Oh the conversations I have had with agency owners about valuations and what their agency is worth. If you’re serious about buying or selling an agency, you need to work with a specialist who understands both M&A and agencies (Happy to make a referral if you’d like) but there’s a poor man’s way of getting a ball park figure.
For more information about Drew McLellan or Agency Management Institute – visit http://www.agencymanagementinstitute.com or check out the podcast – Build A Better Agency available at all the usual podcast host locations.
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Hey everybody, Drew McLellan here from Agency Management Institute. This week I am coming to you from Lakeland, Florida. Big shout out to Molly. Molly, thank you so much for sending me the Aberdeen IronBirds t-shirt. Go IronBirds. Appreciate that very much. I actually have two tips for you this week. The first one is a very simple onem and one that you would have thought I would have learned by now. It is not a good idea to go ten or twelve hours without eating very much or drinking very much water because your blood sugar drops. You get dehydrated, and sometimes in the middle of a busy airport, you pass out and you bang your head and your nose. So do not do that. That’s my travel tip for you for this week. The second thing I want to talk to you about is agency valuations. So for many agency owners, they’re wondering what their agency would be worth if they wanted to sell it. You may not be ready to invest in having an actual valuation done, which I highly recommend, and if you need a reference to somebody who does it specifically for agencies, do not go to a generalist valuation expert, but go to someone who specializes in agencies. So if you need that email me, and I’ll introduce you to some folks. But let’s say you’re not there yet, but you want to know ballpark of what your agency is worth. Here’s an easy way to do it. You take five years of your adjusted gross income—so remember that’s gross billings minus all of your cost of goods, including any 1099 labor that you have. You take the last five years of adjusted gross income. So gross billings minus cost of goods equals AGI or adjusted gross income. You take the last five years, you drop the high and the low, and you average the three. And so that’s going to be your base value of the agency, and then depending on a plethora of factors—like are you a specialist, how involved is the owner in the day-to-day operations, what kind of long-term contracts do you have, do you have an area of specialty or expertise, do you have a leadership team that’s intact and that could run the business day to day—those sort of things will contribute to the multiplier. But today, most agencies are selling for about one to two times that average AGI. So again take the five years, drop the high and the low, average the other three, and then depending on those factors I just listed, you’re going to get somewhere between one and two times that AGI if you were to sell your agency. Alright, hopefully that was helpful. Drink fluids, keep eating, be careful on airport floors, and I’ll see you next week.