By Mike Stroman
Multiples of Revenue
Most people would probably say that multiples of revenue are what determine the value of an agency. So, let’s talk multiples of revenue. Is the range of acceptable multiples 1.4 to 2.5? If so, how do we determine where any individual agency falls in that range? Is it just a matter of who demands a higher value?
These are great questions that we are asked every week. And the answer to all these perpetual value questions is: multiples don’t matter! We speak of multiples in reference to agency deals that have been completed in the past, and as a value check on an upcoming offer—but that’s their primary value.
It’s also a method of maintaining confidence in the sale process. Whenever a seller can report, “I got 2x” or a buyer says, “we had to come up to 2.1x,” that’s how we know they’ve stayed within acceptable norms. It acts as a check that the system is working as it should. Plus, rules of thumb are important. They form a framework of thought for lenders and other significant players in the acquisition process.
But if ultimately, multiples don’t matter, what does? Cash flow!
Think of the entire process, not as buying an agency, but as buying a stream of cash flow. It just so happens that the books of business and business processes of the agency are what drive that stream of cash flow!
Can the buyer see a consistent stream of cash flow coming from the renewals of the agency, and the people and processes in place? Can they visualize a method of enhancing the revenue stream? If the answer is “yes,” you’ve got the foundation of a deal.
The Bottom Line(s)
But that’s not all—there’s more to consider. While top line revenue is important, what migrates to the bottom line? That’s a much bigger question. After all, revenue without profit has little value. Which brings into focus an important tool: a Proforma. If you show a buyer how to invest some portion of their wealth, and create more wealth, then you’ve got something to discuss. The problem is, most agency owners are stuck in the “multiples of revenue mindset”–thinking that the entire buyer world will agree on the value they put forth.
But the real bottom line is that if you’re interested in selling or buying an insurance agency, a guide is your best bet! We guide insurance agencies through both sides of the acquisition process with precision. Are you interested in converting your agency into cash? Or acquiring an additional stream of cash flow? Call me to discuss!
Office: 713.568.3063 | Cell: 713.443.8978 | Facsimile: 888.443.3026