When determining the value of your insurance agency, there are two fundamental philosophies. The first is to calculate its intrinsic value—what it’s worth based on its future cash flows.
The second, and often more practical approach, is to determine its relative value by comparing it to what similar agencies are worth in the current market.
Think about it this way: a house has an intrinsic value based on the land and lumber used to build it. But its market price—what someone will actually pay—is determined by what similar houses in the neighborhood have recently sold for.
In the world of agency M&A, this second approach, known as relative valuation, is king. It answers the crucial question: What is my agency worth, right here, right now?
What is Relative Valuation?
The foundation of any DCF model is a forecast of your agency’s free cash flow, typically over the next five to ten years. This is far more than a simple guess; it is the process of answering critical strategic questions about your business.
Instead of building a complex financial model from the ground up, this approach leans on the market’s collective wisdom. It operates on the simple premise that similar businesses, in the same market, should have similar valuations.
This method isn’t about your agency in a vacuum; it’s about your agency’s value relative to its peers in the current M&A landscape.
How Relative Value is Calculated
Relative valuation is accomplished by using valuation multiples. These are standardized financial ratios that allow for an apples-to-apples comparison between different companies.
The Power of Multiples
By applying a multiple to a key financial metric, you can quickly determine a company’s value. For independent insurance agencies, the two most common multiples used are:
- Revenue Multiple (e.g., 3x annual revenue)
- EBITDA Multiple (e.g., 10x Normalized EBITDA)
The EBITDA multiple is by far the most common and credible metric used in professional agency M&A.
When you hear someone say, agencies are selling for 10x EBITDA, they are talking about a relative valuation multiple.
Method 1: Comparable Company Analysis (CCA)
The first method for finding a multiple is the Comparable Company Analysis (CCA). This method involves looking at the valuation multiples of publicly-traded insurance brokers (like Gallagher, Brown & Brown, Aon, etc.).
What This Tells You
This data is easy to find and provides excellent insight into the health of the industry and the performance metrics that matter to public investors.
The Problem with CCA
While useful, CCA is not a direct guide for valuing a private agency.
The vast differences in size, growth, risk, and diversification mean that the valuation multiples of public giants are not directly applicable to a Main Street agency. Its best use is for high-level industry benchmarking.
CCA is a good tool for understanding broad industry health, but it is not the right tool for pricing your specific agency.
Method 2: Precedent Transaction Analysis (PTA)
This is the most direct and powerful form of relative valuation for an independent agency owner. The Precedent Transaction Analysis (PTA) analyzes the actual sale prices of other private insurance agencies that are similar to yours.
What This Tells You
PTA examines the multiples (e.g., the 10x EV/EBITDA multiple) paid in recent, real-world deals for agencies of a similar size, business mix, and location. This allows you to establish a highly credible and defensible valuation range for your own business.
How to Think About It
This method is the closest you can get to knowing the going rate for an agency just like yours. It is the method that most sophisticated buyers and M&A advisors rely on.
PTA isn’t based on public stock market theory; it’s based on what real buyers have actually paid for real agencies in the private market.
The Seller’s Challenge: A Scarcity of Data
There’s a major problem with the Precedent Transaction Analysis, especially for small to medium-sized agencies: a scarcity of public data.
The Information Disadvantage
Most agency M&A deals are private. The terms—especially the price and the multiple—are not disclosed. This information asymmetry has historically put sellers at a huge disadvantage, as they lack the comprehensive market intelligence available to the buyers on the other side of the table.
How Milly Books Solves This
Modern technology is the answer. Milly Books was designed to solve this exact problem. Our platform analyzes your agency’s key metrics and compares them against a vast database of market data.
It effectively brings the market comps to you, providing an instant, objective, and transparent estimate of your agency’s potential market worth. This levels the playing field and allows you to enter the M&A process with a clear-eyed understanding of your position.
You can’t get a fair price if you don’t know what the market is really paying. Access to data is the key to leveling the playing field.
Why Relative Valuation Dominates M&A
In nearly every M&A discussion, relative valuation models take center stage. They are more common than DCF or other intrinsic methods for several practical reasons.
It’s Grounded in Reality
This method is based on actual prices that willing buyers have actually paid for similar businesses. This real-world evidence is persuasive to buyers, sellers, and—critically—the lenders who finance the deals.
It Reflects Market Sentiment
Relative valuation inherently captures the mood of the market. It accounts for factors like the availability of capital for acquisitions and the overall economic outlook, which can significantly impact pricing in the short term.
It’s Efficient
Compared to building a detailed, 10-year intrinsic value forecast, analyzing market comparables is often a more straightforward and faster way to arrive at a realistic valuation range.
Relative valuation is the language of the M&A market because it is fast, efficient, and tied directly to real-world, verifiable data.
Actionable Insights for Agency Owners
Understanding this concept allows you to take specific actions to improve your agency’s position and final sale price.
Think in Multiples
Get comfortable with the language of multiples. Understand what drives them up or down. Buyers will pay a higher multiple for agencies with higher profitability, better client retention, strong organic growth, and less owner dependency.
Focus on What You Can Control
You can’t control the M&A market or interest rates. But you can control the quality of your agency. Improving the key metrics (like Normalized EBITDA) that buyers scrutinize is the best way to improve your final price, no matter what multiple the market is paying.
Access to Data is Key
The accuracy of a relative valuation depends entirely on the quality and relevance of the comparable data. To get the best valuation, you need to know what truly comparable agencies are really selling for.
While understanding your agency’s intrinsic strengths is vital, its ultimate sale price will be determined in the marketplace. By understanding relative valuation, you can position your agency to win.
The Market’s Verdict
The market-based approach gives you the market’s verdict—a clear price signal based on what buyers are willing to pay today. By understanding the principles of relative valuation, you can stop guessing at your agency’s value and start taking action to ensure you achieve its maximum price when the time is right.
Ready to see how your agency fits into the current M&A landscape? Create your free Milly Books account to get an instant, data-driven valuation and gain access to insights that drive informed decisions.
Frequently Asked Questions (FAQ)
It’s a method of valuing your agency by comparing it to the market price of similar, comparable agencies that have recently been sold. It’s often called a market-based approach.
Relative value is the price the market is paying for an agency like yours today (i.e., comps). Intrinsic value is the fundamental worth of your agency based on its own future cash-generating ability (i.e., a DCF analysis).
This is the most accurate form of relative valuation. It involves looking at the actual sale prices and valuation multiples (like 10x EBITDA) from recent, private sales of agencies similar to yours.
Because the value is based on comps, you must have accurate and relevant data. If you don’t know what similar agencies really sold for, you are at a disadvantage. Buyers have this data; platforms like Milly Books provide it to sellers to level the playing field.
Glossary of Key Terms
- Relative Valuation: A method of valuing a business by comparing it to the market prices of similar, or comparable, businesses. Also known as the Market-Based Approach.
- Valuation Multiple: A financial ratio (like 10x) that is applied to a key metric (like EBITDA) to determine a company’s value.
- EBITDA Multiple: The most common valuation multiple in agency M&A. It is the Enterprise Value (EV) of the company divided by its Normalized EBITDA.
- Precedent Transaction Analysis (PTA): A valuation method that looks at the prices and multiples paid in recent, real-world sales of comparable private companies.
- Comparable Company Analysis (CCA): A valuation method that looks at the multiples of publicly-traded companies.
- Market Sentiment: The overall mood of the M&A market, including buyer optimism and the availability of capital.