Browsing through insurance agencies for sale requires more than just looking at cash flow and sales history. There are red flags that professionals trained in agency valuations look out for. Below are three of them.
Look Out for These Flags
Insurers face thousands of claims daily from clients who want to collect on their policies. These claims mean a significant amount of cash moving from the company to each policy owner every day. Throw in government and private litigation, and the company may have a severe cash flow problem.
Fortunately, it’s easy to research if an insurance agency has a pending regulatory violation that resulted in a lawsuit. One good source for information is the Securities and Exchange Commission. The mandated periodic reports have a section on litigation that insurance companies are required to disclose to their stockholders.
Non-Performing Portfolio and Inconsistent Revenue Flow
An insurance company that does not have a consistent cash flow may have cash management problems or have issues with liquidity. This setback may result from the quality of its insurance products or too much debt. In any case, you must know what financial problems plague your options. This is vital for you to accurately measure your risk.
One indicator you should look at is EBITDA. The acronym means “Earnings Before Interest, Taxes, Depreciation, and Amortization.” This figure indicates income after operational expenses are deducted and can show how top management is making decisions that affect cash flow and working capital.
Lastly, reputation measures how your agency stands with its intended audience and whether you can expect a good revenue flow after the acquisition. Insurance executives understand that their reputation is directly tied to their market value. They also know that it influences how much premiums they can charge clients.
You should see how the existing executive team handles issues with their reputation. Are they proactive or reactive? Checking this minor detail out can help you gauge how much work you must do to boost the company’s reputation and market value as the new owner.
We’ll Help You Evaluate Insurance Companies for Sale
Choosing which insurance agency to acquire can be a complicated endeavor. We can help you go through your options and make sure you pick the right choice. Call us now.