When we’re doing valuations, whether we’re actually part of the transition or the succession plan or not, one of the things that I think many of you really underestimate is the power of how you compensate yourself and what that does to the valuation of your business. One of the larger factors in valuation is what we call owner compensation.
And what we mean by that is every way that the owner gets value out of the business.
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Hey everybody, Drew McLellan here from Agency Management Institute, this week coming to you from Detroit, Michigan. Today we're headed to see the Detroit Tigers play the Boston Red Sox. But this week we've been here working with an agency where the founder is getting ready to sell their agency to an internal employee. And when we're doing valuations, whether we're actually part of the transition or the succession plan or not, one of the things that I think many of you really underestimate is the power of how you compensate yourself and what that does to the valuation of your business. And so I will tell you that one of the larger factors in a myriad of factors, but one of the larger factors in valuation is what we call owner compensation. And what we mean by that is every way that the owner gets value out of the business. So that's, of course, your W2 income. That's your dividends or draws. That's how the agency funds your 401k and matches it. If you have a defined benefits program, it's how that gets funded. But it's also all the pass-throughs and all of the personal expenses and all of the ways that you maximize your ownership by running expenses appropriately and legally through the business. And I'm telling you, between that and all your benefits, all of those things add up and they have a significant impact on the value of your business. So as you are making money decisions and you are often, many, many of you, are often robbing Peter, meaning you, to pay Paul, meaning your team, or you are not taking a paycheck because you don't want to lay someone off, or you are kind of hedging your bets because things are a little soft and so you're not taking as much money out of the business, you need to understand that you're hurting yourself both in the short run, meaning you're not being fairly compensated for owning the business and doing the work that you do, but also you are hurting yourself in the long run. You are not adding to the value of your business the way you should be. So I am here to tell you, remember, we see the financials of 250 agencies every year, and I'm here to tell you that I don't care how big or small your agency is, you should be taking a minimum of a quarter of a million dollars out of the business every year. And I'm talking a minimum. Many, many of our agencies get closer to, agency owners get closer to $600,000 or $700,000 or $800,000 a year. And the larger agencies with the larger EBITDAs obviously are taking more than that proportionally. But even if you're a four-person shop or a five-person shop, you need to make sure you're making $200,000 or $300,000 by the time you add everything up at a very bare minimum. So do not cheat yourself short-term or long term. It has huge impact not only on your family now and what you could do with that money, but also when you go to sell the business, internally or externally. When you go to evaluate that business, it has a huge impact. So don't shortchange yourself. All right? I'll see you next week.
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