What is Your Agency Worth’ Productivity and Revenue Determine Value

Over the years, I have found that many agency owners peg their agency value to traditional benchmarks and current market values. At one time, the industry benchmark for an average agency was one and a half times annual revenues. This seemed to work and most agents accepted it as a rule of thumb. We all know that this has changed as agency acquisition patterns and preferences changed. What hasn’t changed, however, is that few agents have ever taken the approach that they could intentionally build value. So while sales and expense as the components of profit are frequently discussed, the idea of value is not.

Value and not profit should be the main concern of any agency principal. Revenue and productivity are the two components of value and while revenue is the more obvious of the two, it is less important. Productivity, because of its ability to leverage value and the difficulty that most agents have in improving it, is far more important.

How much time do you spend on issues directly related to productivity? In an insurance agency these can be viewed as both internal (operational) and external (sales) productivity. Internally we may measure productivity by per capita income. Externally we may measure productivity by prospect generation, hit ratio (prospect conversion to client) and average account commission income. Together these key productivity performance indicators tell us how little of our revenue dollar we need to spend to run our business model. They will also greatly influence the impact of how we value the income stream.

A question that I think any business owner needs to ask is, “How are we going to make money today?” This translates to the business model for the firm. The interesting thing is that most business owners never ask that question. They work on sales, products and services, and maybe human resource issues but rarely are they focused on how they are going to make money. This suggested focus leads to an understanding of how the fundamentals of the business are integrated. It also points to the importance of the two suggested value components.

On the revenue side, a professional services firm such as an insurance brokerage increases it by building demand. It builds demand by building relationships and solving problems. These problems may be in the form of various products and services. The more unique or exclusive a product or service the higher the value associated with the revenue stream. This uniqueness or exclusivity will also enhance its ability to create a sustainable demand for the agencies offerings.

The system of fours
Here are the four key questions for each value-building component.

Productivity:
(1) What is our per capita income and what can we do to increase it? What do our employees believe is possible and what do we need them to believe?

(2) What is our rate of qualified prospect development and what can we do to increase it? What do our producers believe is possible and what do we need them to believe?

(3) What is our hit ratio and what can we do to increase it? What do our producers believe is possible and what do we need them to believe?

(4) What is our average commission income per client and what can we do to increase it? What do our producers and staff believe is possible and what do we need them to believe?

Revenue:
(1) What are the problems common to our clients that we need to solve in order to add value to the transaction?

(2) What unique products or services do we provide? What should we provide?

(3) What exclusive products or services do we provide? What should we provide?

(4) Do we believe that we can continually create new products and services based on our client’s problems that will add value to the transaction?

Belief is a powerful component of change in any of these areas. It requires the daily attention and work of the owner to change the employee’s beliefs and habits.

An agency or brokerage business that is dependent on the owner for its day-to-day operation will leave little time for that owner to work on these issues. That is the reason that most of these areas are neglected in favor of the routine work involved in business value-building.

Therefore, the owner that wants to build or create value needs to move beyond just day-to-day operational management. That is why a business that can operate on a sustainable basis without the owner’s involvement is worth the most. What should an agency be worth? It should be worth whatever the owner wants it to be worth!

Jim Hull is president of J.R. Hull Co. (www.hullconsulting.com), a consulting firm that specializes in helping small- to mid-size firms grow.