Why Your Agency Is Losing Value And What You Can Do About It | Part 1 of 10
*This article starts a continuing series about how to maintain and grow the value of your insurance agency so it will hopefully be worth more tomorrow than it was yesterday. In this entry, we cover the meaning of “value” and why it should be the highest priority for every insurance agency owner.
There are many reasons for owning your own insurance agency instead of working for someone else. You control your own destiny, you can make a very nice living (hopefully), and nobody is telling you how to run things…you are your own boss. But while enjoying what you do and the benefits of being a business owner, many agency owners forget that they own a valuable business asset that one day will likely be the foundation of their retirement.
And unfortunately, in today’s competitive insurance marketplace, most agencies are losing value every year because agency owners are neglecting core principals in running their agencies. That means when it comes time to cash out to a business partner, family member, or another agency, you’re going to end up with a lot less than you had hoped for.
When we discuss value, it’s important to understand the difference between Income value and Asset value. You might be making a great income and bringing home lots of money each month, but that doesn’t mean you are creating any value in the business asset you own so that it will be worth something one day to somebody else.
Take for example the agency that has $200,000 in commission income and $100,000 in broker fee income each year. Those broker fees are great when they hit the bank account, but they have literally no value in terms of your business asset. In other words, nobody is going to “buy” your broker fee income, the way they would buy your commission income. Buyers don’t even consider fees part of your total agency when they determine what they would pay. Just because those fees are making you money today, that doesn’t mean they will add to the overall value of your agency tomorrow.
The value of your business is determined by numerous factors about the way you are running the operation. It is a common and pervasive misconception that the value of an insurance agency can be determined simply by taking some annual commission number and multiplying it by another number. It’s not.
If you were buying an apartment building and the current owner said he collected rents of $100,000 each year, would you just multiply that number by 2-times and offer him $200,000? Of course not, you would need to know what the expenses and maintenance of the apartment building were, how long the tenants had been there, what the average rent for each tenant was, and dozens of other factors that would determine how much you would be willing to pay for the apartment building. Do you think it’s any different with insurance agencies? It’s not.
So all of those factors that can increase the value of your agency or decrease the value of your agency, are the things that owners need to start paying attention to now, so when they’re ready to take some chips off the table they have put themselves in the best possible position to realize the maximum value for the business they have built.
Your agency is probably the most valuable asset you own. It’s never too early to start taking stock and improving the critical things that will make a difference in how much your agency is worth to someone else. We will examine each of the primary factors that impact the value of your agency beginning with the next Alliance Alert newsletter.
About the Author: Jerry Pickett is VP of Mergers & Acquisitions/Client Consulting with Agency Acquisitions – an Astonish Results Company (www.AgencyAcquisitions.com). Agency Acquisitions works with agency owners to help maximize the value of their agency, perform agency valuation analysis, and handle all aspects of acquisition transactions for sellers and buyers of insurance agencies. Contact Jerry @ 614.859.9606 or email: email@example.com