Good Financial Management Will Boost Your Agency’s Value

As an independent insurance agency owner, preparing for an eventual exit is something that has crossed your mind. One of the easiest ways for us to identify well-run agencies is the quality of financial management. Good financial practices not only improve your visibility over the agency’s performance but also streamline the valuation process and position your agency as an attractive acquisition target.

The heart of a good valuation is a thorough review of an agency’s historic performance and working through the process of creating a pro forma. Two of the most common hurdles that we encounter in a valuation process are:

(1) Waiting for owners to catch up their data, as opposed to being able to produce current financial and production reports upon request, and

(2) Having to unwind an agency’s messy financial and data management practices so that we can benchmark the agency’s performance.

Good Financial Practices = Marketplace Credibility

Credibility is lost when an agency owner cannot generate clean and accurate financial and operational reports in a timely manner.  From an outsider’s perspective, it gives the impression that the business is not being run properly and that the data, when finally provided, could be of questionable reliability.

In relation to selling an agency, the result of a loss of credibility due to poor financial management is a loss of perceived value and possibly even a loss of interest by buyers. Contrastingly, when you are able to present clean, accurate, and well-organized reports on demand, you boost your credibility and the perceived value of your agency because you and outside parties will have a quick and clear view of the agency’s performance, including profitability, historic growth, and growth opportunities.

Good Financial Practices = Better Equity Management

Good financial management isn’t just about preparing for taxes or a sale; it also empowers you to manage your business effectively.  As Peter Drucker once said, “What gets measured, gets managed.”  It is nearly impossible to manage a business when you don’t have good data to measure performance against though.  Ergo, good financial management enables you to effectively manage growth, profitability, employee productivity, customer retention, issues with carriers and lines of business, etc.

One key difference between small and large companies is the quality of financial management and reporting.  Large companies have many shareholders, which makes financial transparency a requirement.  Small companies, on the other hand, often either have poor practices or intentionally obfuscate their financials to avoid paying taxes.  Whether the murkiness of an agency’s financials is intentional or not, the lack of clarity comes at the cost of equity management.

One reason that publicly traded companies trade at higher multiples is due to their transparency of regularly reporting financial and operational results. While your privately owned business may not have the same regulatory requirements, you can and should operate your agency with a similar approach.

Questions to ask yourself:

• Do you know your organic growth rate?
• Do you, or can you, measure retention?
• Do you have a month-end close process for accurate financials?
• Do you know your revenue per employee?
• Do you measure the profitability of your teams?
• Do you reconcile commissions to your profit and loss statement?
• Do you depend on contingency or bonuses to be profitable?
• Do you know your profitability metrics like EBITDA?
• Do you have a cash reserves target?

The Solution

You may not have the resources of a publicly traded broker.  You may not even know where to begin to tackle addressing your agency’s financial practices.  We have a solution for you.

Our team has evaluated thousands of insurance agencies.  We have seen the good, the bad, and the ugly when it comes to financial practices.  We can help you set goals and develop procedures to put your agency’s financial management on the right course.

Our ABC CFO^TM service includes:

• One-on-one monthly consultations.
• Value building goals roadmap.
• Projects throughout the year to help you manage risks and build value.
• Regular reporting dashboard.
• An annual 10-k style report, providing a comprehensive view of key metrics and goals.

The Bottom Line

Good financial management is essential for maximizing your agency’s value. By setting the right goals and putting into place the right procedures, you will be able to more effectively manage your agency to increase its value and enable a smoother exit for yourself as a result of the financial and operational transparency that you create.

If you are interested in working with us to develop a plan to improve your agency’s financial management, please schedule an introductory call.

Posted by:
Colby Allen
VP of Valuation and Consulting / fCFO
Direct:  (321) 255-1309