*This article is part of 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 basics of an agency’s Financial Performance and how it relates to value.
There are two words that will come up again and again whenever there is an analysis of what an insurance agency is worth; “financial performance”. But those two words and their importance are very misunderstood.
If you don’t have a perfectly clear idea of your agency’s financial performance, you are hurting the value of your agency.
In an earlier article of this series we covered the importance of understanding key performance metrics about the sales production in your agency, so you can measure your current and future sales against your past sales data to make sure you are writing more business. The exact same thing holds true with your financial performance. As an agency owner, it’s not good enough to simply know whether or not you made any money this month. You need to know where the money came from, if it was better or worse than the same month last year, and what factors contributed to the decline or improvement.
First, you need a good understanding of what is meant by your financial performance numbers. The number that most agency owners blurt out when asked about their agency is a rough estimate of the amount of premium they have in their book of business.
Here’s something that may surprise you: Your financial performance has very little to do with your premium volume. In terms of the value of your agency, the amount of premium you have is almost irrelevant.
The reason it’s irrelevant is because the premium isn’t your money, it’s the client’s money! As an agency owner, you can’t spend premium, you can only spend the revenue that is generated by that premium. That revenue is your money and that’s what determines your financial performance and must be fully detailed in order to maximize the value of your agency.
These categories of revenue and expense are the very minimum that agency owners should keep well organized, updated each month, and track over various time periods in order to understand their agency’s financial performance. The tracking of these numbers is what will generate one of the most important aspects of determining how much you agency is worth: the trend. It is often the case that the trend of your financial performance over the previous 12-months or 3-years can be even more important than the financial performance itself. If your trend shows increasing revenue and profits year over year, then your agency will be worth more. If your trend shows decreasing revenue and profits, then your agency will be worth less. Pretty simple.
But the important thing is that you won’t know the trend or what your agency’s financial performance is at all, until you start keeping track of all of these things. Printing out your commission statements from a website each month is not considered tracking your financial performance!
Last month we went over the importance of quality data and I suggested that every agency owner write down on a piece of paper and post on the wall next to their desk, ““When it comes to determining how much my agency is worth, accurate accounting data about my agency’s financial performance is gold!” You should still write that down if you didn’t do it last month, because it’s true.
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: jpickett@astonishresults.com
