Are you sure? It’s a common question. It is a question that goes hand in hand with big business decisions. It also has a big factor in agency valuations. If you’re discussing a sale with a buyer and describing your agency’s selling points, the last thing you want to hear is that question. If your buyer questions your numbers, or your projections, how will that affect the agency valuation?
Defining Agency Valuation can be Difficult
There is no defined formula to measure the value of any agency. There are, however, certain factors that affect every valuation. Just like real estate, the value of an agency relies heavily on how much a buyer is willing to pay. No matter how much you might think your agency is worth, you need to find a buyer willing to pay that amount.
The one thing buyers don’t like is uncertainty. The best way to think about it is to put yourself in their shoes. If you were investing millions of dollars, you would want to be certain of your return. One of our favorite slogans is “Uncertainty Diminishes Value”. That slogan perfectly defines how uncertainty affects agency valuation.
Buyer’s Find Uncertainty Easy to Spot
The question is then, what do we mean by uncertainty? There are a number of factors within your business where a buyer might find uncertainty. Your continued passion for the business and your involvement after the sale will be a major factor in the buyer’s interest in your agency. If you’re unclear over your motives for selling, or your future plans, that can place doubt in your buyer’s mind. That doubt will diminish the agency’s value in your buyer’s eyes.
Uncertainty can also be found within your book of business. If your revenue is over reliant on a single relationship, the risk related to the loss of that account will create more uncertainty. Your buyer will see that relationship as crucial to the continued success of the business. It would be unreasonable to expect them to make a large investment that relies so heavily on one relationship.
Buyer’s Don’t Like to Gamble
On the other hand, certainty can solidify an agency valuation. Imagine that you are buying an agency that has a really strong book of business across many different accounts. The owner is young, successful, well connected and wants to grow within the merged entity. The business has been growing year on year and is situated in the ideal location for its line of business. That doesn’t sound like a gamble, does it?
It sounds like a sure thing. It’s easy to imagine many buyers showing an interest in that agency. It’s also easy to imagine the agency valuation would involve a big premium multiple. That example describes a near perfect agency for a buyer for a number of reasons: growth, revenue and the owner’s desire to grow. Those as strong individual factors that will enhance the value of the agency. Together they offer an even more valuable factor, certainty.
The most common question we are asked by agency owners is “What is the Value of my Agency?” , there is no copy and paste formula that works for each agency, but we have created a list of 9 Indicators of Value for you to read here.
