Many insurance agency owners have long reliedon an old formula for determining the value of their business.

“I don't need a valuation,” one owner told me, “I know how itworks. Everyone gets a multiple between one and two times revenue.”Interestingly, the following year that owner was surprised when aprospective buyer started looking at his company and things gotmore complicated.

The first problem with the “one to two formula” is thatit's both true and false. Many transactions do end upvaluing out at 1 to 2 times revenue. Depending on the size of yourfirm, that can be a very big range. Consider the difference betweenone and two times revenue for a $1 million agency. The differenceis a million dollars!

So you need to ask yourself: Is getting more of the secondmillion that you might have gotten worth a little time andmoney? Is your goal simply to get out–or to get out with as muchmoney in your pocket as possible?

The second problem with the “one to two formula” is thatusing such a formula doesn't mean that your business was fairlyvalued. Buyers are generally pretty sophisticated todayand will want to consider a variety of factors besides revenue. Asa result, using a more sophisticated method can protect you, ifyou're smart.

Here's an example. An owner, 62, has an agency with a $2 millionbook of business. The owner wanted to sell and thought a multipleof revenue of 1.5 or higher would produce a sale price of $3million to $3.5 million for the agency. He hadn't done any priorhomework or planning for this exit strategy. The transaction endedup closing for $2 million.

What accounted for the lower value? Several very important factors played a role:

• Two accounts made up 40 percent of the book, and one of thoselarge accounts was a long-time friend of the owner with no loyaltyto the acquiring agency;
• The owner was not willing to stay involved going forward;
• The agency's other top producer did not have an employmentcontract;
• Fifty percent of the book was with one carrier.

While it would be natural for the owner to feeldisappointed or that he had been outflanked by a savvybuyer, perhaps the reality is different. Had the owner done moredue diligence and gotten a thorough valuation, each of thosecostly–and very fixable–vulnerabilities would likely have come tolight and been remedied before the selling process even began. Ineffect, his attempt to take an easier path cost him as much as amillion and a half dollars.

This kind of mistake is much more common than most agency ownersrealize. We've seen it again and again. Unfortunately, there is noway to fix it later–or even during the selling process. What's doneis done.

What's the alternative?

The smartest path is for owners to really know the value oftheir agency. Valuations are not just for transaction purposes.They identify risks and vulnerabilities while you still have plentyof time to address them. And they can educate owners so they are assavvy and prepared as the buyers who will be combing their books.The old saying is still true: It's never too early to plan ahead.And it's never too early to begin to build toward an exit strategythat maximizes your take-away.

Even though your agency is likely the largest asset you own,most owners spend little if any time understanding what theiragency is worth and how to increase the value. Identifying areasthat need to be addressed is good business and good foryour sale price. After all, you probably spend most of your dayidentifying areas of risk that your clients should consideraddressing, why not do the same for yourbusiness?

What are the payoffs of a valuation?

Agency owners with a well-prepared and current valuationunderstand two things very clearly: 1) the real value of theiragency; and 2) exactly where they can maximize that value when thechange of ownership takes place.

In addition, valuations can play a role in planning and growth.Having a current valuation is not only a good tool for strategicplanning (such as succession and continuity), but can also be usedto help secure financing quickly for unexpected opportunities, suchas to acquire talent or assets. It's quite common for a valuationto speed up financing by allowing your bank's underwriters toquickly understand and verify the value of the agency. This speedcan provide a first-mover advantage over competitors who are notprepared.

A skilled and thorough agency valuation can also assist you inboth planning and growing your agency. This planning can beleveraged in increasing both the present and future value of youragency.

How can you leverage your value?

A thorough agency valuation, updated every few years, providesthe proper foundation for planning, growth and the eventual sale ofthe agency–all good reasons for getting around to it now.

Because there are far better methods of valuing an agency todaythan using the old multiple of revenue rule, we are convinced thatconsidering multiple factors beyond just the book of businessdollar value (see above) will provide a far more accurate value anda larger reward for the agency owner who has built their businessover many years.

Keep in mind that a solid valuation can not only increase youroptions and a potential payout when you sell, it can also save youmoney, especially in taxes.

Once the valuation is completed, that value should playa central role in the owner's corporate perpetuation andpersonal estate planning, and your advisers can put it to good useto minimize taxes. To ignore what is likely your largest assetmakes little sense, yet many owners do just that. The tangibleimpact of not incorporating this planning into your agency will belargely felt when you exit the business, usually at the time whenyou can least afford it.

Owners who take the time to not only accuratelydetermine the value of their agency today, and who do allthey can to increase that value, are the smart owners who maximizethat value.