Understanding a firm’s valuation is prudent as business owners seek to grow wealth. Valuation represents the financial worth of the business based on factors such as earnings, growth potential, market conditions, and operating characteristics. These inputs are used by investors and stakeholders to assess a company’s attractiveness for acquisition, investment, or strategic partnerships from an internal (i.e. perpetuation) or external (i.e. sale/investment) perspective. George Bucur, MarshBerry’s Managing Director and Specialty Co-Head, addresses the “noise” in the marketplace, which often times distorts valuations making them difficult to compare on an apples-to-apples basis. Join us for this multi part series as George breaks down where these multiples originate and offers insights into those critical factors owners may be able to influence to maximize value.
Valuation Drivers of Specialty Insurance Distributors
Video Transcription
Hello, I’m George Bucur, managing director and co-head of MarshBerry specialty practice. Serving specialty organizations such as MGAs (managing general agent), MGUs (managing general underwriter), wholesale brokers, and program managers, we’re here today to talk about one of the most popular conversations in the marketplace: value, and how valuation is derived.
Now, part of the challenge is that while value is simple at the highest level, when you start to get down into the weeds, valuation can have a lot of intricacies. Specifically, valuation at its core can be calculated as an EBITDA (earnings before interest, taxes, depreciation, and amortization) number multiplied by a multiple, plus or minus the implications of the balance sheet. That gets you to a valuation.
Now there’s different types of valuations. On the more conservative side, we have fair market value calculations, which are determined for internal purposes primarily –maybe tax planning, estate planning, and/or selling stock from one shareholder to an employee for example. Then we also have external valuations, sometimes are referred to as investment value or market value. Now these valuations are more aggressive when it comes to pro forma adjustments and can take into consideration compensation changes or other synergies of a partnership with an external party. Whether you’re getting any valuation on this spectrum, the amounts can change and vary significantly. That’s why it’s important to understand the nuances of how valuation is calculated and what it means in the context of the objective you’re trying to achieve.
Now from an M&A (mergers and acquisitions) perspective, one of the reasons why valuations are so popular to talk about these days, when it comes to M&A buyers oftentimes depict or communicate valuations in different ways. Going beyond the methodology that I previously stated around EBITDA multiplied by multiple, plus or minus the balance sheet, including other factors such as growth on equity that you might be expected to take or a compensation you might receive throughout a period of time with that counterparty. This all convolutes the conversation; it can be, frankly, very confusing not just to an individual receiving an offer, but when it’s communicated in the marketplace in terms of the valuation multiples that are being received. That’s why, self-promoting a plug here, getting an adviser to talk you through and understand those implications are very important, but I digress.
Getting back to the valuation, the most important factor that an owner can control is two of the major components in the calculation. One, being the pro forma EBITDA; that has the most control. EBITDA will influence valuation more than any other factor that you can control. Next, when you take that pro forma EBITDA and you apply it against a multiple to get to your enterprise value, that multiple can be influenced by many factors, hundreds of factors. But at the end of the day, the five primary factors are going to be the historical growth capacity and future growth opportunity of an organization, their systems and processes that they have in place, in other words, how efficient do they operate –this oftentimes translates to EBITDA– the caliber of management and the duration that management wants to continue working with the organization, and then the overall inherent concentrations of business. For example, an MGA might have one market that is a concentration, and sometimes thought of negatively sometimes, positively depending on the situation. But as an operator, it’s important to track valuation so that, one, you know that the investments you’re making into your organization are adding value, but two, so that you know what your worth within the marketplace and you can communicate that to employees to promote talent and/or if you’re looking to transact externally.
If you have questions around how valuations may impact your organization or what you can do to maximize the valuation of your organization, we ask that you reach out. Until next time, be well.
MarshBerry is a global leader in investment banking and consulting services, specializing in the insurance brokerage and wealth management sectors. If your firm seeks expert advisory guidance to refine your business strategies, drive sustainable growth, or facilitate a sale, MarshBerry is the ideal partner to support you in making these critical business decisions. Collaborating with a trusted advisor who deeply understands your business and the industry can help you maximize value at every stage of ownership.
