Key Factors to Consider When Determining Insurance Business Valuation

June 18, 2020, Posted by: Aaron DiCaprio

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Are you considering purchasing an insurance company? If you are, you may want to reach out to an insurance consulting company with a background in insurance business valuation.

Important Valuation Factors for Insurance Businesses

Before you purchase a company, you must know if it is profitable, and there are several ways to find out. Some methods are more complicated than others, but with the help of a professional, you can find out the value of an insurance company. Here are some key factors to consider when determining insurance business valuation.

Cash Flow

Buyers will naturally want to know how much cash a business can generate. A cash flow statement will show the inflows and outflows of cash over a set time. The current cash flow is discounted for its future value. If a company has shareholders, more than likely, potential buyers will want to know about cash flow.


Anything an insurance company owns and can be shown on a balance sheet is considered an asset. Assets include cash, equipment and vehicles, land, supplies, and accounts receivable. But intangible assets, such as intellectual property, also have value. Another asset is known as goodwill. Goodwill is essentially the value of your client base. From an accounting perspective, it is the premium paid for the business over the book value of any assets that have been listed on the balance sheet.

Multiples of Earnings

If a business has shareholders, you will want to look at multiples of earnings per share of stock. This figure represents the earnings of each shareholder, or EPS, which is not considered the same as any dividends. The higher the EPS, the more valuable the company will be. Earnings are determined by taking profits or net income and reducing them by taking out interest and taxes. The final number obtained is then multiplied by the number of shares.

Seller’s Discretionary Earnings 

Similar to multiples of earnings, the seller’s discretionary earnings valuation technique is used for valuation purposes, but it is also used for smaller companies in which there is only one owner. To obtain this figure, the gross profit is reduced by several numbers:

  • Add non-recurring (one-time) expenses.
  • Subtract non-recurring (one-time) income.
  • Add personal and non-essential expenses.
  • Subtract non-operating income.
  • Add amortization, depreciation, and interest expenses.
  • If the owner does not work in the business, add salaries and wages of workers.

The valuation is typically expressed as a multiple of SDE ranging from one to four times. The multiple will depend on the type of business.

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