There are a few phrases that we use over and over. The most common relates to agency valuation. We regularly tell people that there is no set formula for calculating the value of an insurance agency. We often explain that statement by offering the list of factors that can influence value. We tell clients that no one can know for sure what the value will be, but we can identify the factors that will influence that value. That conversation often leads us to another of our favorite phrases.
Uncertainty Diminishes Value
A good rule of thumb when trying to define whether a factor has a positive or negative effect on value is to say that ‘uncertainty diminishes value’. For every factor that influences value, that rule is key. If there is uncertainty in your business, you can be certain that it will diminish the agency valuation. A mistake some clients make is to confuse uncertainty with flexibility. This can lead clients to close avenues that could actually boost the attractiveness of their agency to a buyer.
While uncertainty diminishes value, flexibility can have a positive influence on an agency valuation. We are able to create a list of factors that influence value, because we are aware of the factors that buyers find attractive in a prospective purchase. Ultimately, the agency value comes down to what a buyer is willing to pay, which makes the buyer’s opinion vital in determining value. Buyers like flexibility because it offers them options.
Buyers Like Flexibility
An agency that allows the buyer to choose a future management structure or offers cross selling opportunities place the buyer in control of the agency’s future. Flexibility in a purchase means a buyer isn’t just purchasing an existing business; they have the opportunity to mold an existing business in their image.
Uncertainty on the other hand, turns the purchase into a gamble. Agencies that rely heavily on single relationships, or offer no certainty on future management become a risky proposition. As soon as a buyer starts to think about the ‘what ifs’ in a purchase, the agency valuation is likely to suffer.
The key here is control. If you have the ability to put the buyer in control of the future of the business, they will see that as a positive factor. If there are factors in your business that neither you nor the buyer control, that buyer may not want to risk much of their money.
We know there is no definitive formula for calculating agency valuation. One thing we can tell you is that while uncertainty diminishes value, flexibility can have the opposite effect.
Although we cannot give you a valuation without a full consultation, we are happy to offer you our free whitepaper “The 9 Indicators of Value” which look at value in an agency, where it is gained, and where it can be lost. To read, Click Here.
