a range that can be very big depending on the size of your firm. The difference for a $1,000,000 agency, for example, is a million dollars!
The second problem is that applying the ‘one-to-two’ formula doesn’t necessarily mean your business was fairly valued. Buyers are generally pretty sophisticated today and will want to consider a variety of factors besides revenue. As a result, using a more sophisticated method can protect you.
An Old Formula Many insurance agency owners have long relied on an old formula for determining the value of their business — the ‘one-to-two’ formula.
“I don’t need a valuation,” one owner told me, “I know how it works. Everyone gets a multiple between one and two times revenue.” Interestingly, the following year that owner was surprised when a prospective buyer started looking at his company and things got more complicated.
Range vs. Real Ratio The first problem with the ‘one-to-two’ formula is it doesn’t tell you a real ratio, rather it gives you
Here’s an example. A 62 year-old owner has an agency with a $2 million book of business. Without any prior homework or planning for an exit strategy, the owner thought a revenue multiple of 1.5 or higher would produce a sale price of $3,000,000 to $3,500,000 for the agency. The transaction, however, closed for $2,000,000. Several important factors played a role in the lower value including the following:
• Two accounts made up 40% of the book of business and one of
those large accounts was a long- time friend of the owner, with no loyalty to the acquiring agency.
• The owner was not willing to stay involved going forward.
• The agency’s other top producer did not have an employment contract.