While getting a valuation before you sell is critically important, waiting until the last minute may be too late to implement the changes and overcome weaknesses to significantly improve value.
To know where you are going, you must first know where you are currently. The biggest step in business planning each year is having a clear metric for the agency's success—and the most effective metric to start with is an independent, fair market valuation of your agency.
A valuation report will give you a comprehensive view of your agency and the true, fair market value of your agency. You will also learn about a host of factors that bring risk to your agency's success, which can ultimately drive the value down.
Whether you are an owner who is just getting started or a tenured veteran in the industry nearing retirement age, the best time to get a valuation is now. Then you can start using it as part of your business planning process. No matter the plans in place, a valuation is a tremendous instrument to utilize to help you maximize your agency's value.
The “Valuation Report Business Planning" chart illustrates three examples of agencies that used valuation reports as a central business planning document.
Agency 1 conducted two valuations, four years apart. Agency 2 completed three consecutive valuations, and Agency 3 completed a valuation as part of its annual review process.
As you can see, these three agencies saw increases in their agency value over a five-year span— some more significant than others, but growth nonetheless.
These agencies used the valuation report to understand their weaknesses and risks, focusing on what was hurting their value.
After their first valuation, Agency 1 learned they needed to clean up their balance sheet, reduce costs and improve profitability. Over a five-year span, they did just that. They retained earnings to strengthen their balance sheet which led to the opportunity to acquire a book of business without taking on significant debt. Between their growth by acquisition, a strong balance sheet and improved profitability, the agency increased its value by almost 50%.
Agency 2 used the annual valuation to continue their steady march to profitable growth and increasing value. And Agency 3 has consistently grown over the five-year span as a result of being informed of their risks, focusing on reducing those risks through diligent business planning and increasing revenue, thereby boosting the agency's value by millions of dollars.
A valuation report will not lead to 50% growth in agency value for every agency. However, it is an important tool to start your path toward increased growth and value.
When studying the reasons why agency owners completed a valuation with IA Valuations over the past couple of years, it showed that principals that use an agency valuation for business planning see an average growth of 10.2% over a two-year period.
On the other hand, those using a valuation because they are getting ready to sell are only seeing growth at 5% over two years.
There are many advantages to planning early. While getting a valuation before you sell is critically important, waiting until the last minute may be too late to implement the changes and overcome weaknesses to significantly improve value.
Luke Hippler is business planning and valuation analyst at IA Valuations.
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