Don't Overlook Growth When Valuing an Agency
American Agent & Broker › Vol. 78 Nbr. 9, September 2006
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Summary
Many agency owners wonder why growth should be a factor in an agency's valuation. Most understand why profit margin is a key component, but they sometimes question the importance of growth. Growth generates profit just as much as good expense control does. Growth multiplies the profit margin. Therefore, a company with a higher expected future growth rate than another (and with the same profit margin) is the more valuable. One way of looking at the relative importance of growth and profit margin is to consider the two factors from a "wasting asset" perspective. With this valuation approach, the assumption is that nothing is invested in growing an agency. That usually results in a negative growth rate, which is offset by an extremely high profit margin. Buying or selling an agency is an important transaction, so valuations are well-worth doing correctly.
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Extract
Don't Overlook Growth When Valuing an Agency
MANY AGENCY owners wonder why growth should be a factor in an agency's valuation. Most understand why profit margin is a key component, but they sometimes question the importance of growth. The reason lies in what the buyer is actually purchasing.
Excluding speculation, every business value is based on f...See the full content of this document
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