Insurance agency owners that are going through the selling process quickly become familiar with EBITDA, Earnings Before Interest, (Income) Taxes, Depreciation, and Amortization. Sellers often notice that different buyers will calculate very different EBITDA numbers. In fact, EBITDA can vary so much that many sellers question its legitimacy as a marker of value. However, EBITDA is a critical indicator buyers and their financers use to determine market value, profitability, and financial health. It is, therefore, vital for sellers to understand EBITDA.
EBITDA calculations are not definitive. EBITDA aims to provide a clearer insight into an insurance agency’s operational efficiency and overall profitability. Buyers and financers use EBITDA to compare agencies regardless of size, structure, or tax environment. Different buyers will utilize different metrics based on their own unique development strategy, risk tolerance, and financial framework to determine EBITDA. For sellers looking to understand these differences in valuation, here are some key insights:
Cost Structure and Operational Efficiencies
Some buyers may calculate a higher EBITDA in anticipation of cost savings after acquisition. Buyers will identify redundancies across the organization structure in order to determine how to best streamline processes and costs with a new acquisition. This streamlining can lower operational costs while boosting productivity. Buyers factoring this into their EBITDA calculations may come in with a higher valuation.
Expense Adjustments
Different buyers will calculate non-recurring expenses, non-cash expenses, and one-time gains or losses differently when determining EBITDA. When isolating these non-standard costs from the core business performance, buyers can get a more accurate snapshot of an agency’s performance and profitability. A buyer who excludes these expenses will calculate a higher EBITDA than a buyer who does not account for expense adjustments.
Retention Risk Assessment
When calculating EBITDA, potential buyers will assess the risk of client loss, talent loss, and operational disruptions. How these factors impact the final EBITDA will differ from buyer to buyer. Customer retention and operational continuity will positively impact EBITDA calculations. Buyers who include these adjustments in their EBITDA estimations will value retention higher than buyers who do not adjust EBITDA for retention risks.
M&A Synergies
Synergies created through M&A transactions are a critical value driver when buyers calculate EBITDA. Synergy can cause a buyer to valuate a merged agency above the value of the two individual agencies. Synergistic value drivers include product bundling, new distribution channels, geographic expansion, and cost reduction. Buyers motivated by M&A transactions are looking for this kind of value creation when evaluating the true worth of a business. Buyers looking for synergistic potential will place a higher value on these qualities when assessing your business’s EBITDA.
EBITDA zeros in on the core earning power of an insurance agency, allowing buyers to make informed decisions about valuation. Springtree Group can advise sellers in understanding and improving their EBITDA numbers to appear more attractive to compatible buyers. We can explore your options to negotiate the best deal for you and your agency.
