As I wrote in my last blog, the next five years are going to be an excellent time for agents to grow their business through acquisition. The pace of buying and selling is already feverish for agents with $1 million of revenue and greater. I think the pace will pick up for smaller agencies soon.
But while there is significant opportunity it isn’t for everyone. The ill prepared can hurt themselves very badly. How can you prepare to be a good purchaser?
Agencies sell on economic value. For smaller agencies that is usually expressed as a multiple of revenue. But you need to understand that buying revenue isn’t what counts, buying profits is!
Calculate Your Profitability (EBITDA)
So, the starting place is for you to understand very clearly your own profitability. If you get this right you will be able to value your own agency correctly, which will give you credit worthiness for an acquisition.
It will also help you to understand how to value a prospective purchase in terms of what it adds to your bottom line and not just your top line. So, first figure out your EBITDA.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization. This is the key number to understand in valuing an agency. You need to know yours. Agencies are trading today between 4 and 10 times EBITDA. Sellers talk multiples of revenue. Smart buyers talk multiples of EBITDA and when you know how to figure yours you will also know how to calculate whether an acquisition is a good deal for you or not.
Maximize Potential from Your Acquisition
The second thing to do is make sure your house is in order.
- Are you retaining business at 90% or do you need to work on your customer retention plan?
- Are your employees servicing a volume of commission, and creating a spread (the difference between commission earned and employee cost) in the upper 25% of all agencies?
- Are your paperless procedures state of the art? Do you have enough working capital saved to not only support your ongoing operations but to provide a 25% to 35% down payment?
- Is your personal credit score well north of 700?
- Have you lined up a line of credit with your bank so you can handle any unexpected contingencies? Do you have a written procedures manual to train new employees?
- Do you have a successful new business program in place?
- Do you have an effective cross-marketing program in operation?Have you developed a written takeover plan and business plan for a “typical” agency you might acquire?
These are all things you need to do to minimize risk, and maximize potential from an acquisition. The best opportunities always comes to those who are prepared. Now is the time to get ready!