In the Medicare sector, the valuation of a Medicare Book of Business (BoB) differs slightly from the valuation of an Agency. While a BoB is often valued on a multiple of its revenue, a full agency is typically valued on its profitability (EBITDA).
1. The Valuation Process: Step-by-Step
When prepping for a sale, follow this professional workflow:
- Normalization (Add-Backs):Clean up your Profit & Loss (P&L) statement. Buyers want to see what the business would earn under their management. You “add back” one-time expenses (like a legal settlement) or discretionary costs (like the owner's personal vehicle or a family member on payroll).
- Due Diligence Folder:Organize three years of tax returns, carrier contracts, and “clean” financial statements.
- Benchmarking: Compare your metrics (retention, growth, cost of acquisition) against industry averages.
- Selecting a Method: Choose between an Asset-based approach (valuing the tangible assets), a Market-based approach (multiples of revenue), or an Income-based approach (Discounted Cash Flow).
2. Key Metrics Factored In
Buyers look at these “drivers” to decide where on the multiplier range you land:
- Retention Rate:This is the most critical metric for Medicare. A retention rate of 90%+ commands a premium. High “rapid disenrollment” rates will tank your value.
- Product Mix: A mix of Medicare Advantage (MA) and Medicare Supplement (Medigap) is ideal. MA offers high renewals, while Medigap offers long-term stability.
- Age of the Book:A younger book of business has a longer “life expectancy” and higher lifetime value (LTV).
- Carrier Concentration: If 80% of your business is with one carrier, the risk is higher (if that carrier pulls out of a market, you lose everything). Diversity is key.
- Lead Source:Organic or referral-based leads are valued higher than “bought” or telemarketing leads, which have lower loyalty.
3. Best Formula for a Medicare Company/Book
There are two “standard” ways to calculate value in the Medicare space.
Method A: The Revenue Multiple (For Books of Business)
Used when a solo agent sells their client list to another agency.
Formula:Annual Gross Commission × Multiplier
Standard Range: 1.5x to 2.5x annual gross commissions.
Example: A Medicare book generating $100,000 in renewals/commissions annually is typically worth $150,000 to $250,000.
Standard Range: 1.5x to 2.5x annual gross commissions.
Example: A Medicare book generating $100,000 in renewals/commissions annually is typically worth $150,000 to $250,000.
Method B: The EBITDA Multiple (For Fully-Staffed Agencies)
Used for larger operations with employees, office space, and systems.
Formula:Adjusted EBITDA × Multiplier
Standard Range: 4x to 8x EBITDA.
Note: EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
Standard Range: 4x to 8x EBITDA.
Note: EBITDA stands for Earnings Before Interest, Taxes, Depreciation, and Amortization.
4. Tips for Maximizing Value
- Use a CRM: A book of business that lives in a professional CRM (with detailed notes and dates) is worth significantly more than one on a spreadsheet.
- Focus on the “Tail”: Emphasize your residual income. Buyers are paying for the future stream of renewals, not your past sales performance.
- Institutionalize Relationships:If the clients only like you, the book will churn when you leave. Start introducing staff or “the brand” to clients early so the relationship isn't purely tied to your personality.
- Review Your Vesting:Ensure your carrier contracts are “vested” (meaning you own the renewals) so they are actually yours to sell.