Everyone in the financial services and insurance business lately seems to be selling their insurance agency and a lot of you are asking yourself, “I wonder what my book of business is worth and can I even sell it?”
The short answer is yes, you can sell your agency. It just depends on a number of factors and a detailed due diligence process. And, you need to find the right buyer.
The overwhelming truth about the insurance industry right now is that the senior healthcare market continues to rapidly grow with the continued expansion of the baby boomers turning 65 and needing Medicare insurance, especially Medicare Advantage. The opportunity for growth has been, and still is, very hot.
But, don’t just take my word for it. See what HealthAffairs.org has to say about it.
After a 9 percent increase from 2021 to 2022, enrollment in the Medicare Advantage (MA) program is expected to surpass 50 percent of the eligible Medicare population within the next year. At its current rate of growth, MA is on track to reach 69 percent of the Medicare population by the end of 2030.
Due to this growth, we continue to see an incredible amount of FMO consolidation for those insurance agencies focused on health insurance, specifically Medicare which includes both Medicare advantage and Medicare supplement.
There has never been a more exciting time for qualifying health insurance agency owners to consider what a potential exit or transfer of equity looks like via full or partial acquisition, both of which will have some type of earn-out scenario. We’re even seeing some independent agents qualify for similar firm valuations.
But what does it take and how does a business owner get started?
Selling Your Medicare Book of Business
The first question we get is, “how is a Medicare book of business valued or how do I determine a sale price?”
Valuation rule of thumb is most commonly a multiple of adjusted EBIDTA which is earnings before interest, depreciation, taxes, and amortization. You can read more about adjusted EBIDTA here.
The next item is product mix.
Various insurance products are valued differently based on first year commissions and subsequent residual income. For example, a prospective buyer isn’t going to pay the same multiple on a $1M adjusted EBIDTA from term life insurance as they might for $1M in Medicare advantage or Medicare supplement sales.
Health insurance builds a residual book of business overtime with a higher life time value which has a big impact on valuation and final purchase price, especially when paired with a strong and steady growth strategy that the new owner can count on.
Medicare advantage plans and Medicare supplement plans seem to be the hot trend in the acquisition pool, but other insurance brokerage products are also being considered.
- Prescription drug plans
- Life Insurance (final expense, IUL, advanced markets, etc)
- Group health
- Business insurance
Primary consideration factors for selling your book of business.
Below are the initial items a potential buyer is likely to ask you for after you’ve executed a mutual NDA.
- Adjusted EBIDTA
- Total client base by product type and carrier.
- Total first year commissions by product type
- Enrollment quality such as rapid disenrollment, policy lapse rate, renewals, etc. This is a risk management 101 element you’ll see in all M&A deals.
- Last 3 years of financial statements
- Current YTD financials
The next step of the sales process after the initial discovery is receiving a letter of intent which is typically for a set period of time such as 60-90 days. During that time you will begin the due diligence process with your prospective buyer to work through the final value of your agency and kick off deal underwriting. This is a key element of support you can expect from a business broker and CPA if you planned to take your agency to market ahead of finding a potential buyer or M&A deals.
Additional insurance mergers and acquisitions considerations.
Aside from the standard considerations, below are some additional areas that may be considered by a potential buyer. It’s important to have everything organized so a buyer can easily see the value of your book and how it will sustain the current customer base and continue to show profitability post acquisition.
- Total insurance policies sold during AEP compared to OEP and rest of year. (Medicare agencies only)
- Proprietary technology such as CRM, lead generation technology, or cybersecurity that has a material impact on retention, cost of acquisition, or protection of consumer data. Insurtech continues to boom in financial services.
- How many full-time insurance agents on your team and the ratio between experienced and new agents as it relates to sales volume. Do you have all your eggs in one basket or is your production spread through out your distribution with a healthy number of applications per agent per year?
- Effectiveness of referral channels. Strong referral channels are a great indicator for a profitable agency if the referral sales volume has a significant impact on controlling acquisition costs.
- Proprietary lead generation such as integrated social media webinar funnels or SEO rankings.
- Unique sales incentives that are key to sales success and employee / sales team culture.
- Insurance lead costs and the average acquisition costs of a new customer for the various insurance plans you’re selling.
Every buyer has a different appetite and something you might not consider valuable could be the missing link the buyer has needed and is now willing to pay for it. This is commonly going to occur when you’re working with a much more sophisticated buyer with a well defined M&A strategy as well as most private equity firms.
Here is what McKinsey has to say regarding M&A strategies for insurance.
For companies considering acquisitions, an M&A blueprint should target specific growth themes and boundary conditions that reflect a comprehensive self-assessment of a company’s competitive advantages as well as the compelling strategy requirements for its business model that make it well suited to pursue M&A in a specific area. For example, a personal lines P&C carrier’s corporate strategy included enhancing customer growth through a digital engagement platform. Confident in the company’s ability to rapidly scale new businesses, managers decided that a program of M&A to acquire the various components of an integrated, direct-to-consumer platform would be the best way to accelerate domestic growth and support international expansion.
Moral of the story, make sure you have your value proposition organized so you can tell the most compelling story to your potential buyers who likely know exactly what they are looking to acquire.
Who is buying Medicare books of business?
The typical types of groups you can expect to deal with when selling your agency or book of business are as follows:
- Larger FMOs with a focus on Medicare agent and Medicare sales growth.
- Competing insurance agency
- Private equity firms
- Venture capitalists
- Insurance companies. For example, Aetna and Humana are two that have been known to make M&A transactions over the years. However, this is the least likely.
How to Sell Your Medicare Book of Business
The Redbird M&A team is talking with independent insurance agents and independent insurance agencies every week about the potential for selling their agency or specific block of business.
The most impactful thing you can do is simply raise your hand, ask questions, and make sure you’re visible and part of the discussions when companies are discussing potential new M&A opportunities. Let people know you’re interested in selling so they keep your agency top of mind.
Minimum qualifications to sell your book of business.
We’re seeing different categories of buyers in the current market, but they all seem to be based on the following minimum EBIDTA amounts.
Clearly, the larger multiples are for those $1M or greater, but there is definitely an appetite for the smaller agencies $500k or less.
We are seeing a lot of independent agent’s receive year-over-year acquisition deals for their book of business, which is one of the more interesting models we’ve helped with over the years. It provides upfront funding and ongoing support for growth vs. a typical earn out model which a lot of agent’s can’t qualify for.
If you’re interested in learning what your agency or book of business is worth, we invite you to schedule a time with a consultant on our mergers and acquisitions team to discuss the process and and current acquisition opportunities.