Multiples vs. Margins: What REALLY Matters?

Almost every conversation with an insurance agency owner considering a sale inevitably revolves around multiples. It's a natural focus, but it's also a potentially costly one.

When it comes to multiples vs margins, while multiples are important, the real game-changer lies in your profit margins.

I've seen firsthand how a seemingly smaller multiple, coupled with a significantly higher margin, can result in a substantially larger payout.

This isn't just theory; it's a reality that can transform your exit strategy.

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[00:01]

Almost every conversation that I have with an insurance agency owner who's considering their options to sell their business, sometime the next, well, tomorrow to three years from now, either starts with, finds its way to or ends with Topic of Multiples.

[00:17]

What are the multiples for insurance agencies? What are they trading at? How are they valued? What are the ranges? What are the factors that influence that range? All great questions and definitely, definitely need to be asked and definitely topics I'm going to touch on in future videos. But I would love to see a transition, a little bit of a shift towards how do I optimize my margin and what margins are acceptable and what should I be striving for in terms of my profit margin opposed to just focusing on the multiples.

[00:48]

Ultimately, the value that's created from optimizing a margin typically significantly outweighs getting a turn or two more on your multiple. For example, simple $1 million revenue agency operating at 20% margin, gets a 10x offer.

[01:06]

Fantastic double digit multiple. Gets essentially 2 million dollar proceeds. Same exact agency operating more efficiently, more effectively, 40% margin, 400,000 EBITDA gets an 8x offer, 3.2 million in proceeds.

[01:23]

So the same agency, one's more optimized, gets two turns less on their multiple, but makes 1.2 million more in terms of the value for their business when they sell. So it's not that the multiples aren't important and it's one of the main primary focuses of ours when we're supporting clients at Legacy Advisors.

[01:39]

We want to make sure that we get the absolute maximum multiple for their business off of the optimized margin. And that's what needs to be just discussed a little bit more and brought up a little bit more. And it's one of the things I push on a lot of conversations I have for agency owners who are looking to transact.