While the “multiple of revenue” approach limits the ability of a would-be acquirer to assess the risk of the agency, a valuation method that incorporates a multiple of pro-forma profitability will factor in the risk of the agency. Some of the factors that can negatively affect agency value are explained below.
Non-owned Books of Business
If your agency uses outside agents who ultimately own their client accounts and maintain the relationships, this could negatively impact agency value. To mitigate this risk, ensure that all of the key accounts and relationships are owned by the agency.
Not Having Employment Agreements
Many agencies do not have employment agreements that are strong enough to protect their interests. And, for agencies that do have agreements in place, many times the non-compete and non-solicitation language is inadequate. Agencies without strong agreements in place are at risk of losing clients and revenue if a key employee decides to leave. Make sure to work with your legal counsel to create or review agreements that will protect your agency’s interests.
A history of weak year-over-year growth of commissions & fees will negatively impact the value of an agency. An agency with flat or declining sales suggests that its sales culture is non-existent or not effectively driving organic growth. An acquirer would view this agency as a wasting asset compared to an agency that is driving increased organic growth year-over-year.
Not Having a Perpetuation Plan
Agencies that have taken the time to craft a perpetuation plan and strategy are less risky than those who are waiting for a rainy day to define their succession strategy. An agency with a perpetuation plan has established the timing and mechanisms necessary to transfer the ownership, relationships, and leadership to the next generation of agency leaders. The plan will set in place a philosophy for continued growth, profitability, leadership, and personnel. Agencies without such a plan have increased risk as they have not been driving the changes necessary to increase the value of the agency.