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Agency ValuationKnow Your Numbers
There are many established industry metrics that you can use to evaluate your agency. They highlight your strengths and point to areas to investigate and/or improve. Whether you call them KPIs, benchmarks or metrics, they all do the same thing - measure your performance. Remember, many agency processes affect metrics. You may need to review and refine before you have good data to measure.
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EBITDA
Let’s start with a big one, EBITDA: Earnings Before Interest Taxes Depreciation and Amortization. This measures your operating profit. It takes out all the extras that, if you sold your agency, the new owner would not have. We all think our baby is the prettiest, right? We all think our agencies are worth a bazillion dollars. This calculation will give you the facts -- Numbers don’t lie. Look at your income statement for the factors in this calculation.
Calculation:
EBITDA is essentially net income (or earnings) with interest, taxes, depreciation, and amortization added back.
EBITDA = Net Income + Taxes + Interest Expense + Depreciation & Amortization
Make sure you have accounted for any non-recurring income or expenses, such as contingencies and subtract contingencies received. If the owner doesn’t take a salary, you need to adjust for that expense as well and add reasonable owner salary.
EBITDA can be shown as a dollar amount or percentage. To calculate the percentage, divide the EBITDA $ by the Net Earnings. Typical healthy EBITDA is 25% - 30%.
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Organic Growth Rate
Organic growth rate is a combination of carrier rates, client exposures, retention and new sales. We can’t control all variables that affect growth. We have no control over the client exposures or the carrier rates. However, we can control the agency retention and new sales.
Calculation:
(This Year’s Annual Revenue – Last Year Annual Revenue) / Previous Year's Annual Revenue
Do you differentiate new client sales and existing client cross selling? This will depend on how you code new sales in your agency management system.
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Retention
Retention can be calculated on policies, premium, revenue or customers. Each one tells a different story. Some say policy retention is the truest way to measure. The agency can influence the addition or subtraction of policies within the agency. Premium retention will include changes in client exposures and carrier rates, both of which are out of your control. Revenue retention is a product of the same variables you can’t control.
Customer retention is useful if you look at when you lost the client. How long does your client stay with your agency? If they are leaving in the first couple years, maybe their expectations weren’t met. A typical scenario is that the producer and service team are not aligned with the agency brand. The producer possibly over promised and the service team under delivered because they weren’t aware of what was promised. If the client departs after working with your agency for many years, maybe they weren’t feeling the love anymore. Is the agency giving consistent attention year after year?
Calculation:
[(Total Policies or Premium or Revenue or Customers scheduled for timeframe – Cancellations) / Total Policies or Premium or Revenue or Customers scheduled for timeframe] X 100
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Trust Ratio
Can you pay your premium payables to your carriers? Important ratio to ensure you have enough liquid assets to pay you agency bill premium to carriers. Must be over 1.0.
Calculation:
(Cash + Premium Receivables including pre-bills) / Premiums Payable
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Current Ratio
Measures the ability to pay short term obligations that are due within 12 months.
Calculation:
Current Assets / Current Liabilities
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Revenue per Employee
Determines if you are appropriately staffed. You can compare your metric to industry standards in resources such as Best Practices Study or the Growth and Performance Standards
Calculation:
Agency Revenue / # of employees
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Compensation per Employee
Determines if your compensation is in line with similar agencies. Compensation includes salary, commission and benefits.
Calculation:
Total Annual Compensation / # of employees
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Spread
Measures your cost of services provided to your clients. The bigger the spread the better. Ideally, revenue should grow faster than compensation.
Calculation:
Revenue Per Employee – Compensation Per Employee
Final thoughts
All of these metrics can be used to evaluate how you compare with competitors of similar size and location. This is only some of the data that can be measured. As mentioned, you may need to clean up some data or find the data before you can start tracking or measuring. The data can be tracked at whatever time intervals makes sense for you. Look back to see what you have accomplished then celebrate. It’s important to celebrate all your hard work.
