Are you working hard to grow your agency by adding one client at a time? While organic growth is important, equity growth can be accelerated through effective financial management, acquiring other books of business and proper succession planning.

Independent agencies typically start small, depending on the owner's background in the industry. Every business owner knows the faster you're able to grow, the more successful and profitable your agency becomes. Frequently, owners focus on attracting new clients or expanding into new lines as the primary method of achieving growth.

While these can be good tactics for organic growth, if you want to supercharge your revenue, secure your retirement and prepare your agency for the unexpected, you also need to pay attention to the financial and business side of growing an agency.

Determining Your Agency's Value 

Your agency means everything to you—but how much is it worth to others? Knowing your agency's value is essential if you need to sell. It can also be useful in other situations.

Agency finance experts tell us that agency valuations can be used in business planning, shareholder buyouts and mergers & acquisitions (M&A) transaction support, as well as litigation support, tax compliance, employee stock ownership plan (ESOP) compliance and even life insurance underwriting.

However, most agency owners have never had an agency valuation completed and aren't familiar with the process.

How Is Your Agency's Value Determined? 

As an agency owner, you know that there are a lot of factors that go into your agency's worth. Therefore, it shouldn't be surprising that calculating an accurate value for your agency can be complicated.

Most agency owners are aware of a “quick and dirty" valuation method that multiplies the earned commission by a certain number, such as 2.0 to 3.0. While this method is easy, it's not necessarily accurate. Compare two agencies that both generate $500,000 in revenue, but one agency is run by a young producer who is actively adding accounts, while the other is run by an agent who's reached retirement age and is steadily losing accounts. Using the quick and dirty method, these two agencies would have the same value—but a potential buyer could see things very differently.

There are three basic valuation approaches that take these factors into account, according to the U.S. Chamber of Commerce:

1) The asset-based approach. This totals all of your investments in the business.

2) The earnings value approach. This focuses on the company's ability to generate cash flow in the future.

3) The market value approach. This looks at the value of other similar businesses that have sold recently.

Which Valuation Method Should You Use? 

Knowing the purpose of your valuation can help you determine what type of valuation you need. For example, the value to a strategic buyer might be different than the value to a lender or the IRS. Each party looks at the business for different purposes and focuses on different factors.

Preparing for Your Agency Valuation

Valuations take work. The valuator needs to dig in and understand the history of the business. When you have your agency valued, you will need to provide the following:

• Three to five years of financial statements.
• Balance sheets.
• Tax returns.
• Revenue reports.

 You'll also need to be prepared to answer questions about your agency's organization structure, accounting, producer agreements, network agreements and various other factors that could impact your agency's value.

Want to learn more? This white paper shares smart financing, acquisition and succession planning strategies that support agency growth and long-term success. Download it now.