Tools & Strategies for Business Excellence

The Value Equation

Whether you're planning to sell your agency, buy another, or just make sure you're operating at peak performance, understanding what determines value is critical to long term success.  

Agencies often talk about value in terms of a multiple of revenues or value is viewed in terms of a multiple of earnings.  In fact, agency value is made up of many components.  Some components are easily identified and very tangible.  The revenue stream generated by a book of business and the impact of the balance sheet on that revenue are examples of tangible value. 

As an agency owner, your best measure of value may be in the profit you take from the agency.  Investments in the agency, such things as funding new producers, developing a professionally trained staff, utilizing technology to support the business processes, may subtract from your profits.  However, it’s the agency infrastructure that makes up a good portion of the second part of the value equation—Intrinsic Value.

Intrinsic or underlying value comes from the culture, the organization and the management of the agency.  These are less easily quantified, but they are real nonetheless.   A well-managed and well-run business can perpetuate the revenue stream and mitigate the normal business risks.  The greater the revenue stream and the lower the risk, the higher the value.