious, and popularity of local microbrews, many pubs and bars are enjoying solid growth and steady earnings.
Valuing a bar is all about earnings
Business value of a bar or pub is driven by its profitability. A key measure of the bar value is how much discretionary cash flow it throws off.
A number of factors affect how profitable, and therefore, valuable a bar is. The top hitters to check:
Bars and microbreweries often are a gathering place for the locals. If you target a specific market demographic, the bar should be located where these people like to spend their time. Ample parking is very important.
2. Rental expenses
Lease expenses and terms are a big factor affecting bar values. Successful bars keep theirs under 8% of sales.
3. Liquor license
Liquor license is a requirement to generate sales, produce profits and build a bar’s value. A liquor license is especially valuable if the number of licenses in the area is limited, deterring competition.
4. Whether drinks are measured or free poured
How the drinks are served affects the bar’s cost of goods and its cash flow. A rule of thumb is to keep the drink costs under 30% of the price.
5. Additional profit centers such as on-premises vending
On-premises vending of products and games is a frequent addition to the bar’s revenue. This also helps keep the customers in longer, often increasing the drink sales volume.
6. Payroll expenses
Payroll expenses within 25% of the bar sales are the industry norm.
Business valuation methods for bars and pubs
Business valuation based on income is the typical choice for valuing bars and pubs. The Multiple of Discretionary Earnings method is an excellent choice because it lets you figure out the effects of various financial and operational factors into the bar value.
Since bars sell often, you can value a bar by direct market comparisons. Multiples of discretionary cash flow are the preferred choice. You can also price a bar based on its revenues. Even then it is a good idea to check your business valuation results by using the cash flow based multiples.
You will find extensive coverage of business values for bars and pubs in the ValuAdder Market Comps Tool. Based on the current business sales, the Market Comps give you an instant estimate of the business selling price range, average and median values.
Bars are rarely valued based on assets. This is because many business buyers change the bar concept and invest heavily into upgrading the assets, such as furniture, fixtures and equipment. By convention, the business-owned real estate is broken out and valued separately.
While business valuation is hardly black magic, 3 common myths do need dispelling:
Myth 1: There is only one way to appraise a business.
Not so. In fact, there are three ways, known as approaches, to determine the value of a business. Each has strengths and drawbacks. That’s why a well-prepared business appraisal uses a number of business valuation methods to get accurate results.
Myth 2: Valuing a business involves filling out a couple of forms.
You wish! Business valuation is part art and part science. It requires that you make a number of important decisions about why and how you value your business. This way you get reliable business valuation results that you can interpret – and defend in any situation.
Properly prepared business appraisals account for this and get very accurate results. You can do this by analyzing the business carefully, choosing the appropriate business valuation methods, and drawing a well-considered business value conclusion.
Myth 3: Once my business is appraised, I am done.
In fact, a business valuation is valid only on the date it is completed. A business is like a living and breathing thing – its situation changes all the time. So does its value.
Re-appraising your business regularly is an excellent strategic management tool – it lets you see how your business value evolves in response to financial and operational changes in your business.