Agency Profit Sharing Matters…but Growth Matters More
When I speak with agents about why they join an agency group, the two most common reasons I hear are increased profit sharing and market access. Those are two valid reasons. But if that’s all you’re getting from a group, you’re selling yourself short. Why? If you are like most owners, your agency is the single largest asset you have. You owe it to yourself to maximize the returns you see from it.
Let’s look at two scenarios:
Scenario A – Increase your profit sharing by $50,000 per year. Sounds pretty good, right?
Scenario B – Increase your cash flow (pre-tax income) by $500,000 per year, and the value of your agency by $5,000,000. Sound even better?
You’re probably thinking…of course Scenario B sounds better, but how the heck do I do that? By focusing on growing not just the profit sharing your agency receives, but the overall growth of your agency.
When looking at impacting your agency’s growth, there are essentially three key components to measure:
- Premium growth of your agency year-over-year
- Revenue, or income from the policies you sell, as well as any profit sharing and other income
- Pre-tax income, or earnings before interest, tax, depreciation and amortization (EBITDA), aka how much cash flow you are generating
Consistently measuring these three components through your agency management and accounting systems allows you to see a snapshot in time of how much your agency would be worth if you were to sell it. While the marketplace changes all the time, we are seeing multiples at an all-time high. As a quick rule of thumb, your agency is worth about two to three times your current revenue. Of course, a true valuation would require a more sophisticated analysis, but this gives you a rough yardstick to work with.
The Value of Compound Growth
To impact your agency’s valuation, you need to do two things:
- Control and grow the things you can control (premium, revenue and earnings before interest, tax, depreciation and amortization (EBITDA)
- Leverage the power of compound growth
Compound annual growth rate (CAGR) is averaging the same growth rate every year over time and leveraging the compounding effect. For example, as depicted in the chart, consider a $10M premium agency. If that agency grows by 3% (industry average) per year over a 10-year period, it would be estimated to have $500,000 in annual cash flow and be valued at about $5M. If that same agency were to increase its growth from 3% to 7% (Renaissance member average growth) per year, they would increase their cash flow to $750,000 per year and be worth about $7.5M.
As an exercise, let’s look at CAGR growth compared to profit sharing growth. Let’s say you earn $50,000 more per year in profit sharing. Over 10 years, you would earn $500,000, no small amount. But if over that same ten-year period you were able increase your CAGR from 3% to 10%, you would increase annual cash flow by $500,000 and grow your agency’s valuation to $10 million. All in all, an increase of $10,000,000 over 10 years ($5M in additional cash flow + $5M in additional agency value), compared to the $500,000 from the profit sharing increase. While we wouldn’t dismiss the quest to increase profit sharing (often one of the main motivations for an agency seeking membership in an agency group), we simply don’t think that’s enough. The real key is in maximizing your growth.
Achievable? Yes, it is. How? Over future blog posts, we’ll discuss the growth levers to focus on to maximize the growth of your agency.
Author Leanne Ross is Senior Vice President, Agency Recruitment at Renaissance Alliance. Renaissance Alliance has been helping independent agencies grow premium and profit beyond their peers for more than 20 years. For any questions or to learn more about how Renaissance Alliance can help your agency grow premium, revenue and agency valuation, reach out to Leanne.Ross@RenaissanceIns.com or 586.246.1046.