Tips for increasing your firm’s value

Specializing in a niche or segmenting your clientele can increase the worth of a small firm, as highlighted in the Value Index for group benefits and individual life insurance clienteles, published in the April 2024 edition of the Insurance Journal. 

While consolidators are mainly interested in larger firms, what can a small, individually owned life insurance firm without a well-developed corporate structure do to attract a strong buyer? 

Such firms rarely attract the attention of major consolidators, according to Yan Charbonneau, President and Chief Vision Officer at Synex Business Performance. Charbonneau observes that consolidators now have even greater purchasing capacity than Canadian insurers and banks. He points to American private equity funds (with Synex backed by BBH Capital Partners, and AGA Group Insurance recently acquired by TA Associates) and brokerage giants like Marsh, a subsidiary of Marsh McLennan. 

Charbonneau observes that this capacity eludes the individual life insurance distribution network. "Small individual life insurance offices don't have the financial ability to buy each other out. For my part, my average acquisition cost is 15 million dollars. Therefore, a firm generating recurring revenue of 500,000 dollars is a very small transaction. It must offer added value," he explains. 

Yet, Charbonneau would not overlook a firm that specializes in a clientele of interest to him. "For example, I might be willing to pay above average for a firm that has developed a clientele exclusively of electrician entrepreneurs, since I would know that I could achieve growth in this sector without having to develop expertise." 

Choosing your valuation method 

In the Value Index Report, Martin Luc Derome, owner and CEO of Queenston M&A Inc., stressed the importance of deeply segmenting a clientele when it comes to individual life insurance and investments. Queenston offers segmentation tools by policy and sells them in lots. 

Valuing a firm requires flexibility. Generally, large group insurance firms are traded based on a multiple of the value derived from earnings before interest, taxes, depreciation, and amortization (EBITDA), but not always, Derome explains. He cites an example of a transaction facilitated by Queenston, where the owner chose the net revenue valuation method, even though it could have been based on EBITDA. The firm was producing 50 million dollars in annual recurring revenue, most of which remained after paying advisors. "Going with EBITDA would have penalized him," explains Derome. 

However, EBITDA often suits large group firms. Derome mentions working on a case for a large group benefits firm targeting a multiple of 18 times EBITDA. This firm was generating annual premiums of between 500 and 600 million dollars. 

Moderately sized group benefits firms, for example, producing between 25 and 30 million dollars in annual premiums, typically trade at 8 to 10 times EBITDA. Derome mentions reaching the higher end of this range in a transaction targeting a firm with about 17 million dollars in annual premium production. 

More than just revenue 

Queenston uses three different revenue sources in its valuations: EBITDA, revenue (gross or net), and recurring revenue (which does not account for new sales). Assets can also be considered. Smaller firms are typically traded based on a multiple of recurring revenues, he says. 

Does the firm use client management software? Does the owner have a successor? – Martin Luc Derome 

Other factors also play into Queenston’s valuation algorithm, Derome points out. "Does the firm use client management software? Does the owner have a successor? A well-defined emergency plan in case of disability or death? A written operational process?" These and many other factors can affect the value of a practice, he adds. 

Managing emotions 

He underlines how crucial it is for the visions and personalities of each party to align. This is what specialists call "fit." "Without it, the transition won’t work," he warns. Strong personalities on both sides also require special attention for the transaction to succeed. In both small and large deals, Derome describes himself as someone who manages the emotions of the parties involved (chief emotional officer). "When there’s a transaction, emotions are running high."