Growth is a key factor in an agency's value. Chris Burand explains why poor or erratic growth is a risky investment, while strong, consistent growth indicates a healthy agency and a better investment.
I'm often asked why an agency growing slowly is far less valuable than an agency that's growing quickly (all else being equal). The answer can be found by looking at revenues.
Let's say that two agencies are for sale. Each has a 10% profit margin and each initially has $1 million in revenue. Agency A grows at 3% and Agency B grows at 10%. Over five years, the agencies would generate these profits:
| |
Agency A
|
Agency B
|
|
Year 1
|
$103,000
|
$110,000
|
|
Year 2
|
$106,090
|
$121,000
|
|
Year 3
|
$109,273
|
$133,100
|
|
Year 4
|
$112,551
|
$146,410
|
|
Year 5
|
$115,928
|
$161,051
|
|
Total
|
$546,842
|
$671,561
|
In five years, the buyer can make nearly $125,000 more by purchasing Agency B rather than Agency A. Do you think that some buyers might pay more for agency B, all else being equal?
Now consider a third agency, Agency C, that has a history of great growth followed by negative growth. Agency C's total profit after five years is very close to Agency B's, but would you pay as much for Agency C as Agency B?
| |
Agency A
(3% Growth)
|
Agency B
(10% Growth)
|
Agency C
|
Agency C's
Growth
|
|
Year 1
|
$103,000
|
$110,000
|
$120,000
|
20%
|
|
Year 2
|
$106,090
|
$121,000
|
$117,600
|
-2%
|
|
Year 3
|
$109,273
|
$133,100
|
$135,240
|
15%
|
|
Year 4
|
$112,551
|
$146,410
|
$151,469
|
12%
|
|
Year 5
|
$115,928
|
$161,051
|
$148,440
|
-2%
|
|
Total
Profits
|
$546,842
|
$671,561
|
$672,749
|
|
I've shown this comparison to hundreds of audience members - and 95+% voted that they would pay more for B because it exhibited strong, constant growth.
The importance of growth is critical in a hard market. Net premiums written increased 15% in 2002, so an agency only had to maintain their accounts for revenue to increase significantly (10% or more). If an agency grew only 5%, why would a buyer pay an average price, much less top dollar, for this agency? They're obviously having retention problems. The reason for their poor retention, whether they're simply doing a poor job, writing accounts at high risk for acquisitions, or suffering from the poor economy doesn't much matter. Moreover, if an agency can't grow in a hard market, what will happen in a stable or soft market?
For many owners, this all makes sense until the valuation is for their own agency. Then they suddenly find excuses for explaining away slow growth, erratic growth, or no growth. From a buyer's perspective, though, poor or erratic growth is a risky investment, while strong, consistent growth indicates a healthy agency and a better investment.
Growth is a key factor in your agency's value. If you're planning to sell soon, consider whether it's worth making an extra effort to increase growth and/or steady the growth to prove that your agency is worth top dollar.