Insure Your Future

Brokerage Valuation 101: What Factors Do Appraisers Consider?

4 November 2021 by Sue Palmer

There are plenty of reasons to conduct a business valuation process for your insurance brokerage. You may be considering selling your company, for example, or you may be seeking additional investors. Whatever the case, understanding the market value of your company provides critical information for both stakeholders and prospective stakeholders.

An appraiser will consider many factors when looking at your business. They'll often look at far more factors than could fit into a brief article, which is why professional evaluations are necessary in the first place. However, most valuations include a few straightforward considerations that are relatively easy to understand. The three factors below are often the first things an appraiser will consider.

1. Market Conditions

There's no such thing as a static or unchanging industry. Market conditions can change for every business, no matter how critical it may be to its customers. The insurance industry has changed drastically over the years, and those changing conditions can impact the worth of individual brokerage companies.

Appraisers usually begin by looking at valuations for other companies in a similar position in your market. This process helps the appraiser determine how your business stacks up against its competitors. Looking at the industry as a whole also helps your appraiser determine your valuation's upper and lower bounds. This examination will include both national and regional market conditions.

2. Similar Businesses

While your appraiser will need to look at market conditions as a whole, they also want to avoid considering companies that are too different from your own. For example, if you operate a relatively small insurance brokerage, the valuation of major industry players typically isn't relevant. Likewise, much smaller businesses won't provide useful information for your valuation.

Instead, appraisers will consider factors such as your annual sales and discretionary earnings and compare them to trades for other businesses in your industry. This process allows the appraiser to find companies of a relatively similar size to make an apples-to-apples comparison with other recent sales.

3. Employee Value

Appraisers also need to consider the value of your human capital, which can often be a much trickier topic. Industry experience, time with your company, and many other factors can influence the dollar value of your employees during a valuation. These factors require an appraiser with experience, but it's critical to consider employees, especially when valuing your company for a sale.

An accurate business valuation is an in-depth process that considers a wide range of factors, and this is true for insurance brokerages of all sizes. Working with services like Insurance Agency Appraisal can help.

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