There are over 25 factors that we review when placing a fair market value on an independent insurance agency, and annual revenue growth rate is one of the most important factors that affects an agency’s value.
If you are reading this, it is quite likely that you are contemplating how to grow your agency in order to improve the value of your agency. You have probably heard the phrase: if you aren’t growing, you’re dying. This expression rings true in so many facets of life, and it can certainly be applied to the heart of the valuation of independent insurance agencies.
Remaining stagnant and devoid of growth does not necessarily mean the death of an agency, but there are some red flags that arise when an agency is not growing. This article will dive into how agency revenue growth is the fastest way to grow the value of an agency.
Growth fuels success, optimism, investment, and opportunity. It sets the tone for an agency’s culture and is such a crucial component of an agency’s success and overall value. Specifically, a growing agency can acquire new assets, hire and retain talented individuals, invest in talent, and reinvest earnings into the future growth and development of the agency.
Let’s examine an example that the IA Valuations team sees on a regular basis. Agency A and Agency B are both under the ownership of two principals who are nearing retirement age. Agency B has seen consistent net revenues of around $500k for the past three years, while Agency A has brought in net revenues of $435k, $475k, and $505k over a three-year period for a total of $70k growth in 3 years.
When these agencies go to market, which agency would be a more attractive option for a third-party buyer?
While both agencies have around the same amount of revenue in their most recent fiscal year, Agency A is growing by approximately 10% over a two-year span while Agency B has remained stagnant.
A third-party buyer would look at these situations and favor Agency A because of their growth pattern. Having strong growth could increase the value of Agency A by up to 10-20% because it indicates there are likely people and systems in place that are fueling the agency’s growth. Agency A, and other similar agencies, presumably has a growth mindset, is investing in young, hungry producers, has true sales management, robust marketing, and accountability at their agency.
Agency B may be operating solely from word-of-mouth referrals, with vague producer goals, and is fairly complacent with their sales efforts.
The same example applies when it comes to our personal financial portfolio. Ten times out of ten, you would rather invest in stocks that are growing at a rate of return of 10% over two years rather than stocks that are stagnant, not growing but also not losing.
The point here is that your agency is worth MORE when you are growing. When you have the people, culture, leadership, and systems in place and are committed to the growth of your agency, your value will increase.
Unfortunately, our team sees examples all the time of agency owners who are approaching retirement age and have taken their foot off the gas pedal when it comes to growth. This means you could be leaving money on the table when it comes to selling your agency. Now, when it comes time to retire, or to “smell the roses,” wouldn’t you want to squeeze every penny out of your biggest financial asset? That is what the IA Valuations team is here to do for your agency.
To learn how your growth rates are affecting your agency value, reach out to Luke Hippler, MBA at luke@iavaluations.com.
About IA Valuations and Agency Link – Founded in 2017, the IA Valuations team has performed over 200 valuations to independent insurance agencies across the U.S. Our advisors have 25+ years of experience guiding agency owners on maximizing their agency value, planning, and legal needs for ownership transition. In addition, IA Valuations has provided perpetuation planning, financial modeling and business planning for independent insurance agencies. Finally, IA Valuations has advised dozens of agency owners on selling their agencies through our Agency Link process. Agency Link is a platform that connects buyers and sellers together to further the growth and strength of the IA system. To learn more about IA Valuations, please visit IAValuations.com or contact@iavaluations.com.
The information provided in these documents is general in nature and shall not be construed as personal legal, tax or financial advice for your situation. Please contact@iavaluations.com to discuss your personal situation.
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By Luke Hippler, MBA